Between defence and development

TEN years ago, Pakistan reverted to democratic rule, and the moment provides a good opportunity to take stock of the road travelled since then. One can mark a decade depending on which marker one uses. In February 2008, a general election ushered out the government that was erected under a military ruler and brought in one elected by the people themselves. In March, the new assembly elected their leader of the house, and a new prime minister started putting together a new cabinet. In June, the new government announced its first budget as storm clouds of a crisis gathered around it, marking the first large-scale use of its executive powers.

This will be the eleventh budget since those tumultuous days, and the eleventh exercise of the mammoth executive prerogative by a civilian government formed through a direct franchise. What all has happened since then?

For perspective, consider the two heads of the budget that are critically important to the two main contestants for the exercise of executive powers of government. These are the defence budget and the development budget. The former is used to finance the running expenditures of the armed forces (excluding pensions), such as salaries and routine operating expenses (minus the cost of military operations and procurement). The latter is used to build roads, highways, new buildings for hospitals and schools as well as other infrastructure.

Defence spending does not produce an economic boost because the ‘military industrial complex’ in Pakistan is very small.

In the first fiscal year that the new civilian government completed in June 2009, defence spending was 15 per cent of the total expenditure (actual rather than budgeted) while development spending was 21pc of the total. A decade later, those proportions are only slightly changed, coming in at 17pc and 19pc respectively.

What happened in between, however, is instructive. Months after coming into power, the new government in 2008 was faced with an economic crisis of massive proportions, even by the standards of our own crises past. The external deficit doubled and the fiscal deficit rose by 60pc in one year. As reserves fell to near catastrophic levels of less than one month’s import cover, large-scale capital flight took place, and the banking system saw withdrawals on such an extensive scale that the State Bank had to slash a key reserve requirement to almost half its level to prevent a full-blown banking crisis.

An emergency appeal to the IMF was made in October, and a facility was signed in November 2008. The new IMF programme called for steep cuts in expenditure and large hikes in revenue, a 3.5pc jump in interest rates, as well as a massive devaluation of the rupee upfront and total pass-through of high oil prices to end-consumers, causing a big spike in the price of fuel and electricity, which administered a massive inflationary shock into the economy. Inflation peaked that year at a historic high of 25pc, never seen before in the history of our country.

Whatever fresh political capital the new government had come in with was spent in one go with those adjustments. Almost immediately, the public turned hostile, and growth stalled, falling to virtually an all-time low of 1.2pc. It averaged 2.6pc for the next three years, showing that the slump was protracted.

In Pakistan, the main instrument all governments have to boost growth is the development budget. As per standard textbook economic orthodoxy, governments should spend when the economy slows in order to pump money and create demand, and restrain themselves when the economy starts to grow so as to prevent ‘heating up’, through inflation.

In Pakistan, the choices of spending boosts are limited. Tax cuts are difficult to target because there are very few filers of returns; hardly any entitlement programmes exist and defence spending does not produce an economic boost because the ‘military industrial complex’ in Pakistan is very small. So the only instrument through which the government can implement the economic orthodoxy is through development.

So when the axe of adjustment of the early years fell, it was development spending that bore the brunt. From 19pc of the total expenditures in the year ended June 2009, its share in total expenditures fell to 10pc in the year ended June 2011 (two years later). It crawled up in subsequent years, but didn’t reach its present level until the government completed its term in 2013.

Defence spending (minus pensions, operations and procurement) maintained its level of 15pc in the year ended June 2010 and rose to 17pc the next year in 2011. From here the proportion fluctuated between 15pc and 17pc to the present day.

Two separate priorities were pulling on the state’s limited resources through these years: defence and development. Militancy needed to be beaten back, and the wars against the Tehreek-i-Taliban Pakistan that began in these years saw some of the fiercest fighting that the Pakistan Army has ever engaged in, with more loss of life, displacement of people, destruction of towns and villages, and hard fighting virtually house to house in some cases, like in the recapture of Mingora.

These were also years of the most intense economic slump the country has seen in decades, with widespread unemployment, inflation, historically low investment and massive fuel and power crises. Things had begun to change in 2013, the year before the PML-N came to power, and growth returned only in subsequent years.

But just as growth and expenditures have revived, and relative peace has returned to the country with the end of major fighting operations, a new threat is now looming: the return of economic pressures in the form of the depletion of foreign exchange reserves, and the rise of powerful grievances expressed by populations affected by the decade-long war against the TTP. The coming budget is the hinge around which future priorities will be shaped, but given the enormous uncertainties surrounding its framing, it seems it will be inconclusive in deciding any new balance between the main contestants vying for their share of the state’s resources.

(Thanks to Dawn News)

khuram hussain