In his recent address at the Pakistan Institute of Development Economics, President Zardari prodded the country's economists into finding 'out of the box' solutions to Pakistan's economic problems - a hint about the economy being 'in the box', which may remind you of Ghalib's following couplet:
-- Ki mere qatal ke bad us ne jafa se taubah;
-- Hai us zood pasheman ka pasheman hona
As expected, the President didn't even hint at the resource waste and corruption that pushed the economy into the 'box'. Tactless politicians everywhere ended up doing the same, though not as badly as did ours. Yet, they insist that they aren't accountable. Latest examples: Taj Haider, Shirjeel Memon and Dr Zulfiqar Mirza.
The President spoke of a recovery strategy: cutting non-development outlay [and PSDP], reforming the power sector [via IPPs], restructuring the public sector entities [which one?], incentivising inward remittances, poverty alleviation programmes [like the questionable BISP], and cutting the size of federal and provincial cabinets.
He conveniently forgot that the regime didn't voluntarily reduce the cabinet size; although the key part of the forgotten 'Austerity Plan' drafted by Shaukat Tareen, was activated only after the state became penniless. Record state borrowing thereafter squeezed private sector credit and with it, all hopes of economic growth.
The Musharraf regime caused many of the current economic woes, but did the PPP regime try to undo any eg restructure just one public sector entity? The regime worsened those woes, despite warnings over its exuberance justified in the name of 'sovereignty'? Virtually everyday we hear about the discovery of a fraud in a state office.
Economists repeatedly suggested measures to improve taxation without hurting the incentive for investment by basing taxes on the ability-to-pay, and that surveillance on surrender of indirect taxes collected (and often coolly pocketed) by businesses needs real-time monitoring because that's where the biggest tax leaks are. But continuing tax leaks prove otherwise. Courtesy the inconsequential revision of the Afghan Transit Trade Agreement in 2010, massive corruption therein can't be eliminated until Afghan importers temporarily deposit import duties with FBR (at Pak tariff rates) till Afghan authorities confirm receipt of goods in Afghanistan.
Despite paying the agriculture sector global prices for its produce, the regime doesn't want to tax it although progressive tax on income from plots exceeding 25 acres (with its rate on 'barani' land being half that levied on income from river-fed lands) should be imposed to make the tax system truly equitable, which it is not.
Corporate taxes in Pakistan are among the lowest. Similarly, tax rates on salary incomes in the Rs 1.2 to 2.4 million a year range must rise by 1 percent and those over Rs 2.4 million a year by 2.5 percent. Import duties on luxury electronic goods (except for institutional use), and luxury vehicles also need upward revision.
As for progress on expanding the tax net, it has been pathetic although the FBR admits the existence of 7 million tax evaders. Three years were enough by any standards to achieve this target but all we hear are estimates of the numbers of tax evaders, perhaps, because this lot is too powerful (or regime-friendly?) to tax.
Yet the President said the subsidy regime has been rationalised, tax reforms have been introduced to mobilise resources and the tax net is being expanded via the introduction of the RGST. But the crux of tactless 'rationalisation' has been burdening the existing taxpayers with more taxes, and the imposition of the RGST has been a disaster.
Containing inflation has been the state's biggest failure because, while it didn't muster the capacity to impose its writ on the wholesale and retail markets, it also didn't force the trade associations to draft and forcefully implement an anti-hoarding self-regulatory code, blackball its violators and point them out to the state for punishment.
In the context of containing the impact of the oil price rise, it is worth recalling that on February 2, 2009, the oil price was $36 a barrel. Had we begun strategic forward buying at that time, the impact of price rise could be reduced (via averaging of various contract prices); by continued buying on spot basis, we keep doing just the opposite.
What can economists do in a scenario wherein mismanagement, waste and corruption are the order of the day? Worse still, all this is denied shabbily and court verdicts against the involved politicians and their cronies in the bureaucracy, are defied openly. Can such a set-up enjoy credibility within Pakistan and abroad?
The President said that the government's tough decisions turned the economy around, which is showing signs of recovery, in fact setting new records viz. exports are expected to rise by 25-30 percent to touch $24 billion, exchange reserves are at $17.5 billion, and the GDP will register 3 to 4 percent growth during 2010-11. Some hope!
Do these results reflect government efforts? Firstly, export growth principally owes itself to a rise in cotton price globally. But we lost its benefit; instead of exporting raw cotton and yarn, we could export cloth in its various value-added forms if only the power shortages didn't force the textile sector to operate well below its capacity.
Secondly, high exchange reserves owe themselves to borrowing from the IMF. But the IMF-funded reserves delivered nothing except stabilise the rupee's exchange rate because the bulk of these funds were invested in IMF-specified global securities, and so couldn't help the system cut its costs and rebuild its competitive ability.
As for GDP growth, everyone including the IMF, WB and the ADB believe that it would, at best, be just over 2 percent. Others believe that, given the current pace of growth (wherein until January 2011 only the agriculture sector grew by 3 percent), it may be zero or negative if the power supply scenario doesn't improve.
In a setting of gross mismanagement, the ultimate 'out-of-the-box' solution isn't hard to visualise. Besides, if 45 percent of the electoral rolls (based whereon the regime was elected) were dubious, and so just 28 percent of the listed voters cast their votes, only about 15 percent of the voters actually elected the incumbent regime. So much for the regime's claims about 'sovereignty'! Not surprisingly, this 'sovereign' regime overlooked from day-1 the onset of the recession and the need for austerity; if it hadn't done so, the President would not be seeking 'out-of-the-box solutions'. And if economists must provide those solutions, do we need parliamentarians?