Dar’s daring challenge(s)

At the launch of the Economic Survey 2012-13, Ishaq Dar was vocal and coherent about the degeneration of key economic institutions during the last decade. He highlighted that the tax-to-GDP ratio has declined from 14 percent to 9 percent since PML-N’s last regime. Fiscal woes rose to alarming levels in the last five years.
The public debt doubled in 1999-2008 period to Rs 6.5 trillion, and ever since it has been on a steep northward journey to reach Rs14 trillion by the end of this fiscal. The energy generation capacity has crumbled and is threatening the very social fabric of the country.
The challenge Dar is facing apparently with courage is to mend the structural and capacity issues both in managing the fiscal house and energy sector. It’s easier said than done; and the time for PMLN starts now.
Deterioration in fiscal house owing to low collection and higher subsidies amidst ever-increasing burden of fiscal gap financing on the banking system is the chief reason for persistently high inflation over the past few years. And that is crowding out the private investment. Poor governance of public sector amid higher spending on current expenditure has eroded growth. Investment to GDP ratio nosedived from 19.2 percent to 14.2 percent in the last five years.
That trend ought to reverse to absorb two million new entrants in the job market every year. The biggest sector likely to benefit from such a reversal would be energy. Hence, resolving circular debt is imperative not only for slashing power outages to half, but also to send the right signals to potential investors.
Dar is promising to design a financial arrangement soon which he is going to announce in budget speech later today. One option is to issue T-bills and PIBS worth $3-5 billion to clear the outstanding dues and let the efficient IPPs work at optimal levels.
The other option is to issue sovereign bonds and then power generation companies can raise liquidity from the banking system against these bonds to streamline cash flows. The latter option is better and not inflationary, but the former is easy to execute albeit with serious repercussions on inflation.
But the problem doesn’t end here, circular debt will rise again unless the leakages are stopped and tariff rationalisation takes place. It’s important to find Dar’s stance on privatisation or corporatisation of Discos; on incentives to have more IPPs, on prioritization of existing natural resources and policies to entice exploration and production of natural gas within the country. The focus of medium to long-term is upon relying on indigenous energy sources.
Apart from energy plans, cutting down the fiscal deficit is important. By mending power sector woes most of the subsidies would be gone. Privatization of bleeding public sector entities will plug other leakages and generate resources for the government. Although Dar was silent on this plan in yesterday’s public appearance, today’s speech will most offer some inkling of this plan. And it’s right time to invite foreign investors when stock market is hot and confidence is building up on the new regime.
Then the tax base has to broaden along with improving governance at the tax collecting authorities. There is no way that retail sector can continue contributing 16-18 percent to GDP and paying just 2-3 percent of tax. Dar has to set the right tone today by not discriminating PML-N’s trader community voters. For that reason, all incomes must be taxed equitably. Although the PML-N has an imposing presence in the centre and Punjab, getting all the provincial governments on board to implement agricultural income tax will be a tough political test.