How to revive the economy?


ISLAMABAD:

As a new coalition government has been formed at the center, the new prime minister is seeking to reset major economic reforms and has received a lot of attention for his ambitious plans to address Pakistan’s long-term fiscal problems and difficulties fiscal health.

Although we have yet to see him present an ambitious legislative program in parliament, it is important to learn the lessons of history and not fall into the trajectory of the chronic debt crisis, which is currently occurring in the Sri Lanka as the island nation finds itself with no dollars for food and fuel.

Like Sri Lanka, Pakistan’s annual oil import bill amounts to around 60% of its foreign exchange reserves. This makes our economy very vulnerable to Brent prices, as we are constantly borrowing in dollars to finance energy imports.

In addition, revenues from oil and energy consumption are in rupees, which creates a multitude of risks, including currency risk.

In the past, PML-N governments tended not to devalue the rupee so that these energy imports remained affordable for the middle and lower classes, whose incomes increased only marginally or not at all.

However, the upper middle classes and elites have always exploited the availability of “cheaper dollars” by purchasing imported cars, electronics and other goods, resulting in import-led growth. This hurts the overall economy in the long run, and we see rising inequality, shrinking foreign exchange reserves, and rising current account deficit (CAD).

Therefore, the government must perform balancing acts on two fronts. First, it requires a sustained influx of dollars to manage the trade deficit, and second, it should manage the CAD and increase the tax base to fund subsidies, social security programs, and new infrastructure.

With the era of Covid fiscal stimulus seemingly over, the viability of all these programs needs to be checked, as loose monetary policy is now nearly impossible.

Trade balance

With regard to import bill management, the existing floating exchange rate and policy rate determination system should be maintained as they serve as early warnings of a deterioration in the balance of trade and payments.

Currency devaluation only stimulates exports in the short term, so the government should encourage export-oriented sectors (excluding the agricultural sector) by rewarding growth and upgrading of technology, but at the same time, it should penalize non-growth and rent-seeking behavior at the expense of government subsidies.

For example, the textile sector should be ready to invest in the modernization of its factories, otherwise all available subsidies should be phased out.

Similarly, to attract capital from abroad, the government should launch lucrative housing programs, priced in US dollars, in city centers exclusively for expatriates. Residents should be prohibited from buying such properties on the secondary market to avoid housing bubbles.

The Roshan Digital Account is an excellent initiative that has boosted the trust of overseas Pakistanis in our government and is expected to continue.

At the same time, the government can discourage imports of all kinds – with the exception of machinery intended for use by export-oriented sectors.

Balance of payments

Similarly, if the government continues to subsidize gasoline and electricity, or tries to stop the devaluation of the rupee, it will lead to a further deterioration of the CAD problem – leaving little fiscal space for the federal government to finance infrastructure or development projects.

Provincial governments, however, have ample fiscal leeway to do so – thanks to the notorious 18th Amendment. So, if the government is eager to execute CPEC 2.0, the provinces must take charge instead of the federal government.

The Ministry of Planning should be delegated and it should help provincial governments carefully structure agreements using FIDIC contracts and ensuring compliance with PPRA rules – not to mention the use of labour, local materials and equipment on a preferential basis.

However, if the federal government remains adamant about scheduling megaprojects instead of opting for fiscal austerity, then it needs to cut losses to state-owned enterprises, especially transmission line losses to distribution companies ( DISCO), and should focus on reducing subsidies while increasing the overall tax base.

DISCO line losses are as much a structural problem as a behavioral problem.

If allowances and bonuses for employees and CEOs of DISCOs are tied to reducing online losses, and poorly performing DISCOs receive a one-time additional subsidy to upgrade their transmission system, that will surely help.

Otherwise, it is not fair that taxpayers in Faisalabad or Islamabad continue to pay for thefts or losses elsewhere.

In addition, our tax base as a percentage of GDP is remarkably low and remains a concern. Instead of granting tax amnesties, the government should start taxing the rich while rewarding law-abiding taxpayers.

Access to all social security services such as public education, Ehsaas/BISP cash transfers, health care, utility stores and public transport should be tied to an individual’s tax status.

People without a source of income should still be able to file a “nil” tax by texting or using the FBR app. In fact, the right to vote should be tied to declarant status.

Taxpayers can also be categorized into gold, silver, and bronze, and offered premium services and discounts based on their tax contributions. Similarly, long-term taxpayers may also be considered eligible for the EOBI pension.

In a nutshell, current economic indicators suggest that tighter policy would bring inflation numbers down to single digits, but it also means that the days of cheap money are over.

Higher interest rates are here to stay to discourage the government from taking out more loans and to encourage private holders of US dollars to invest in treasury bills and bonds instead.

However, if we continue to ignore this and believe in an import-led growth model with heavy subsidies in place, then we are at odds with economic history and at odds with mainstream views on economic policy.

The writer is a Cambridge graduate and works as a strategy consultant

Published in The Express Tribune, May 2n/a2022.

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