EDITORIAL: The state of the economy today necessitates a set of policy reversals as well as reforms on an emergent basis that would require the incoming government to hit the ground running. Unlike previous governments, which were reprieved from responsibility for taking extremely politically challenging decisions due to an interim caretaker set-up, this government does not have that luxury. In addition, the coalition partners would in all likelihood disassociate themselves from such unpopular decisions while Pakistan Tehreek-e-Insaf sitting in the wings is likely to harp on some reversals as indicative of their anti-poor stance.
The first decision that one would hope is taken even before these lines are published is the withdrawal of the relief package on petroleum and products (10 rupee reduction per litre) and electricity tariffs (5 rupee per litre) till 30 June 2022; and the withdrawal of exemptions under the 1 March industrial policy which included an amnesty scheme barring specific industries.
Though the outgoing PTI government had already tweaked these packages to lessen the cost to the exchequer and soften the opposition by the International Monetary Fund (IMF) by changing the diesel price mechanism and reducing the scope of the industrial amnesty package by imposing performance criteria but in our view, nothing short of the withdrawal of these two packages would bring the Fund team on the negotiating table to discuss the seventh review. The start of these negotiations must include an extension of the ongoing Extended Fund Facility programme from the scheduled September end to next year — an extension that should be possible given that the total number of reviews envisaged in the sixth review documents is nine and the usual period between two reviews is three months or so.
There is no doubt that withdrawal of the relief package would fuel inflation which has continued to spiral for the past three and a half years. However, dealing with inflation through a rise in cash disbursements and enhanced subsidies or ever-rising injections into the economy not backed by higher productivity, the PTI government had remained oblivious of its own contribution to inflation. The new government would have to strengthen district administration, one of the weaknesses of the PTI government, to ensure that the price set is the price at which items are available in the market.
The second decision that the government needs to take is to proactively begin implementation of power and tax sector reforms. The circular debt has risen from 1.2 trillion rupees in 2018 to over 2.4 trillion rupees today and one would urge the government not to follow its 2013 flawed policy of clearing the debt through an irregular payment violative of the rules as it was made directly to the State Bank of Pakistan, bypassing the Accountant General of Pakistan, so declared by the Auditor General of Pakistan.
This amount must be cleared through sectoral reforms including coming down hard on electricity theft and non-payment by government entities, provincial and federal. In this context, some flawed policies of the 2013-18 period must be avoided that included setting up coal plants away from the source of coal and not focusing on the obsolete transmission network as well as taking ownership and improving on the PTI administration’s IGCEP (Indicative Generation Capacity Expansion Plan) rather than dismissing it simply because it was developed by a political opponent. The quicker these reforms are implemented the sooner the multilaterals will abandon their insistence on higher tariffs to achieve full cost recovery.
Widening the tax base remains a priority task acknowledged by the past three administrations and yet it remains unmet. It is time that the tax system is made fair, non-anomalous and equitable and for that there is a need to shift the emphasis from indirect taxes to direct taxes which account for no more than 30 percent of total tax revenue collected.
The Benazir Income Support Programme (Ehsaas Programme is not on paper) is likely to continue but the fact of the matter is that the new government may be tempted to reduce it further to adjust the projected rise in the budget deficit. This should be resisted at all cost as without this support hundreds of thousands of families are not going to be able to meet their expenses. The Sehat Sahulat Card is financially unviable as the numbers benefiting from it rise and additionally has some major lacunae inclusive of collusion between hospitals and patients. These lacunae need to be ironed out and an actuarial study carried out, as suggested in 2019 by the German GiZ and UNDP, to determine the premium and whether it is affordable by the provincial governments.
The budget deficit has been ignored in the ongoing IMF programme by its focus on primary deficit (minus debt servicing cost or interest) — a factor that accounts for debt stocks rising exponentially during the previous administration — domestic debt from 16.4 trillion rupees to over 27 trillion rupees and foreign debt from 95 billion dollars to over 130 billion dollars. The government needs to contain the budget deficit and bring it down to 6 percent of the GDP, if possible for next fiscal year. This is a challenging task made all the more challenging as in the next fiscal year resources would have to be set aside for interest payments and principal as and when due (G-7 countries Debt Relief Initiative to enable poor countries to better deal with the pandemic will expire this year).
Be that as it may, one would hope that the disastrous and economically flawed policy of an overvalued rupee (2013-17) to understate the deficit is not followed and instead massive sacrifices are made by all recipients of current expenditure. One can also hope that pension reforms whereby, like in the rest of the world, the employee makes a contribution, is implemented for all future retirees.
Mian Atif, a US economist of Pakistani descent, tweeted that PTI-led government inherited a bad economy in 2018 but left a worse one in place. That sadly is true and one would hope that the new government is cognizant of not only the mistakes of its predecessor but also mistakes by the PPP-led (2008-13) and the PML-N administrations (2013-18).
Copyright Business Recorder, 2022