Raise domestic savings, expand tax base

"The fruits of growth in the global economy cannot be reaped fully if the increase in domestic productive capacity and the depth of financial markets is not commensurate with the demand created for exports or to absorb financial inflows, respectively," the recently released policy statement by State Bank said.
Not surprisingly, the supply side constraints and institutional inefficiencies cited by central bank officials last week, are vocal in the Fiscal Policy Statement 09-10 released by the Finance Ministry on Monday.
"The monetary tightening started since April 2005, but fiscal expansion neutralized gains from tightening", the finance ministry said.
Even prior to 2005, monetary overhang of quantitative easing and the flurry of capital inflows after 9/11 were not complimented by development spending, including that on energy infrastructure.
A serious lack of coordination in monetary and fiscal policies at the time of boom, made the economy vulnerable to both the external and internal shocks. Now, in the face of global economic slowdown amid a bleak security situation at home, Pakistans economy is at a dead end - at least in the short to medium term.
"The onus of fiscal adjustment indiscriminately fell on the development expenditure in 2008-09 with rigidity in current expenditure and stagnancy in revenues," the FPS said.
Although, both monetary and fiscal managers acknowledge the vice of low production capacity at home, the higher public debt servicing (43.6% of government revenues) and the erosion in tax base is creating a vicious cycle.
"The persistence of a high saving-investment gap has meant that crucial investments have had to be financed through debt creation as opposed to access to increased savings. The impact of these two vital developments is not only reflected in the fiscal deficit, but also the increasing debt burden of the country," the FPS highlighted.
The optimal way to put the economy back on wheels is to spur domestic savings and to expand the tax base, partly by improving tax collection system. After resolving these structural impediments, the focus can be tilted towards supply-side bottlenecks through aggressive development spending.
Unfortunately, even with dedicated efforts to lower the element of corruption, it may take years to make institutional reforms effective. The first step is to identify problems, followed by envisioning of polices and of course, the oft-skipped part, the implementation of polices.
The strong lobbies, bureaucratic hurdles and quick changes in governance system, hence policies, are main impediments to smoothen the process of implementation. Ergo, being at the helm of IMF might be a blessing in disguise for a steady application of certain policy sets.
Despite changes in system from authoritative model to democratic at the time of economic crises, the populist government at present ought to eliminate the board subsidies. In this context, the shift towards targeted subsidies, like support prices of farm products, is a right approach to spur the agriculture based growth.
However, high inflation demands more of those targeted-subsidies programmes to eradicate poverty and to attain Pareto efficiency. Although, foreign aid and loan programmes on paper do address these issues, geo-political interests are of their core importance.
Until people start paying taxes and unless those taxes are routed to right channels with public savings routed to domestic investment, all these efforts would take the country nowhere.