Dr. Ashfaque Hasan Khan is the Principal and Dean, School of Social Sciences & Humanities, National University of Sciences & Technology (NUST), Islamabad. He is also a member of the Economic Advisory Council of the Federal Government. His work in the government includes several roles at the Ministry Finance (1998 to 2009), including Special Secretary Finance, Director General, Debt Office, and Economic Adviser. Dr. Khan was also elected as a member of the Board of Trustees of the International Islamic University, Islamabad. Dr. Khan holds a PhD in Economics from the Johns Hopkins University, USA.
Selected excerpts from BR Research’s recent conversation with the outspoken economist on economic challenges facing the current government and possible solutions are produced below:
BR Research: As a member of EAC, what would you identify as the top challenges for the current government?
Dr. Ashfaque Hasan Khan: At the EAC, we have only had one inaugural meeting thus far. It was a get-to-know exercise with a discussion of the agenda going forward, not much more than that. My personal view is that the immediate challenge facing Pakistan is its balance of payments. Imports are growing rapidly and exports are not increasing as much. Remittances are more or less stagnant. All those things have amplified the current account deficit (CAD).
I had reminded the previous government to do something about the growing CAD, but they wasted a lot of time. Even as we speak, we have not taken any major or credible decisions. Whatever measures have been taken in the mini-budget look more like business-as-usual.
Going forward, I see the economy slowing down and GDP growth in FY19 might clock in around 4 to 4.5 percent. There are several indications: imports of diesel have slowed; credit off-take hasn’t picked up this year; the LSM growth was negative in July; agriculture sector is affected due to low amounts of rainfall. The textile industry, which seems happy with the mini budget, says exports will be enhanced due to better competitiveness. If we can really enhance our exports and taking the baseline assumption of an economic slowdown, the CAD can come down from $18 billion to $12 billion as a result of slowdown in import growth.
BRR: Considering a looming slowdown, how sound is the idea of further monetary tightening?
AHK: The SBP’s monetary policy is a forward-looking policy. Another adjustment is required to slow down the economic activity. I am expecting another rate hike tomorrow, between 25 to 50bps; most likely it will be 25bps.
BRR: What is the external financing gap and how would you recommend bridging it for the remaining nine months this fiscal?
AHK: If the CAD comes down to $12-13 billion and if the loans repayment is about $7 billion, you will need $20 billion. We can expect $12 billion from traditional and non-traditional financing sources including FDI and loans from the World Bank, Asian Development Bank and Islamic Development Bank. So, we need to worry about filling the remaining $8 billion gap. This is the baseline situation I am talking about.
So far, marginal steps have been taken to fill the gap. We need some major measures on the import side. If the finance minister suggests that we need to reduce another $3 billion of imports, the financing gap can come down to $5 billion. A financing gap of $5-6 billion is not a lot, by the way. You can raise funds through euro bonds. You can go for syndicated loans in Chinese market. You can float bonds for non-resident Pakistanis. I have no information on how much money is going to be coming from Saudi Arabia; it would be a bonus.
BRR: You don’t seem to be in favour of going to the IMF. Why is that?
AHK: I don’t like that option because Pakistan must learn to live without the IMF. Every two or three years, we get a severe headache and we run to the IMF for aspirin. We should not get this headache every three years. IMF is a temporary solution. I am against such solutions. Raising $6 to $8 billion from today’s international market is not an issue. We need to take charge of our economy! The ministry of finance, in my view, needs to make policies and not just implement them.
BRR: How far did the mini budget go in addressing the fiscal imbalances?
AHK: The previous government’s finance team laid a fiscal landmine for the current government perhaps because they were aware that they would not return to power. Therefore, a revised budget was the need of the hour.
The measures that have been taken in the mini-budget will restrict fiscal deficit between 6 – 6.5 percent of GDP. The new revenue target of Rs4361 billion, which is a growth of about 13 percent, includes new tax measures of Rs183 billion. Without those tax measures, the growth in revenues will be 9.7 percent, which is less than the nominal GDP growth rate.
Then, out of the tax measures Rs183 billion, Rs93 billion has been calculated to come through “improvements in efficiency of FBR” – a practice of the nineties to meet shortfalls. We need to forget about this number. Remaining will come through tinkering in regulatory duties and adjusting the income tax rates.
BRR: Do you agree that disease is the fiscal deficit?
AHK: In my view, 6-7 percent of fiscal deficit seems to have become the new normal for Pakistan, for two reasons. One, there is a manufacturing defect in the NFC award – it has taken away the motivation to undertake meaningful tax reforms for both federal and provincial governments. Another limitation is that if the federal government undertakes tax reforms on the advice of IMF, people react and nothing gets done.
Constitutionally we cannot change the resource distribution formula. But there are other ways to improve the situation while conceding that the 57.5 share cannot be changed and is a given. I would point out that prior to this 7th NFC award, federal government used to collect 5 percent as collection charges; currently, it is one percentage point. Get it back to 5 percent.
Second reason behind the high fiscal deficit is that even though bulk of resources is going to the provinces, there is still sense of deprivation with regards to mega-projects done by the federal government for them. But it is the provinces’ job to develop their own resources. The provincial mindset of dependence on federal government to undertake development projects needs to change
We need to have a permanent NFC team that is headed by a renowned economist dealing in public finance and has membership from the provinces taken from retired secretaries of finance and revenue. I suggest that provinces should get 75 percent of the amount based on the formula and the remaining should be disbursed on the basis of performance.
BRR: What is your view on recent controversies generated around gas price hike and the removal of bar on non-filers buying properties and vehicles?
AHK: The gas price hike was a right policy to take. Our gas prices are linked with oil prices in the international market at one-sixth of the oil price. When oil prices began to decline 2014 onwards, gas prices also came down which is why we were getting a relief in our gas bill. However, 2016 onwards, oil prices have almost doubled hovering between $76 - $80 per barrel. On top of that, our exchange rate has depreciated over 20 percent. That forced the government to raise the price, which is the same as passing on the petroleum prices. If he hadn’t done that, we would have turned OGDCL, SSGC and SNGPL into white elephants just like PIA and PSM.
But the government has failed to defend its policies. The government has only one person in Asad Umar defending its move. Cabinet members such as Dr. Ishrat Husain and Abdul Razzak Dawood should also speak out.
On the issue of non-filers, I am of the view that it is discriminatory to bar someone from buying something. If I don’t file a return, I should be punished for that. But why are we punishing non-filers by banning purchase of just two items, real estate and cars If I have money in my pocket, it is my fundamental right to buy a car or a house. Instead, allow people to buy such assets, and when they come for registration, make them file their returns.
On that point, I feel that if the government backed off, it will give a bad signal that it is prone to pressure. That would not a good signal for the markets.
BRR: Capacity payments to IPPs increased by 40 percent last year and amounted to almost Rs500 billion in FY18 alone. As they are take-or-pay contracts, there isn’t any other option but to increase the amount of energy sold by at least 30 percent on an annual basis to reduce the capacity burden. But that is next to impossible given the supply side distribution and transmission constraints. What can the government do to tackle the issue?
AHK: I don’t know how demand projections for power plants have been calculated for ten years down the road. Last year in June, installed power capacity was over 26000 MW. And by 2024, we will be adding some 36000 additional MWs. Our installed capacity will therefore be 62000 MW in six years. That will massively increase capacity payments. Capacity payments already increased to Rs490 billion in FY18 – next year they will be Rs650 billion – in other words, two percent of GDP will be spent on capacity payments, regardless of whether you use all that power or not.
I would recommend the new government to review the entire power-sector program. Certain projects are already completed; there are some that are ongoing; but we need to rethink some of the projects that are still in the pipeline. With the fiscal space we have, it will be extremely difficult to make capacity payments. And then the system trips down handling more power as we haven’t made adequate investments in power transmission.
BRR: Lastly, EAC is a body with voluntary advice. How much effective can it really be?
AHK: I have been saying this for long that my experience working with the EACs of two previous regimes was very poor. The finance minister has to report to the Prime Minister so there is a conflict of interest as everything must be reported as looking fine. Past EACs used to be little more than eyewash. The difference this time is that we have a PM who is heading the EAC.
To make the EAC more effective, I feel that we need to follow the model in the US, where there is a permanent Council of Economic Advisors. Members take leave from their daytime jobs, have full-time, tenured roles, and look after different advisory responsibilities.
However, we still joined hands with the current government because the Prime Minister is an honest and sincere individual who wants to do good things for this country and we as EAC members see it as our moral duty to help him however we can. We will also be vocal in telling the PM if we have reservations over policies.
Comments
Comments are closed.