Earlier this month, former Finance Minister, Asad Umar, launched a ‘draft’ medium term economic framework and stated that the roadmap still requires consultation and will be finalised after the IMF programme. Two weeks later under pressure from all quarters he resigned from his position. I would argue that the much promised economic roadmap (and that too, half cooked) came very late and at a time when markets were not willing to believe the PTI government’s narrative. For a moment let’s recap the ‘economic sins’ committed during the past eight months.
From day one the government exhibited poor understanding of the current account gap and fiscal deficit. With both at record high level, the economic managers could not reach a consensus whether to approach IMF or not. Ultimately by the time IMF was engaged there was complete chaos in the financial markets.
The oil and utility prices were increased without a plan in place to bring about structural changes in the power and gas supply chains. Instead of allowing the currency to find its new value once and for all, the episodes of rupee nosediving continued in a very erratic manner adding to the uncertainty faced by the business community. The declining value of currency was termed necessary for boosting exports — a naïve argument at a time when interest rates were being increased and fiscal measures to control imports of inputs and raw material were in place. Ultimately exports also could not post an uptick.
The growing fiscal deficit needed urgent remedial measures. Tax revenue targets were missed. The government announced two mini-budgets which again exhibited inexperience and in the end could not deliver the desired tax-related gains. On the expenditure side, the government’s decision to wait long for the energy sector taskforce to devise a plan rather than immediately take the painful measures (known to most experts) and curb circular debt, proved to be a mistake.
Similarly, no credible plan to manage losses of public sector enterprises was in place. Sarmayah-e-Pakistan Limited was established to stop PSEs from further bleeding — a measure which will only deliver in the longer term. Pakistan Banao Certificates were launched at a time when diaspora had lost confidence in the government’s capacity to turnaround the weak economy. Clarity on way forward — for PSEs laying dormant, large receivables of energy companies, and debt restructuring at these enterprises — was never there. The result was an expansion in fiscal deficit and record high inflation in the month of March.
In a last bid effort, Asad Umar tried to sell a new Amnesty Scheme to the cabinet. This plan met with resistance as many of the Cabinet members had vehemently opposed the Amnesty Scheme by PML-N last year. They were not willing to offer something which could be termed another ‘U-turn’. The bureaucracy at Federal Board of Revenue also had little confidence in this plan as according to them tax payers have in the past seen such schemes with suspicion.
Also, with the ongoing drive of the federal government to find ways and bring back the money stashed abroad, commitments provided to Financial Action Taskforce and more vigorous accountability efforts by local institutions, it will be difficult to convince people to declare their hidden incomes and assets.
The Finance Ministry was also not throwing its weight behind the investment diplomacy efforts being spearheaded by other institutions within the government. For example, even after eight months in office not a single large inflow of foreign direct investment could materialise. Offers by Saudi Arabia and United Arab Emirates to invest in oil refining, LNG and related sectors are taking too long to materialise. Despite the former finance minister stating that debts of China-Pakistan Economic Corridor (CPEC) are not more than 10 percent of overall debt burden, there was utter lack of clarity on how to move forward with next phases of CPEC and the future of China Pakistan bilateral economic relations. This reflects in the declining interest by China and non-China private sector investors in special economic zones.
With the finance minister gone and significant reshuffling of the federal government, the question remains where should the new finance head start from? Putting in place a strong economic team can certainly act as a confidence booster for donors and foreign investors. The important positions at Planning Commission, Ministries of Finance, Commerce, and Energy and tax authorities remained vacant this year.
Second, to end the utter economic uncertainly all around, bring the IMF agreement to a closure. This will require some compromises which in the short term may be painful. However, such an agreement can help Pakistan raise medium to long term assistance from other multilateral and bilateral sources. This will also instill stronger confidence in business community aiming to lock themselves in long term investment contracts.
Third, no more blank cheques for energy generation and distribution companies and other public sector enterprises. Those with weak probability of revival require a disposal plan immediately to stop further bleeding of exchequer. The time to think about other possibilities, including public private partnerships and outsourcing management of these entities, is long gone. The confidence in the new plan will come through strengthening of Fiscal Responsibility and Debt Limitation law.
Fourth, revival of growth will require stronger public investment, at least in the short term. This can happen through boosting of tax revenues by: a) doing away with DC rates in the real estate sector and allowing transactions on market value, b) collecting (tax) liability from agriculture incomes just like any other form of income, and c) rationalisation of exemptions from income tax, customs duties, and sales tax. At the same time, provincial governments would need to be convinced to improve their own tax effort so that greater room for welfare spending can be created under provincial annual development plans.
Finally, while these reforms and adjustments remain critical to Pakistan’s future economic stabilisation and growth, perhaps most important today is the task of putting food on the tables of the poorest of the poor. In this regard, the new finance minister will need to take measures that can help the PTI government deliver on the demands of the economically unprivileged population. Therefore, budget allocations for social protection and social safety nets as committed under the ‘Ehsaas’ programme need to be protected and expanded overtime.