The absence of pro-growth policies

The Lahore-based think tank, Institute of Policy Reforms, in a recently launched report concluded that the Sharif administration's economic policies do not support economic growth. Growth, it further argued, is the key to creating more jobs, providing better living standards and reducing poverty and warned that "business as usual is no longer an option. Each year an additional 2 million people enter the job market and by 2030, Pakistan's population will touch 260 million, more than half of which will be in cities." The issue remains one of inadequate savings for investment in future growth and the report points to major infrastructure deficit, low private investment, paltry outlay on education and training and maintains that "governance often burdens businesses, political economy favours the influential and resource allocation is inefficient."
None of the above conclusions comes as a startling revelation and Business Recorder has since long been urging the government to temper its overarching focus on fiscal deficit reduction, a key condition under the 6.64 billion dollar three-year Extended Fund Facility of the International Monetary Fund, once the fiscal deficit had been brought down to 4.9 percent in 2014-15, down from over 7 percent in 2012-13. The suggestion was not to a shift away from reducing the fiscal deficit but to assuage it by inculcating a pro-growth policy that would have necessitated a higher outlay on development expenditure. Sadly, the 2016-17 budget envisages a fiscal deficit of 3.8 percent in comparison to the 4.3 percent the year before - or a reduction of 0.5 percent which is only 0.1 percent lower than the reduction in fiscal deficit realised between 2014-15 (4.9 percent) to 2015-16 (4.3 percent). In other words, the emphasis remains on deficit reduction and it is unlikely that the projected growth rate of 5.7 percent would be achieved without considerable data manipulation.
Economic theory dictates that a high growth rate of the economy has positive implications on the government's revenue generating capacity but in Pakistan's case, this may have to be supplemented with wide-ranging reforms of the tax structure that remains heavily skewed in favour of indirect taxes whose incidence on the poor is greater than on the rich; and rising reliance on withholding taxes as a component of direct taxes (to the tune of 75 percent at present) in the sales tax mode rather than in the income tax mode accounts for little if any shrinkage of the parallel illegal economy.
At the same time, current expenditure is rising at a faster pace than development expenditure - from 2,611 billion rupees to 3,843 billion rupees - a rise of 47 percent. Defence rose from 545 billion rupees to 860 billion rupees or a rise of 57 percent and the major contributor to the rise is the interest and principal payment as and when due as a consequence of the massive rise in reliance on borrowing. Thus in 2012-13, interest payment was budgeted at 925,775 million rupees while in 2015-16 the revised estimates gave a total of 1,315,016 million rupees - a rise of 42 percent in just three years and this in spite of the fact that the rupee is grossly overvalued to understate the external indebtedness. The projection for 2016-17 has not been taken as a yardstick as the budgeted and revised estimates during the Dar-led Finance Ministry vary considerably; for example, last year, the budget gave a total of 1,279 billion rupees as mark-up on domestic and foreign debt while the revised estimates were 1,315 billion rupees or a difference of 36 billion rupees. The IPR's recommendation that can be supported is to increase government revenue and reduce external borrowing but there is also a need to reduce domestic borrowing as well as reduce current expenditure.
Exports have witnessed a steady decline in recent months due to an overvalued rupee and delays in refunds, decisions attributed to the Ministry of Finance; what is required as per this think tank, is an export-oriented trade policy with the tariff structure supporting export-led growth, components of the recent package, and suggested a review of the government's power policy.
To conclude, there is much about the state of the economy that must be a source of serious concern for the government; however, data manipulation as well as sponsoring some supportive articles in the foreign press continues to be cited by the PML-N leadership as a yardstick for complacency with the policies of the Dar-led Finance Ministry. And unfortunately criticisms followed by recommendations are dismissed as either politically motivated or anti-state.