EDITORIAL: Inter-ministerial coordination and cooperation, the hallmark of smooth government functioning, appears to be increasingly under strain as the Khan administration struggles to deal with multiple issues (ranging from rising poverty levels coupled with a consistent rupee depreciation since May 2021 to persistently high inflation rates, particularly in kitchen items, to a rising current account deficit) and multifarious structural issues, particularly those relating to the power sector and the Federal Board of Revenue (FBR).
Minister of Finance Shaukat Tarin’s insistence that growth is the way forward, an objective based on the premise that economic growth would imply increasing the quality and quantity of factors of production notably land, labour, capital and entrepreneurship, is sadly not quite applicable in Pakistan. There is the sustained failure of successive administrations to check the money laundering rampant in certain sectors like real estate. Moreover, labour remains largely unskilled due to lack of affordable training institutes, the cost of capital (discount rate) has been particularly high during the Khan administration and even today, 7.25 percent is the highest in the region, and entrepreneurship is largely family-based with corporations struggling to cope with taxation measures that remain focused on increasing government revenue rather than on promoting productivity. It was perhaps in this perspective that an international donor agency report concluded that as and when Pakistan’s growth rate increases so does the current account deficit and when the growth rate exceeds 3.75 percent the external account comes under extreme pressure leading to severely contractionary policies designed to contain imports.
In 2020-21, the growth rate was double than the projected 2 percent at 3.94 percent due to: (i) higher exports as orders from India under lockdown were diverted to Pakistan which in turn was backed by appropriate expansionary monetary and fiscal policies; (ii) lower international prices of crude oil and POL products, Pakistan’s major import items, that contained the import bill, and (iii) a massive rise in domestic consumption due to suppressed demand during the pandemic. In effect, the higher growth rate was not only backed by a rise in export orders made possible by factories producing at capacity but also by higher domestic consumption. Tarin’s intent to raise productivity through expanding the existing capacity is an objective that is perhaps not as short-term as he expected.
To make matters even more of a challenge, Tarin is up against other ministries that are not only challenging his decisions but are not implementing the reforms that the government pledged with the international donor agencies. The power sector continues to resist attempts to undertake structural reforms and instead is supportive of passing on its own poor performance (reflected by the growth of the circular debt from 1.2 trillion rupees in 2018 to over 2.5 trillion rupees today) onto the hapless consumers as was the case during previous administrations. And to add insult to injury the delays in procurement of fuel, particularly RLNG, has already cost the treasury around one billion dollars. The Commerce Ministry justifiably refuses to take the blame for the rise in the import bill due to these delays or indeed for the rise in the international prices of oil. And argues that the Finance Minister’s decision to import wheat and sugar, in spite of data suggesting that output this year would match demand – a claim that has been proved inaccurate in the past, is puzzling and not to be laid at its doorstep.
The demand to fund the Prime Minister’s social safety net projects including Benazir Income Support Programme, koi bhooka na soye, panahgahs, concessional credit, targeted subsidies is rising. However, in this context, it is relevant to note that the rise in current expenditure since the last year of the PML-N administration has been from 5.1 trillion rupees (revised estimates) to the current budget’s 8.4 trillion rupees – a rise of 61 percent while Ehsaas programme raised allocation from 120 billion rupees in 2017-18 to 246 billion rupees in 2021-22; in other words, not much of a rise in terms of the rise in total outlay. It is unclear how much of the 1.4 trillion rupees earmarked for the recently launched amid much fanfare Kamyaab Pakistan Programme is for the current year and how much for next fiscal year.
Panic appears to have set in as reflected by ministers blaming each other for their own performance, or lack thereof, and this together with rising inflation is further exacerbating the prevailing economic situation. The first line of defence for the government must be to curtail the rise in current expenditure evident during three years of its ongoing tenure, a major component of the higher outlay which, in turn, is the cause for an unprecedented rise in domestic and foreign borrowing as well as inflation. Structural reforms especially in the power sector as well as in FBR (which remains focused on raising revenue instead of implementing reforms, a fact sadly in evidence in the Prime Minister’s tweets and statements when he extolled the FBR for exceeding the tax target) must begin and therein would lie some breathing space for the administration.
Copyright Business Recorder, 2021
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