The state of the economy today should be a source of serious concern to the eleven-party coalition government in power less than nine months – not because inflation is unchecked, not because unemployment is rising, not because the government does not have the fiscal space to carry out the needed relief and rehabilitation required by the 33 million flood affected victims, many reportedly still living roadside, but because of flawed policies that the country can no longer afford.
The coalition has already appointed two sets of economic team leaders - incumbent Finance Minister Ishaq Dar (appointed 27 September) and Jameel Ahmed, Governor, State Bank of Pakistan (SBP) (appointed on 26 August). Previously, Miftah Ismail held the finance portfolio (11 April-27 September) with Murtaza Syed, Acting SBP Governor (5 April- 25 August).
The change in the first economic team, the grapevine contends, is not due to their performance, or its lack thereof, but because Ishaq Dar enjoys the ear of the PML-N supremo, Nawaz Sharif, and was desirous of the appointment as finance minister for the fourth time, a view strengthened by Ismail publicly accusing Dar of denigrating him in the Whatsapp group of senior party leaders.
The Ismail-Murtaza Syed team successfully negotiated the seventh/eighth International Monetary Fund review while the current team has yet to meet prior conditions for the ninth review and disturbingly has implemented decisions that are violative of the spirit of the Fund programme: (i) provision of electricity to exporters at the rate of 19.99 rupee per unit estimated at about 100 billion rupees - unfunded; with the general public paying around 40 rupees per unit it is hard to view this subsidy as anything but elite capture especially given the 33 million flood victims; (ii) an agricultural package envisaging around 1.3 to 1.5 trillion rupees of additional credit to farmers; however, there are legitimate concerns that this maybe hijacked by the rich farmers, as in the past, and is predicted to be highly inflationary as money supply will rise that is not backed at least initially by a rise in output; and (iii) a widening interbank and open market rate that maybe understating the debt servicing/payment of principal as and when due but is creating issues of far greater magnitude inclusive of declining remittance inflows, shrinking reserves and clearly not in consideration negatively impacting (of an artificially strengthened rupee) on exports – a lesson that has clearly not been learned from Dar’s previous stint as the finance minister.
Today Pakistan does not have the luxury of abandoning the Fund programme, as the pledged assistance from friendly countries of 4.2 billion dollars minus the over 10 billion dollar rollovers, and from multilaterals, budgeted at over 40 billion dollars this year alone is pegged to the success of the ninth review.
The country also does not have the luxury of continuing its flawed policies particularly with respect to the power sector and tax sectors. Dar has disclaimed responsibility for the outflow of dollars to Afghanistan by arguing correctly that it is not the finance ministry’s domain to stop the outflow yet he must accept that the buck stops with the economic team leaders because his flawed policies have made the outflow more attractive – policies that include little exchange flexibility, no fiscal discipline, and cutting development budget to minimize the rising budget deficit. One would.
So what is the way out of the current economic impasse? First of course is to stop dithering and claiming successes in negotiating loans from abroad which are all pegged to the success of the Fund’s ninth review. In other words, go back on the programme even at the cost of the incumbent economic team leaders losing all face.
Second, one would urge the finance minister to undertake/commission empirical studies to identify the outcome of his policies 2013 to 2017 so that he does not continue to repeat mistakes whose price is eventually paid for by the general public.
Secondly, a mini-budget is required and this necessitates a focus not on generating the budgeted revenue shortfall but on reforming the inequitable, unfair and anomalous tax structure. The current system continues to rely on regressive taxes whose incidence on the poor is greater than on rich, or in other words raising sales tax (accounting for 44 percent of total FBR collections in the current year), a regressive tax, should not be a priority in a country where poverty levels are rising.
The country has also been subjected to a recent steady rise in petroleum levy on all related products (petrol levy already maxed at 50 rupees per litre) to its maximum limit which incidentally is not under the head sales tax but in other taxes.
The budget for the current year envisages 37 percent revenue from direct taxes (out of which around 70 percent is from withholding taxes in the sales tax mode) and 63 percent from indirect taxes. Customs duties that have taken a hit due to administrative and exchange measures would be met, if past policies of the incumbent finance minister are anything to go by, by further raising existing indirect taxes or brining other items under this net.
Thirdly, and perhaps of most relevance today with the economic impasse continuing is for the mini-budget to include reduction in expenditures and not development expenditures as was the case in the past (as they negatively impact on growth) but on current expenditures which should imply: (i) implementation of identified pension reforms where future pensioners must contribute to the pension fund instead of the treasury bearing the entire cost from the budget and not from a dedicated fund; (ii) all subsidies not targeted towards the poor and vulnerable must end; (iii) while immediately the government cannot but raise electricity tariffs to meet full cost recovery targets set by the IMF and the World Bank yet it is critical to begin implementing reforms that would improve governance rather than passing on the buck to the hapless consumers; (iii) sacrifice in terms of freezing pays and perks are required for the civilian and military establishment as well as members of the executive (the 70 plus ministers/ministers of state/advisors etc.); and (iv) all procurement must be frozen excepting what is required to combat the rising wave of terrorism in the country.
To conclude, a gentle warning to the eleven-party coalition government in general and the PML-N contingent in particular is: the general public can no longer bear the cost of the elite capture of revenue measures and untargeted subsidies especially after the recent floods and hence there is a need for urgent change in policies towards those that are economically viable.
Copyright Business Recorder, 2023
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