By now, nearly all our provincial governments should have balanced their announced budgets for the fiscal year that began on July 1st. To do so even on paper they have probably had to fill the deepest budget holes in modern memory of Pakistans economy since shortfalls seem to be the order of the day starting from the Center and precipitating right down to the smallest national entity. As any management guru would tell you that such serious shortfalls, where incomes do not tend to support spending, invariably lead to mismanagement and to keep pace with mounting Bills-Payable there remain basically two options: One, to simply borrow more and Two, to compromise on States duty towards its people in order to cut expenses. The prevailing Sugar crisis in the country amongst other reasons can also be mainly attributed to the on-going cash-crunch in governmental coffers resulting in its inability to act in a timely manner to ensure availability of adequate sugar supplies in the market. In spite of draft proposals to import 100,000 to 200,000 tons as early as February/March 2009, the decision one feels was either deferred or simply not acted upon due to the likely prioritization of limited resource at hand, which obviously at the time tilted in favor of other spends over import of sugar. Little could anyone at the time realize that Brazilian and Indian crops (The two largest produces of Sugar in the world) would meet disasters of their own creating a global shortage of Sugar where prices will reach a level by August 2009 that imports in Pakistan would end up costing more than Rs.70/kg The real trouble is that even if the Pakistanis (resilient as they are) learn to live without eating sugar till the next season this may just be the beginning of more tests to come. If the eighteen months decision-making track record is anything to go by, it appears that the present economic managers possess rather simplistic mindsets where they conveniently assume that any success in achieving macro stability will also somehow automatically reflect itself through market mechanism at the micro level. Surely, this is no longer the case even in the most mature and developed markets these days, let alone in a developing market like ours. The recent recession has at least taught us one very important lesson that markets around the world cannot be left on autopilot. Unless the State can have the vision to steer and guide markets as they move through highs and lows, gross imbalances will keep occurring. ~ Joseph Stiglitz. For example, while it is a good sign that S&P (Standard and Poor) has up-graded Pakistans sovereign credit rating to B- from CCC+, but it will be foolhardy on the part of the government to assume that things are improving and that serious economic issues in the country seem to be over or are on the mend. What they need to realize is that on the domestic front in their tenure thus far they have, a) failed to meaningfully inspire the local manufacturing sectors, b) caused significant damage to the manufacturing-competitiveness (cost of doing business) in Pakistan by persisting with an overly tight monetary policy and c) been unable to competently manage the supply side aspects of not just food essentials but also other essentials like power, gas, security, image, etc. Meaning, they now need to prepare themselves in advance that owing to these shortcomings the economy may have already entered a phase where on one hand we witness a declining domestic demand cum deep routed economic inactivity but on the other hand still need to cope with an inflation that has become stubborn in nature and with a danger to re-erupt from time to time in basic essential areas that mainly affect the poor. To overcome this, unless local costs of production are reduced and average national productivity is enhanced, this phenomenon can compound over time, especially as Pakistan synchronizes itself with the rest of the world amidst the WTO global pricing regulations in a scenario where the Pak Rupee continues to consistently remain under pressure. If not timely checked, these developments can in-turn lead to a vicious cycle that can in our case then see the Central Governments revenues continually diminishing, whereas, the deficits for provinces and public sector institutions continuously rising. Thus resulting in higher budget shortages/cuts with each passing quarter and all this at a time where tax revenues are already depressed due to high economic inactivity, unemployment is also high and rising, but the provincial appetite for funds ironically is swelling, thereby, exerting a strong pressure on the Center to increase lending/aid to its subordinate provincial units. It is imperative that we avert such a vicious cycle, because a continuous fiscal stress will simply impair the ability of Pakistanis to withstand the present economic crisis, meaning things can quickly lead to social unrest, and inter-provincial and also intra-provincial disharmony. To do so we first need to take care that we avoid falling into the obvious trap of unleashing deep spending cuts on public support mechanisms. Such measures not only damage important institutions like social service agencies, schools, healthcare networks, parks, cultural forums, etc., but also an untimely removal of each relief subsidy meant for the average citizen (in power, gas, food items, petrol, etc.) quickly results in resultant public frustration. This then leaves us with two main ways to fill the anticipated gaps: i) More federal stimulus in the shape of direct fiscal aid to provinces and ii) more tax increases. The dilemma with such options however is that, given a government that is already way too high in its borrowings and that tax increases are invariably perceived as being bad in downturns, what really can be done? Regrettably, the choices are few and challenging: 1) Tax increases on the high-income bracket, 2) Dramatic prudence within the government and serious spending cuts on non-essential areas, 3) Greater autonomy both at the provincial and the local-bodies levels to allow each area to micro-manage and learn to cope with its own set of problems, and 4) Perhaps the most important to directly involve private sector expertise and provide them with the necessary freedom and legislative support to manage key national institutions in order to improve their efficiency and performance. With each passing day the options to turn around the Pak economy are shrinking. While there are no cheap, easy or fast ways out of this present economic impasse, only visionary decision making at this stage by the political leadership can take us forward by ensuring that planned fixes are designed to be fair, adequate, transparent and professionally executed, i.e. all at the same time.