EDITORIAL: Muhammad Aurangzeb resigned as president and chief executive officer of Habib Bank Limited and surrendered his Dutch nationality, before accepting the portfolio of finance, a privilege and an estimable position conferred by the newly-installed Shehbaz Sharif-led coalition government directly and by the people of this country indirectly.
His experience is diverse, accumulated in highly regarded foreign and domestic investment banks as well as in several countries and to-date his behind-the-scene services to the country are well known, including extricating the country out of the Financial Action Task Force’s (FATF’s) grey list. There is no doubt that he will bring considerable experience and goodwill to the table, which would stand the country in the much-needed good stead; however, what is critical is to acknowledge are his strengths and the limitations confronting him premised on the current state of the economy.
The finance minister would, within the first week of his appointment, engage with the International Monetary Fund (IMF) on the second and final review of the Stand-By Arrangement (SBA) with negligible flexibility to seek a phasing-out of the harsh conditions that account for the steady rise in utility charges and prices of petroleum products today. He is likely to lay out his vision for the next programme that all are agreed is critical to averting the continuing threat of default facing the economy – a vision that incorporates a design with out-of-the-box solutions that will increase the country’s leverage with the Fund.
It is unlikely that the Fund team will cease to insist on full cost recovery as a key upfront condition for either the success of the second review or indeed the next programme and therefore one would hope that Musaddaq Malik, the Energy Minister, begins to implement the structural reforms envisaging massive curtailment in the circular debt exacerbated by mismanagement and corruption prevalent in the sector. The attainment of full cost recovery must over time shift from passing on the buck to the hapless consumers to implementing reforms that may necessitate revisiting the large annual budgeted subsidies to the sector.
To increase the leverage with multilaterals and bilateral, Aurangzeb would need to focus on three measures. First and foremost among them is a robust and sustained support from all the major recipients of current expenditure, preferably voluntarily, with an agreed realistic time line, the time defined as the period required to improve the key macroeconomic indicators which, unlike during the past two decades at least, will not be tweaked by the government’s data gathering machinery and thereby compromise the ability of the finance minister to take appropriate mitigating measures.
Pension reforms, a rising component of current expenditure, identified after studies by domestic and international consultants, must begin to be implemented and in case of staff resistance, as has happened repeatedly in the past, the Margaret Thatcher approach to quell protests related to her privatisation initiatives in the 1970s must be followed.
Secondly, Aurangzeb would need to look at the revenue side of the budget and one would hope that his reforms do not focus only on administrative measures (as proposed by the caretakers) but also seek to reduce the current heavy reliance on indirect taxes whose incidence on the poor is greater than on the rich (currently around 75 to 80 percent of all taxes are generated from indirect taxes). In this context, it is relevant to note that the petroleum levy is also an indirect tax. Raising direct taxes would entail ending all exemptions for elite groups/sectors, including traders, and bringing the farm tax by provinces at par with the tax paid by the salaried class.
And finally, a massive reduction in domestic borrowing (as foreign borrowing from foreign markets - banks and debt equity – is too expensive given our poor rating) a highly inflationary policy should be the preferred way forward to check inflation. Rating agencies have indicated that if Pakistan succeeds in getting another longer term Fund programme our rating will improve, which will bring the rate of borrowing from the commercial sector abroad down but that may take us to the end of the current fiscal year.
To conclude, the state of the economy today is such that the incumbent finance minister will face pro-people policy challenges dictated by the donors (multilaterals and bilaterals) and the only way to ensure he succeeds is for all domestic stakeholders to voluntarily sacrifice their existing allocations and tax exemptions that would dampen the need to borrow domestically or internationally.
Copyright Business Recorder, 2024