Economy of Pakistan has remained under turmoil most of the period under different rulers either from political parties or establishment. Hence it is the time; we should refrain from defending or opposing any institution in Pakistan on allocation of funds. This is a country for everyone and nobody is innocent in absolute manner. We should only care for the betterment of country’s economy in spite of different odds.
On 25th May, 18 monetary policy for the next two months has been announced. Monetary policy announced by SBP is meant to lower inflation, create growth prospects and employment. For the next two months SBP has decided to increase the policy rate by 50bps to 6.50 percent effective from Monday 28th May 2018.
“Chairman Centre of Advisory Services for Islamic Banking and Finance (CAIF), Former Head of FSCD SBP, Former Head of Research Arif Habib Investments and Member IFSB Task Force for development of Islamic Money Market, Former Member of Access to Justice Fund Supreme Court of Pakistan
Why! Because, Pakistan’s economic growth was provisionally estimated to achieve a thirteen-year high level of 5.8 percent for FY18. Concurrently, headline inflation remains moderate and is expected to stay well below the annual target of 6.0 percent. However, the balance-of-risks to the sustainability of the healthy-growth-low-inflation nexus have now shifted due to the various reasons. First, the balance of-payments picture, despite an increase in exports and some deceleration in imports, has further deteriorated due to a sharp increase in international oil prices and limited financial inflows to date. Second, the revised estimate for fiscal deficit stands at 5.5 percent of GDP as compared to initial target of 4.1 percent for FY18, reflecting a significantly higher level of fiscal expansion than previously anticipated. These twin deficits- depicting the elevated aggregate demand in the country are adversely affecting the near-term macroeconomic stability. On the external front, the current account deficit widened to US$ 14.0 billion during the first ten months of FY18, which is 1.5 times the level of deficit realized during the same period last year. SBP’s liquid FX reserves saw a net reduction of US$ 5.8 billion to reach US$ 10.3 billion as of 18th May 2018. Reflecting the increasing pressures in the external sector, PKR has depreciated by 9.3 percent against the USD up till 24th May 2018.
Before this, our Parliament has already approved Federal Budget for 2018/19 giving sketch of economic scenario in the coming months.
Fiscal budget for 2018-19 amounting Rs 5,932 trillion has been announced with half of the total money going to debt and defence sectors, allocating around 23% of it to the defence needs while another 30.7% for debt servicing. Rs 1.607 trillion will go to debt repayments. The debt servicing cost increased by 17.8% from last year’s value of Rs 1.364 trillion. Rs 1.1 trillion have been approved for the defence budget. After adjusting salaries it was revised upward to Rs 998 billion from last year’s value of Rs 920 billion. Additional Rs 100 billion will go to Armed Forces Development Programme (AFDP) as well.
The current budget deficit stands at a record value of Rs 2.029 trillion. Rs 800 billion have been allocated for federal development budget with a decrease of Rs 201 billion from last year. Rs 445 billion have been allocated for running the civilian government. However, the government revised this amount and allocated Rs 426 billion instead. Rs 342 billion has been approved for pensions as compared to last year’s figure of Rs 248 billion. Rs 36 billion have been allocated upfront for the first time ever to cover these increments. Minimum 10% increase in salaries, 10% increase in pension to new retirees and 20% increase in pensions to old retirees will be given in the upcoming fiscal year. Rs 624 billion have been approved for grants and other expenditures. Rs 179 billion have been allocated for subsidies that government offers. An unrealistic target for the collection of Rs 4.435 trillion through taxes has been set for FBR as well. The government has also reduced the net lending to Rs 78 billion from last year’s value of Rs 123 billion. Rs 14 billion has been allocated for health and Rs 98 billion for Education.
Budget Strategy Paper states that the 5.3% budget deficit of total GDP will be covered through domestic and external loans. The current government has relied heavily on loans instead of generating a sustainable revenue stream. The government has borrowed a record, over $40 billion, in loans from local and international lenders in during its tenure. The country is planning to borrow another record-breaking $13 billion next year to cover the expenses.
At a time when security assistance from the US is dwindling, Pakistan has raised its defense spending for the year 2018-19 by around 19.6 per cent, the highest increase during the PML-N government’s current tenure.
The increase is also seen as significant amid the PML-N’s uneasy relationship with the military leadership following a series of political controversies stemming from the disqualification of former prime minister Nawaz Sharif in July last year. In 2013-14, the total outlay of defense budget was around Rs 600 billion which has now jumped up to Rs1.1 trillion, showing an increase of 83 per cent in the last 5 years during PML N period.
Now we are heading towards elections in July 2018 with lot of programs, meetings and rumors.
However for any government coming after elections following issues existing already would require planning, legislation and implementation strategy.
- The most significant challenge is the energy/power crisis. According to some estimates the growth in Pakistan is 1/3rd off to the on-going power shortage.
- Opening up of markets and encouraging trade:The region that is Pakistan can become a connector of markets like it has historically been. The country is surrounded by resource rich countries and it should take advantage of the complementarities that can arise in through the labor market, or through trade.
- Investment in human capital. First is to improve general education outcomes across all levels. Second is to improve the skillset of the Pakistani labor force.
- Land reform:Land is very central to industry and to urbanization (which has been uneven). Land issues remain central to what happens to the urban space. Property rights also need to be established while agglomerations are to be thought over. Most importantly the writ of the state to introduce a new system is essential. However land reform without financial market is useless
- Currently only 14 percent of Pakistanis have bank accounts; hence access to finance is very limited. The financial sector needs to be reformed with a keen focus on who it lends to, on what conditions, to what end and how it can be made more accessible across a wide array of stakeholders including individuals, the private sector and the public sector. System of creating/providing credit to these people engaged in small medium enterprises is very important. They require access loans bigger than what microfinance banks offer.
- Legislation on government borrowings should be brought forward from current Act framed in 1944. SBP has worked on it when I was Director there. The draft can be made available as and when desired.
- Improving Health and Education sectors.
- To carry on the War against Terror, Sectarian attacks and general law and order situation.
- State owned enterprises are also in a crisis like PIA, Steel Mill, and Railway etc. They need to be put on workable state.
- The regulatory framework needs to be improved. Legislative and empowerment measures must be taken to strengthen existing institutions such as the Federal Board of Revenue and the Competition Commission of Pakistan.
- As unemployment among the youth is rising, direct intervention is warranted. Employment guarantee schemes like in other countries can be implemented in Pakistan.
- The state has to play a role to incentivize private sector to grow as private sector savings need to be mobilized to bring the economy back on track. At the moment private sector confidence is zero due to the circular debt issue. Conditions don’t exist in Pakistan to allow the private sector to lead infrastructure led-growth.
- Employment as a percentage of population has declined. Industry and formal sector Jobs are not being created and should be a deep area of focus. Several things are important under this. First female rates of participation are essential as they form 50 percent of the demographic dividend. Secondly employment creation through small scale manufacturing can be critical. Thirdly need to look at success stories such as lady health workers program that has created over 10,000 jobs and has had the greatest impact in terms of women’s empowerment, fertility rates, malnutrition etc.
- Restoring the tax base is essential to any effort at tax reform. It is also important to ensure mechanisms to tax the very rich in the country. If you can demonstrate states’ credibility, willingness to pay taxes will increase. Hence service delivery needs to be improved.
- Develop a tax directory.All tax-payers return and assets should be put on a tax directory as a first step towards transparency.
- Clear Tax laws should be prepared and passed through parliament for Services, Agriculture, Wholesale and Retail sectors.
- Revamp the Board of Revenue:Set up a new autonomous revenue authority with no link with the government and hire employees at market wages. The board of revenue is one of the most important organizations for Pakistan’s economy. Practical lessons can be learnt from Latin America.
- Bring the informal economy into the tax bracket:Small scale informal sector is engaged in unrecorded or undocumented economic activity and hence remains unregulated and untaxed. This sector ends up using resources from other sectors and not paying back. They need to be taxed.
- Asset transfer from the rich to the poor can occur through taxation so taxation should be made mainly through direct taxation.
- Governance Reform should be made through well-functioning civil service that monitors, evaluates and calibrates and knows when to exit when an intervention fails. They need to work with industrial units just like in Malaysia and Korea. Hence any industrial policy without attaching it to the core element of reform will make it difficult to implement.
- Industry interventions need to be context specific and detailed. There are certain clusters, industry or geographical clusters that have a lot potential. This can be addressing bottlenecks of each industry. Such as the soccer ball industry in Sialkot. China and Thailand has new technology. Sialkot needs time to get these resources by becoming efficient and reducing costs. The Gujarat fan industry for instance has issues with labor contracts. So productivity can be enhanced by improving labor contracts. Such interventions have pay offs in the short run.
- Across the board policy framework for manufacturing is also needed.
- Review the tariff structure..
It seems as if Pakistan’s economy is stuck in a state of multiple equilibrium and in order to get out of this exceptional adjustment needs to be made. Political coalitions must be strengthened, as they are required to push reform. Any reform that is passed must be accompanied by legislative reforms by provincial governments. There must also be a clear political calculus on how to change and bring reform. All of this needs to be strategically thought out by the parliament. (Enewspaper.com.pk WhatsApp +923132434567)