PIDE proposes three-point strategy for economic recovery

The Pakistan Institute of Development Economics (PIDE) has submitted its 'Viewpoint' on the coming budget, for 2011-12, with a 3-point strategy to steer the economy out of stagflation through better macroeconomic management, maintaining fiscal prudence, and prudent monetary management to spark the revival of the private sector.
During a pre-budget seminar, organised by the PIDE here on Wednesday, Dr Muslehuddin, of PIDE, stated that the strategy suggests various measures to improve macroeconomic management. These include putting limits on magnetisation of fiscal deficit and strict adherence to the prescribed limit, improving co-ordination between the Centre and the provinces, which has become all the more important in the wake of the 18th amendment and the 7th NFC Award, careful evaluation of sectoral economic decisions like wheat pricing and subsidies to different sectors, resolving the problem of circular debt to mitigate energy crisis in the short run and effective utilisation of the PSDP and provincial ADPs to reduce poverty and overcome energy shortages are vital sparks of economic growth and private sector revival.
On fiscal prudence, he said that the PIDE viewpoint laments that the brunt of an attempt to contain the fiscal deficit has fallen on the public sector development program (PSDP) while the non-development expenditures have largely escaped the fiscal pruning. The 'Viewpoint' emphasises that the cut in development spending including cuts in critical physical infrastructure spending needs do not augur well for the country's long-term competitiveness. It has been argued that while the Planning Commission has achieved some success in rationalising these cuts, still much more needs to be done to ensure concentration of limited development funds into key sectors, such as energy and more labour-intensive activities. This, argues the Viewpoint, will help create jobs and spur economic growth.
On monetary management, he stated that the current monetary policy has not proved helpful in either ensuring macroeconomic stability or reviving growth in the economy. The reason has been that while the increase in interest rates have little short-term impact on dampening inflation it does slow down the economic activity of the private sector. The Viewpoint goes on to argue that the possibility to attune monetary policy towards igniting the revival of the private sector does exist because of three reasons. These include:
(i) government borrowing from the central bank has shown a decline in recent months and if the trend continues, inflationary pressures shall stand somewhat contained. This would provide an opportunity to redirect monetary policy towards boosting economic growth; (ii) the exchange rate is stable on the back of strong remittances, robust growth in exports, and comfortable foreign exchange reserves; (iii) there are distinct signs of recovery in the economy as shown by PIDE Business Barometer, which suggests that almost half of the firms posted a modest increase in their business volumes during second half of 2010 and the firms also remain optimistic about growth in business volume during the first half of 2011.
It has been proposed to freeze non-development public spending. This would force adoption of austerity measures by the public sector and provide the much needed space for development spending. On the fiscal front, the tax-to-GDP ratio remains low, putting pressure on public finances with little room for fiscal stimulus. In efforts to reduce the budget deficit, the Public Sector Development Program (PSDP) has been drastically slashed with adverse consequences for long-term competitiveness, Dr Muslehuddin added.
With the low tax-to-GDP ratio, the need to generate more revenues also has a sense of urgency. Past efforts to enhance tax revenues have been hampered by lack of documentation of the economy. The imposition of RGST would not only generate more revenues but would also help documentation. "We feel that not only the RGST should be imposed but other potential sources of tax revenues including agriculture, services, and real estate be brought under the tax net," he added.