Not an Easy Road

By: Editorial Team
Published: October 1, 2017
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Prime Minister Shahid Khaqan Abbasi has taken the reins of the country at a time of political turmoil and deepening uncertainty following the disqualification of his party leader Nawaz Sharif.

But perhaps more important are the economic challenges that he faces, thanks to the flawed policies of the Pakistan Muslim League-Nawaz (PML-N) government in its first four years of power.

The economic crisis aggravated as the entire cabinet, instead of focusing on the job at hand, was busy defending the party head and his family in the Panama case, which ultimately led to Nawaz Sharif’s ouster.

While the headline growth number rose to a decent 5.3 percent in the previous financial year, the other major macro-economic indicators deteriorated, prompting suggestions that another International Monetary Fund (IMF) programme is inevitable.

This concern was largely due to the record high current account deficit as well as falling exports, falling foreign exchange reserves and a stagnating industry.

A stubborn approach by Ishaq Dar – who is heading the all-important finance ministry in Abbasi’s cabinet just like he did during Sharif’s days – as well as his inability to appoint professionals to run institutions independently, has added to the crisis.

And though Dar is still there, his wings have been somewhat clipped by the new prime minister – much to the delight of many who think that the chartered accountant is only good at manipulating numbers rather than strategic planning and policy making.

Whether the new prime minister will be able to stand up to the grave economic challenge and take some unpopular, but necessary measures ahead of the next year’s general elections is the biggest and the most important question.

Narratives asked Pakistan’s three top economic gurus what immediate measures Prime Minister Abbasi needs to take to revive the economy.

Boosting Exports Must for Economy

Dr. Ishrat Hussain, Former Governor, State Bank of Pakistan

In the given economic scenario, boosting our dwindling exports is the most important short-term objective and we need to give it immediate attention to achieve economic improvement. Pakistan needs non-debt creating flows at the moment and, along with exports, the government needs to focus on how to improve remittances and how to bring in more foreign direct investment (FDI). These are all non-debt creating flows and this is where the focus should be.

It is also important to realise that we don’t have to cut down our imports, because imports, like liquefied natural gas (LNG), are helping the economy; imported machinery is a capital good while raw materials are necessary for manufacturing. So it won’t help if we look to reduce imports, rather, it will have a negative effect. We just need to concentrate on exports right now.

Secondly, the government needs to carefully evaluate the current over-taxation of the organised sector. The burden on the organised sector has to be reduced so that the private sector gets some independence and space to work. In my view, these are only two things that Prime Minister Abbasi needs to do right now, and if he can do these in six months, it would a great achievement.

The current PM has the capacity and the ability to meet these challenges. He is a doer and has shown that in the petroleum sector

Having said that, I firmly believe that the current prime minister has the capacity and the ability to meet these challenges. He is a doer and has shown that in the petroleum sector. The LNG issue was pending for a very long time and he has resolved it. He was hugely criticised there too but he produced results. Where there is a will there is a way, and he can take positive measures for the economy in the short time as the prime minister of the country.

The immediate step that needs to be taken to boost exports is to align the input prices with those of the competition. The government needs to see what incentives exporters are getting in India and Bangladesh and give the same incentives to our exporters. The process of rebates for exporters should be simplified as well, and long bureaucratic processes should be done away with. Their refunds should be given immediately so that liquidity is restored. These are pretty basic issues and can be carried out in six months. It’s all about management.

The other step that people have been talking about is the devaluation of the rupee. But if we go for that, there will be negative effects as well. So if the cost of input for the exporters is decreased, it will have an effect equivalent to that of devaluation. We are importing raw cotton and yarn, so any devaluation will increase the cost for textile importers, and then the buyer will also ask for a discount because of devaluation.

As a result, the cost of importing machinery will increase and thus decrease capital formation. You have to look at the overall picture. I have been saying that if you want to go for devaluation, do it gradually, and don’t give a shock effect to the economy.

Achieving Economic Stability

Syed Salim Raza, Former Governor, State Bank of Pakistan

The prime minister has got only about six months, so for him, it’s a question of stabilising matters right now. The issues we currently have are pretty clear. Our current account deficit has ballooned, and the trade deficit is one-and-a-half times our exports. The reserves of the central bank are decreasing.

So the question now is, how do we stabilise the situation? By itself it looks as if devaluation, even if it is done gradually, is necessary. But if the government doesn’t plan to do this then it has to defend the rupee with additional reserves. As I said, the deficits are widening, and debt is also rising, including the Chinese debt for CPEC. So there has to be some clarity.

Finance Minister Ishaq Dar has been talking about issuing bonds and Sukuk. There has to be a short-term plan and whatever is there in Dar’s mind, needs to be clearly spelt out.

Otherwise the market will develop fears that we will need to go to the International Monetary Fund (IMF) again. The government will not want to go to the IMF before the elections because the IMF will prevent them from spending on their own agenda.

Whatever is there in Dar’s mind, needs to be clearly spelt out. Otherwise the market will develop fears that we will need to go to the IMF again

Given the adverse current account situation, there has to be at least a short-to-medium plan to stabilise our reserves. Our budget deficit is now 5.6 percent of the GDP, according to the government, and that does not include the reported circular debt of Rs. 500 billion rupees. This circular debt will add about 1.6 percent more to the deficit, pushing it to more than 7 percent.

There are also held up tax refunds of about Rs. 200 billion reportedly. We do not need to wait for the next budget for revising our tax policy. The only thing we need to do in the tax policy is broad-basing. We have a real narrow base, so the people who are already in the tax net are forced to pay more. It is nothing beyond that.

We do not apply stage by stage tax. That has to change. We need to immediately improve it and increase the scope of taxation. We seriously need to consider taxing the agriculture sector, and resolve the issues of taxes on services. It is not easy but it has to be done.

We also need to improve the efficiency of tax collection to improve our revenues. According to an IMF report, our tax-to-GDP ratio is estimated to be around 10.25 percent. Our tax efficiency is only 50 percent, compared to the emerging markets average of 65-66 percent.

Nowhere in the world do we have a hundred percent tax efficiency, but we have a lot of room to improve, and even if we can go up to the standard of emerging markets, we will reach about 15 percent of tax-to-GDP ratio, which will obviously help. So even if we are not willing to add new taxes immediately, we need to reinforce the current mechanism.

And for that the first step that needs to be taken is to separate tax policy and tax collection. At the moment, if there is a deficiency in tax collection, policies are changed. It doesn’t work this way, and shouldn’t be like this.

So in the short-term, the government and the prime minister should focus on these three things – current account deficit, fiscal deficit and tax efficiency – and then plan out a long-term strategy to improve the economic situation of the country.

Battling Multiple Fronts

Dr. Salman Shah, Former Finance Minister

If you really want to revive the economy and investment in Pakistan, it is very important to improve the functioning of the Federal Board of Revenue (FBR) on a priority basis.

Two major issues need to be tackled here. The tax system is in bad shape. It doesn’t incentivise taxpayers to pay taxes, and at the same time do business and create jobs. It is not a growth-oriented tax system and is too coercive. Secondly, corruption and mismanagement are epidemic at the FBR.

It has to be reinvented as a facilitator for the taxpayers and the process has to be simplified so that the rampant corrupt practices end. This is something that Prime Minister Abbasi has to do immediately.

The other important issue, which Abbasi is already focused on, is the energy crisis, which needs to be resolved on a speedy basis. This includes taking measures to quickly add capacity online. Then there are the energy sector reforms that have been talked about a lot but which have never materialised.

Most of the actions that need to be taken to revive the economy only require strong willpower and a stroke of the pen

These reforms need to be executed immediately to end the ballooning circular debt as well as control theft. They will also create competition in the power sector which will improve its performance. Unfortunately, so far the government has all but failed in the power sector. This, for me, is the second most important element that the prime minister needs to take care of on an urgent basis.

Thirdly, there is an urgent need to revive the country’s struggling textile industry. Textiles are the mainstay of our exports and at this point, exports are on the way down, thus creating a huge current account deficit.

The textile industry should be given a short-term boost by reducing the cost of doing business. This has to be done pretty quickly so that the sector bounces back. This is of utmost importance and if the textile industry bounces back in the next six months, through proper measures, it will have a major impact on our economy.

If the prime minister can do these three things in his short tenure, it will be great for the economy and the country. And these can be done. Most of the actions that need to be taken only require strong willpower and a stroke of the pen.

Furthermore, the government also needs to issue CPEC bonds in China. I think they can do a Yuan bond worth $5 to $10 million which will definitely help in reducing pressure on the reserves, and ultimately on the economy.

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Editorial Team
The Editorial team of Bol Narratives