The Trajectory towards Economic Independence

Pakistan has been a member of the the International Monetary Fund (IMF) since 1950 and until 2019, Pakistan has availed from the international financial regime on twenty-two occasions since its membership. Amid the financial dependency and bailout packages provided from the IMF to Pakistan, there has been a negative perception about IMF –as the sole reason for all their economic problems such as high inflation, unemployment, heavy taxation, currency devaluation etc. Political parties, being cognizant of the public’s disapproval of the IMF’s meddling in the economic decision making, further stoke anti-IMF sentiment through sloganeering without realizing the nuances of economic needs and policymaking. Eventually, every administration has to avail the IMF’s assistance in the uplifting of the country, and in the process, breaking the very promises that brought them to office. This article, therefore, is aimed at highlighting the underlying issue in the economic policies of the political parties and suggests a roadmap to economic independence and prosperity.

Every administration in Pakistan comes into office with a similar strategy to achieve economic growth: borrow foreign currency-denominated loans, build some large-scale infrastructure, get a minor growth spurt in the process, and wait until this growth spurt fades so the same process is repeated ad infinitum. The incumbent government also vowed to pull country out of the economic dependency on the IMF to overcome its fiscal deficits. Despite exhibiting a strong disliking for IMF support during its election campaign, they eventually requested the international body for the country’s 22nd bailout package.

I believe the time is ripe for some introspection and to understand that this strategy is bound for failure. Building a strong and resilient economy warrants devising and following consistently a long-term policy which minimizes the influence of the IFIs in the country, and allow the government to initiate economic programs to eradicate poverty and create employment. It is pertinent to emphasize that getting rid of structural adjustment programs is a sine qua non for sustained economic growth.

Firstly, Pakistan needs to focus strongly on the economic leakages caused by institutional decay. One example is that of the undocumented/ informal/ shadow economy, large size whereof due to tax policy gaps has engendered narrow revenue base and tax exploitation. It caused the bankruptcy of the state-owned enterprises and consequently hemorrhaged public funds.

 

  1. The careful estimates show that the informal sector comprises 70% of the economy which is currently out of the direct taxes regime. Further deliberation on the motivations to remain in the informal sector highlights the ineffective regulatory system as the major factor which includes seeking approval from many government offices. The PTI government though did made some efforts in expanding the tax base by the introduction of different measures for the facilitation of tax payers including the launching of Shaulat Web Portal for the dissemination of information online, extension in the filing of tax returns, introduction of tax amnesty schemes and establish a working link between Federal Board of Revenue (FBR) and National Database & Registration Authority (NADRA) to undertake the tax profiling through the data analytics.
  2. Moreover, only a small taxpayer class is subject to taxes. The governments, to reduce the revenue gap, resort to indirect taxation which inadvertently causes the price hike and worsen the suppliers as well as consumers. The authorities, although being cognizant of the cons of indirect taxation, do not pursue actively the formalization of the economy. The exemption of various sectors from the tax net further exacerbates the problem of revenue generation. The revenue base can be enhanced many times by extending tax net to currently exempted sectors of the economy under Statutory Regulatory Orders resulting in the losses of PKR 400 – PKR 600 billion. One such example is the inclusion of agricultural incomes in the tax net, the sector which contributed to 19.3% in the 2019-20 GDP, taxing this source of income at rates applicable to similar incomes in other sectors of the economy would not only supplement the finances of the government, but also have an important symbolic value in terms of fairness and equity. A research undertaken by a reputable think tank in 2013 revealed that tax revenues amounting to PKR 55 – 75 billion can be generated by taxing farmers in Punjab assuming that small and large farmers are equally productive.
  3. The state-owned enterprises can be the earning hand to the government. Instead of owing to inefficient and ineffective management, they usually require bailouts every year. The intensity of the problem can be gauged by the fact that the Minister for Industries answering the questions to the law makers in the Senate mentioned that the accumulated losses of the state-owned enterprises had surpassed the annual defence budget outlay. The Pakistan Steel Mill and Pakistan International Airlines – famous for their bailouts receipt from every government – can learn a lesson or two from NADRA which excogitated a viable and sustainable financial model by offering state of the art services not only to the Government of Pakistan but also to the governments of Bangladesh, Kenya and Sri Lanka.

 

The government has made some progress in expanding the tax base, curbing smuggling, and reducing losses of the state-owned enterprises. However, progress will not be achieved overnight. Development of a clear roadmap to be pursued in the future and implementation thereof remains a big question mark. Moreover, building a political consensus on a common road map and political will to pursue the improvement of the indicators identified in the aforementioned roadmap is crucial to ensure a consistent policy irrespective of the political dynamics.

Secondly, creating a congenial environment for doing business is necessary to attract investors to expand the export industry as well as import substitution industry. The latter is important to reduce reliance on imported raw materials. Importing raw material to manufacture exportable goods leads to a balance of payment crisis as well compromises competitiveness of the goods being manufactured for exports in case of imposing duties on imports. The unfavorable business conditions in Pakistan have not only kept foreign investors away from the country, but also dissuaded local businesses from expanding and/or reinvesting. Resultantly, the investment rate in Pakistan, which was around 18 percent in 2000s, declined to only 15 percent in recent years. However, there is an improvement of Pakistan ranking in the ease of doing business index measuring the ease in compliance with the government regulatory bodies and stronger protection of property rights. The questions that remains is the appraisal of the achieved milestones and improvements of the government, endurances of the policy for the successive governments, along with an exploration of the reasons of deterioration of ease of doing business index between 2008 to 2013 (from 85 to 110) and further worsening to 136 in 2018, so that the underlying factors that caused this deterioration are not repeated.

Thirdly, on the supply side, the government while promoting exports and indigenous growth should also focus on the infrastructure requirements: energy, roads and transport, among others. To meet the funding requirements of this infrastructural enhancement, national savings needs to be improved by encouraging household savings through positive real interest rate and financial deepening to ensure that the household savings found its way to the financial sector and not to the real estate sector or other form of capital formation by informal ways. In the past, the negative real interest rate (adjusted for inflation) discouraged households propensity to save in the financial sector. This will fill the saving-investment gap by allowing the availability of funds with the government to be invested in the priority sectors that are crucial for indigenous growth and reduced reliance on external borrowing. The efforts of the government in promoting savings has been scant, if not non–existent.

The implementation of the above-mentioned components needs a concerted and holistic approach which entails the engagement of all stakeholders ranging from the government, business community, to the political parties in opposition. This requires the development of a comprehensive economic framework with set key indicators highlighting the long-term economic plan with agreed clear roles & responsibilities of the stakeholders and its wider dissemination. The framework needs to be binding and must ensure accountability of the stakeholders. Through this mechanism of combined and multi-stakeholder engagement, several benefits can be reaped. For example, the previous government spent billions of rupees on the conduct of a nationwide population census, the current regime is focusing on the deployment of a nationwide poverty census. Had this framework with the clear roadmap was in place earlier, both of the censuses could have been integrated as one activity and would have resulted in the savings of billions of rupees of the national exchequer. Adding more to the argument, Pakistan’s ease of doing business was better in 2008 as compared to that of 2018 which clearly shows inconsistency in government priorities in different regimes.

Now is the high time for Pakistan to immediately pursue economic agenda irrespective of its benefits to be realized during the tenure of the current government or successive governments. To achieve this purpose, the Standing Committees in Senate, National and Provincial Assemblies with the mandate of finance, revenue and economic affairs can play a pivotal role by bridging governments, opposition parties, academia and industry. Pakistani politicians need to realize that no government can fix these issues by working in silos as the economy is an overarching subject and bad decision-making haunts the country for decades.

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UMAR ALI
About UMAR ALI 1 Article
The author is an Economist having a diverse experience of working with different international development organizations. Currently, he is working as a Project Officer on Consolidating Democracy in Pakistan Programme under COVID-19, funded by the British High Commission.