Pakistan’s economic performance will depend both on the future policies of the Government and the global economic recovery. The economy today is under considerable pressure due to breakdown in delivery of public utilities, huge increases in prices of essential items, unemployment and poverty. The level of government borrowing is rising. Foreign investment, both domestic and foreign, continues to fall. A low tax to GDP ratio remains a problem. Growth is not rising due to inadequate revenue generation and less than anticipated aid inflows. The economy grew by a provisional 4.1% in fiscal 2010. If the previous year’s growth rate of 2% had not been revised to 1.2%, the growth rate would have been 3.1%. The target GDP growth rate of 4.5% for next fiscal is difficult to achieve as no improvements are expected in the manufacturing as well as the public sector development sectors. Governance problems, worsening law and order situation and widespread corruption further bleaken the prospects of future growth.
Any improvement in fiscal and external imbalances so far has been a consequence of expenditure cutting – primarily development expenditure and subsidies – and economic slow down, rather than improvement in underlying economic fundamentals. External Assistance rather then domestic resources has been another source of improvement in fiscal indicators. Pakistan is in a peculiar situation where fiscal deficit is high, debt is increasing rapidly, growth is minimal and unemployment on the rise. This clearly means that money we are borrowing is being used on non-productive expenditure.
The Government has been unable to communicate that VAT is just a modified form of Sales Tax, which has been in existence in Pakistan for the last 20 years. All the challenges that were faced in the implementation of the Sales Tax regime -documentation, exemptions, refunds – still remain. Because of lack of consensus in the business community and political parties, it would be very difficult for the government to impose VAT on October 1st 2010. The FBR will face revenue shortfall in fiscal year 2010. All major tax heads have recorded shortfalls in achieving targets. Consequently, next year’s target of Rs.1,667 B would be a huge challenge. Despite promises by the government of freezing the current expenditure in the last 3 budgets, current spending continues to rise.
One area which has shown improvement is the Current Account deficit which is expected to be around 2.8% of the GDP. The improvement is primarily due to imports contraction, better exports, increase in workers remittances and the U.S. Coalition Reimbursement Funds. At the same time the surplus in the Financial Account has declined considerably due to fall in FDI, portfolio investment and loan inflows. Therefore the financing of the current account deficit will continue to rely on new debt.
The rapid reduction in the fiscal deficit proposed by the IMF should no longer be our objective as it will keep the growth rate low and increase unemployment and poverty. Government should set a somewhat higher fiscal deficit of around 5% of GDP and use the additional fiscal space towards PSDP to generate growth. This is required as the manufacturing sector is not expected to grow due to the prevailing economic conditions. If Pakistan remains committed to the original program agreed to with the IMF, it will have to further cut development spending. China and India already are stimulating their economies to facilitate recovery. NATO countries should be asked to reschedule our debt as they did after 9/11 in order for us to have more fiscal space. We have paid a huge price of $43 B in losses due to war on terror, besides destruction of innumerable families who lost their loved ones.
The losses in the Public Sector Enterprises have reached almost Rs.250 Billion. The quasi-fiscal activity of the government outside the budget has contributed to build-up of circular debt in the energy and agriculture commodity sectors, as a result of which costs for all borrowers in the economy have increased. Government has to reduce such activities and seriously consider privatizing loss making Public Sector Enterprises.
The better than expected growth in the large scale manufacturing sector was made possible by un-utilized capacities rather than new investments. Therefore, despite continuing energy shortages, law and order and financial constraints the LSM was able to respond. However, the non performing loans have doubled in the last year. The government should seek lines of credit for the private sector projects from International Financial Institutions through Pakistani banks. Such loans were available in the 80’s and 90’s and contributed to considerable growth in the private sector. After the bankruptcy of all the DFIs in Pakistan, no project financing is available. The commercial banks offer only short term financing. These banks should be encouraged to offer long term, fixed rate, project financing to the private sector. Banks have become more risk averse as a result of poor performance of the private sector and also because more attractive terms are being offered by the public sector. If manufacturing has to grow, ample credit should be available, interest rates should come down and delivery of reliable energy supply be ascertained. Credit can only be made available if the government and public sector borrowing is reduced from the banking system.
A significant chunk of the PSDP depends on external assistance, the non-availability of which forces the government to drastically reduce it. In the last three fiscal years the government has had to resort to large cutbacks in PSDP bringing it to a low level of less than 3% of the GDP. Cutting development spending is not a sustainable way to reduce the deficit. Also the public sector development program in Pakistan is wasteful, inefficient and slow. It should be totally overhauled.
A major factor in controlling food inflation would be enhancing agriculture productivity. The current policy of crop support prices should be changed by policies where returns to farmers are linked to better yields. Focus should be on value added agriculture like fruits, vegetables, flowers and livestock. Value added agriculture is more perishable so cold chains are required from farms to markets and to airports. All crops should have price floors and ceilings, keeping in mind international subsidies and the prices of domestic agriculture in-puts and out-puts. These floors and ceilings must be announced well ahead of the cropping season and maintained by the government through market interventions. Existing example is the cotton crop price mechanism.
Research institutions should be developed in agriculture sector for crops, fruits, vegetables and livestock through public private partnership where state-of-the-art research should be pursued. Provincial Agricultural Departments must be strengthened. Support to the small farmers is essential, both financially and technologically. This again could be done through public private partnership providing services like seeds, fertilizer, rental tractors and bulldozers and consultancy with respect to modern agriculture techniques.
These policies can increase the growth rate which is critical for producing jobs and reducing poverty, without affecting fiscal stability.
The writer is the Secretary General of Pakistan Muslim League and a former Federal Minister.