Further to my article in Business Recorder in February 2023 titled “Redefining Pakistan’s Economy” that entailed a broader outline of reforms to fix the flawed economic structure, both in medium and long term. However, the way our socio-political situation is deteriorating specially after recent election results and the process of government formulation, I feel the need to put forward some key decisions that are inevitable to ensure sustainability till we move towards reforms.
Our fiscal deficit on day one of compiling the federal budget is around PKR 7.5 trillion. With the FBR revenue of PKR 9.4 trillion and total resources of approximately PKR 12.4 trillion, just two expenses of PKR 7.3 trillion of debt repayment and nearly PKR 5.4 trillion of NFC take away the entire resource.
It is noteworthy to mention that the debt servicing budget for the next financial year might be in excess of PKR 9 trillion. The high level of grants/subsidies, defence expenditure, pay & pensions, cost of running the government and PSDP (public sector development programme) are all financed through additional unproductive debt, and the debt trap including the circular debt is like a crocodile jaw that’s ever expanding.
On the external front, the outstanding payables in FY 2024 amount to approximately USD 24.6 billion; Pakistan has already paid USD 5.4 billion, USD 12.4 billion is expected to be rolled over, while USD 6.8 billion is to be paid during the remaining period, external debt liability for the next year is expected to exceed USD 25 billion.
This repayment timeline coincides with the expiry of the USD 3 billion of IMF programme on 30th of March. At this stage we cannot afford an inability to renew the programme – even delays or uncertainty can push us back to the same concerning levels of the first half of 2023. This shall further lead to the already negative investor confidence and the overall macro-economic outlook.
The actionable measures, after the IMF, include getting hold of whatever we can from the friendly countries in form of debt rollovers or the investments promised through SIFC (special investment facilitation council) forum.
In my opinion the scope of SIFC and the deliverability has to be decisive, specifically with regards to the timelines of the investment inflows and projected feasibilities, ensuring hybrid foreign currency-based returns – that is the number one challenge: keeping in view our devaluation patterns for the last one decade or otherwise getting into the dollar based returns on equity, resulting into another circular debt situation.
SIFC must have a short-, medium- and long-term agenda. There should not be more than 20 to 30 targeted projects that need to be delivered within a calendar year with realistic expectations and business feasibilities.
In this regard privatization of SOEs (state-owned enterprises), the way interim government has done with PIA and FWBL are the best examples and must continue with the same zeal and speed. This must simultaneously be done for the power/energy sectors, railways and the oil & gas sectors on a war footing.
The third focus should be to look within, with a documented USD 340 billion economy, I have a concerted view that a bigger economy is in the informal sector, including a substantial pocket of cash dollars that can be galvanized without being in the radar of IMF’s so-called amnesty schemes.
Now let’s focus on the budgetary deficit; there are a few practical solutions that we must have the political will to undertake for our people and beloved homeland as the deficit can be reduced either by increasing revenues or curtailing expenditures.
The 18th Amendment needs adjustments: either the provincial financial awards for the local governments have to be in place in six months, otherwise the provincial share of the NFC has to be amended. The provinces if don’t deliver on local governments’ actual formulation, and along with cutting down to fifteen ministries, and generating at least 20-25% of their own revenues, then the overall share of NFC award shall have to deduct the debt repayment on proportional terms with the federal government.
While Pakistan has one of the lowest Gross National Savings Rates (GNSR) in the world, at around 11% (Bangladesh at 34%, India at 30%, and Iran at 38%), due to reasons already explained in my previous article.
We need to launch a full-fledged sukuk market that shall not only increase our GNSR multifold but also has the capacity to at least finance 70-80% of our PSDP.
Recent example to substantiate this claim is the Islamabad Metro Sukuk at PSX for PKR 30 billion that was over-subscribed and attracted over PKR 470 billion. We can actually make sukuks for almost every sector and can realistically generate an additional PKR 1 trillion towards financing the deficit and borrowing.
We can launch dollar sukuks, inviting foreign and domestic investments, including mines and minerals, tourism, transport & railways, and ports & shipping sukuks, etc. This can actually help in the reprofiling of the large domestic debt and circular debt.
Interest rates against domestic borrowing should be negotiated and brought down by 5-6%. Moreover, policy rate pegged with inflation needs to be revised with the IMF (International Monetary Fund). We shall be saving more towards the deficit by lowering financial cost.
With GOP being the largest domestic borrower, resulting in almost zero or negative growth in private sector credit and directly impacting the GDP growth, this measure shall also help in poverty alleviation and support the lowest income group.
It is pertinent to mention that we need to increase local confidence with regard to Pakistani Rupee. Buying dollars as an investment against devaluation has to be discouraged, as that drives down the local currency further. An SBP scheme guaranteeing against PKR devaluation by around 7-8% can motivate people to make savings in home currency instead of converting to USD.
FBR’s (Federal Board of Revenue’s) reformation with some more realistic adjustments as recommended by the interim finance minister can actually work, which is a need of time. One of the most important reforms is to keep policy and administration separate so as to avoid the existing conflict of interest.
We can actually increase the direct tax revenue multifold by implementing 10% ushar on agriculture produce that on average is USD 68-70 billion per annum, making us the seventh largest producer of agriculture in the world.
It is to be noted that the 5% of individuals holding 62% of agriculture land, who also control the intermediaries, have flour, sugar, rice and textile mills, and are always a part of every government and power structure, need to be taxed. Retail tax of the top 20% retailers along with real estate tax on the files being held for six months, alone can contribute a substantial amount to the exchequer.
Reducing the size of federal government to not more than 12-15 ministries and slashing the grants and subsidies by 30% is another recommendation. Farm-to-market reforms by inviting the foreign and domestic investors/banks towards creating cottage-based industry, storage facilities, and value addition of exports should be on top priority, along with emphasis on mines &minerals, tourism, documentation of economy and financial inclusion should be the top focus areas for the next government and SIFC.
We must ensure a national consensus on economy, enabling the incoming government with the support of SIFC to deliver upon these challenging recommendations that could actually finance and plug our fiscal deficits within a couple of years.
Copyright Business Recorder, 2024