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It is necessary to learn from history and not plunge into chronic debt crisis
As a new coalition government has been formed at the centre, the incoming premier seeks to reset major economic reforms and has received a great deal of attention for his ambitious plans to address Pakistan’s long-term budget and fiscal health difficulties.
Though we have yet to see him pitching an ambitious legislative agenda in parliament, it is important to learn lessons from history and not to fall into the trajectory of chronic debt crisis, which is happening in Sri Lanka right now as the island nation is left with no dollars for food and fuel.
Like Sri Lanka, Pakistan’s annual bill for oil imports amounts to around 60% of its foreign exchange reserves. This makes our economy very vulnerable to Brent crude prices as we constantly borrow in dollars to finance energy imports.
Moreover, the revenue from petroleum and energy consumption is in rupees, giving rise to a multitude of risks, especially the exchange rate risk.
In the past, the PML-N governments tended not to devalue the rupee so that these energy imports remained affordable for the middle and lower-income classes, whose income increased only marginally or not at all.
However, the upper-middle and the elite classes have always exploited the availability of “cheaper dollars” by buying imported cars, electronics, and other products, resulting in an import-led growth. This hurts the overall economy in the long run, and we see increasing inequality, declining foreign exchange reserves and rising current account deficit (CAD).
Hence, the government needs to perform balancing acts on two fronts. First, it requires a sustainable influx of dollars to manage trade deficit, and second, it should manage CAD and increase the tax base for financing any subsidies, social security programmes and new infrastructure.
As the era of Covid fiscal stimulus seems to be over, viability of all such programmes needs a reality check, as a loose monetary policy is now almost impossible.
Balance of trade
When it comes to managing the import bill, the existing free-float exchange rate and the policy rate determination system should continue as they serve as early warnings of a worsening balance of trade and payments.
Currency devaluation boosts exports in the short run only so the government needs to incentivise export-oriented sectors (excluding the agriculture sector) by rewarding growth and upgrading technology, but at the same time should penalise non-growth and rent-seeking behaviour at the expense of government subsidies.
For example, the textile sector should be ready to invest in the upgrading of its plants, otherwise any subsidies available should be phased out.
Similarly, to attract capital from overseas, the government should start lucrative housing schemes, priced in US dollars, in downtown areas exclusively for expats. Locals should be barred from purchasing such properties from the secondary market to avoid real estate bubbles.
The Roshan Digital Account is an excellent initiative that has boosted confidence of overseas Pakistanis in our government and should continue.
At the same time, the government may discourage imports of all sorts – except for machinery to be used by export-oriented sectors.
Balance of payments
Similarly, if the government continues to subsidise petrol and electricity, or tries to stop devaluation of the rupee, it will lead to further deterioration of CAD problem – leaving little fiscal space for the federal government to finance any infrastructure or development projects.
The provincial governments, however, enjoy ample fiscal space to do so – thanks to the famous 18th Amendment. So, if the government is eager to execute CPEC 2.0, the provinces need to take charge instead of the federal government.
The Ministry of Planning should be devolved and it should assist provincial governments in careful structuring of deals by using FIDIC contracts and ensuring conformance to PPRA rules – not to mention the use of local labour, material, and equipment on a preferential basis.
However, if the federal government remains adamant on programming megaprojects instead of going for fiscal austerity, then it must reduce losses incurred by state-owned enterprises, especially transmission line losses of distribution companies (DISCOs), and should focus on reducing subsidies while increasing the overall tax base.
Line losses of DISCOs are as much as a structural problem as they are a behavioural problem.
If allowances and bonuses of employees and CEOs in DISCOs are linked with the reduction in line losses, and the poor-performing DISCOs are given a one-time supplementary grant to upgrade their transmission system, then it will surely help.
Otherwise, it is not fair for the taxpayers of Faisalabad or Islamabad to continue paying for theft or losses in other places.
Moreover, our tax base as a percentage of GDP is remarkably low and remains a matter of concern. Instead of giving tax amnesties, the government should start taxing the rich while rewarding the law-abiding taxpayers at the same time.
Access to all social security services such as public education, Ehsaas/ BISP cash transfers, healthcare, utility stores and public transportation should be linked to the taxpaying status of an individual.
People with no source of income should still be able to file “nil” tax by sending an SMS or by using the FBR app. In fact, the right to vote should be linked with the tax filer status.
Taxpayers may also be categorised into gold, silver, and bronze, and be offered premium services and discounts depending on their tax contributions. Similarly, long-term taxpayers may also be considered eligible for EOBI pension.
In a nutshell, the current economic indicators suggest that tighter policy would bring inflation numbers to single digit, but this also means that the days of cheap money are over.
Higher interest rates are here to stay for discouraging the government from taking more loans and to encourage private holders of US dollars to invest in treasury bills and bonds instead.
However, if we continue to ignore that and believe in an import-led growth model with heavy subsidies in place, then we are at odds with the economic history and at odds with the prevailing economic policy views.
The writer is a Cambridge graduate and is working as a strategy consultant
 
 
Published in The Express Tribune, May 2nd, 2022.
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