The outgoing caretaker of country’s Finance had only been viewing the matters from a banker’s “balance sheet perspective”—and, hence, portraying dooms day scenario. And the new Finance Minister has started showing signs of anxiety even before taking charge. New government has sufficient political capital to attract substantial Foreign Direct Investment (FDI). And some loans and grants have already started pouring in. Need of the hour is not to panic.
Economy does face challenges needing immediate adjustments, but its permanent recovery lies in meaningful restructuring. Hopefully, Finance Minister would soon be able to distance himself from day to day fire-fighting, and focus on long awaited reforms in financial sector. With or without the IMF, new government should quickly assemble a core group of competent professionals and start implementing the reforms.
Minster for Finance has already dropped hints as to what the new government intends to do. He thought “quick fix solutions were needed to tackle the situation” as country would “need $10 to 12 billion loans within six weeks”. Indeed it was a naïve approach and unnecessary alarm. Pakistan has a robust and progressive economy, incorporating essential features of a typical modern formal economy; but at the same time, it has deep rooted fault lines, at times making its behaviour unpredictable. Pakistan has often faced tumultuous financial conditions, yet it maintained an average growth rate of 6 percent.
Economic affairs are generally run on day to day basis; hence an element of fragility has become perpetually embedded into country’s economic affairs. Real challenge is not arranging “$10 to 12 billion loans within six weeks”, but have a long term Vision so that such patterns don’t come back to haunt our economy every now and then.
Solutions are available. What we need is political will to carry them through. Proposal of floating “Overseas Pakistanis’ Bond” is a viable option and should be fast tracked. Alongside one could think of “Debt Retiring Bond” open to inland and overseas Pakistanis. There is need to create a “Saving Culture” through an environment of austerity and meaningful return on savings. Government restructuring could reduce the governance cost by one third; and fixing “Public Procurement Policy” procedures could add hefty saving of around 40 percent.
There is need to untangle our taxation maze of multiple direct and indirect taxes strangulating those who pay their taxes and letting those go scot free who do not wish to pay taxes. Our taxation system is cruelly pegged. For those who want to pay taxes everything other than breathing air is taxed. And those who do not wish to pay they are offered shamelessly low 2.5 percent tax for their ill-gotten wealth staked outside Pakistan. Most of them did not avail the offer as tax was “too high”.
Country’s existing tax regimes do not provide even playing field for all sectors. Pakistan’s economy comprises of: Industrial Sector (20.91 percent of GDP); Agriculture Sector (18.86 percent of GDP); and a sparkling Services Sector (60.23 percent of GDP.; Agriculture Sector’s tax contribution is little over one percent of gross national tax; Industrial Sector accounts for around 17 percent of tax. Services are inordinately overtaxed. Recently Supreme Court had to intervene to reduce taxation on mobile telephone users and gasoline to provide much needed relief to hapless consumers. Due to inefficient Regulators, the quality of services is far below the acceptable standards.
Pakistan’s economy faces some arduous challenges, which are almost perpetual, like: sustained high population growth rate (over 2 percent); mainly thermal fuel based high cost electricity; shortage of water and electricity; narrow tax base leading to low tax to GDP ratio (12.4 percent); inefficient revenue collection system; inadequacy of infrastructure; high inflation and interest rates etc. Regional and global market dynamic and inter play of American sanctions here and there often make unpredictable negative impact on country’s economy. Single commodity export (textiles) exposes it to vulnerability of price variations in international market; likewise, fluctuation in oil prices is another single factor making unpredictable impact on import bill without any prior warning.
Pakistan’s society is inclined towards consumerism, as a result imports always exceed exports by huge margin (gap is US$37.7b in FY18; causing unsustainable Current Account Deficit (over 18 billion in FY17-18). Over borrowing is a national habit, and now external and domestic borrowing stands at over 72 percent of GDP. Public debt of Rs24.5 trillion includes domestic debt of Rs16.5 trillion and external debt of Rs8 trillion. The financing of the current account deficit by taking more loans is one of the reasons for high debt accumulation. Average maturity time of public debt had come down from 4.5 years in 2013 to 3.7 years in 2017. The indicator of debt maturing in one year also deteriorated in recent years and now 44.4 percent of the total debt is maturing within one year.
Biggest challenge for the new government is enormous expectations of the people who are waiting for some sort of relief from the new government. And going back to the IMF would be a big disappointment. There is a strong public perception, though largely misplaced, that country’s most of economic difficulties are due to the preconditions that IMF has been attaching with its previous packages. Reality is that had we implemented IMF recommendations, we would have long been out of economic difficulties.
Despite a razor thin parliamentary majority of his party, crafty coalition partners and a strong net of dynastic politician around Imran Khan, there is strong aroma of hope that he will be able to gather requisite critical mass to break the stranglehold of vicious factors bringing our economy to such a pass.