Aus­ter­ity mea­sures

The Pak Banker - - FRONT PAGE -

The big­gest chal­lenge to the new govern­ment is debt cri­sis. With debt lev­els un­ac­cept­ably high, the govern­ment is be­ing forced to make dra­matic cuts to make pay­ments and avoid de­faults. Th­ese acts of deficit cut­ting, re­duced spend­ing, and slashed pub­lic ser­vices are col­lec­tively called aus­ter­ity mea­sures. The first step to­wards aus­ter­ity is to cut down on the Prime Min­is­ter's staff and the use of dozens of bul­let­proof ve­hi­cles. The move to abol­ish dis­cre­tionary funds for politi­cians and bu­reau­crats will also cer­tainly ease the bur­den on the na­tional ex­che­quer. In Pak­istan, top govern­ment of­fi­cials, min­is­ters, bu­reau­crats and gen­er­als are known for their lav­ish life­styles. They cal­lously and ruth­lessly use of­fi­cial ve­hi­cles for their chil­dren's school run or shop­ping trips for their wives, they take un­nec­es­sary for­eign trips, have huge trav­el­ling al­lowances, throw lav­ish par­ties and live in ex­trav­a­gant houses.

The govern­ment must im­ple­ment a ban on five-star venues for govern­ment meet­ings; for­eign lo­ca­tions for con­fer­ences, ex­hi­bi­tions and sem­i­nars; and ex­ec­u­tive class air­line tick­ets for of­fi­cials on im­me­di­ately. This would be the great step for cre­at­ing a bet­ter im­age in pub­lic per­cep­tion by sav­ing their tax money.For aus­ter­ity, PM Im­ran Khan should also turn mas­sive build­ings used by gov­er­nors, chief min­is­ters, min­is­ters, bu­reau­crats and gen­er­als to ei­ther ed­u­ca­tional in­sti­tu­tions or for any other ser­vices which gen­er­ate rev­enue for the state.

In the short-term, gen­er­ous pub­lic spend­ing funded by large govern­ment deficits will stim­u­late eco­nomic ac­tiv­ity and al­le­vi­ate the hard­ship caused by re­ces­sion. But in the longer term, ha­bit­ual deficit spend­ing will weaken the na­tion's fi­nances, lead­ing to a loss of con­fi­dence from cred­i­tors and higher in­ter­est rates on na­tional debt, more­over it will place an un­ac­cept­able bur­den on our fu­ture gen­er­a­tions. The end game is sov­er­eign de­fault and even­tu­ally com­pletely with­draw­ing from credit. Hence the govern­ment ef­fec­tively be­comes bank­rupt.The aim of aus­ter­ity is to avoid con­di­tions which lead to sov­er­eign de­faults. It paves the way for sus­tain­able eco­nomic progress by seek­ing to in­crease con­fi­dence in the govern­ment of Pak­istan and its fi­nances. It sends a mes­sage to in­vestors and lenders that the econ­omy in ques­tion in not founded on an in­def­i­nite strat­egy of "buy now, pay later" and that there is a vi­able long-term plan.

Im­ple­ment­ing aus­ter­ity mea­sures can ben­e­fit Pak­istan, and also its cur­rency, in sev­eral ways. The mer­its of aus­ter­ity are even more strik­ing dur­ing a debt cri­sis, as a na­tion can help push in­ter­est rates lower by getting its fis­cal house in or­der and al­le­vi­at­ing con­cerns re­gard­ing de­faults on ex­ist­ing debts. Re­duc­ing in­ter­est rates gen­er­ally helps sup­port eco­nomic growth. More specif­i­cally, it fa­cil­i­tates both in­vest­ment and con­sump­tion in sec­tors that re­spond to sig­nif­i­cant changes in th­ese bor­row­ing costs. In ad­di­tion, keep­ing bud­get deficits mod­est can help cre­ate the per­cep­tion of sta­bil­ity, which in turn can pro­duce For­eign Di­rect In­vest­ment (FDI).

The Pak­istani govern­ment is fac­ing huge pres­sures on its fi­nances due to eco­nomic mis­man­age­ment. Aus­ter­ity brings around a fun­da­men­tal change in economies. Over-in­vest­ment and over-con­sump­tion will be­come un­der-in­vest­ment and un­der-con­sump­tion. Once in­ter­est rates are suf­fi­ciently low for in­vest­ment and con­sump­tion to take place, there will be an uptick in de­mand, lead­ing to strong eco­nomic growth.Ru­pees don't fall from the heaven; they have to be earned here on earth. In­debted coun­tries like Pak­istan can only grow out of their debt trou­bles through strong eco­nomic growth; aus­ter­ity mea­sures alone can­not work. It is im­per­a­tive to en­gage in deep struc­tural re­form to spur growth as this is the right time for the govern­ment to put the brakes on big spend­ing.

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