Adapting to Pakistan’s economic challenges
Keeping aside the exogenous factors responsible for the improvement of Pakistan’s economic indicators, it is clear that Pakistan’s economy is much better off than it was in the 2012-13 period. Let us compare the economic indicators over this period. GDP growth improved from 3.68 percent in 2012-13 to 5.28 percent in 2016-17. Inflation has reduced from 7.36 percent to 4.16 percent. During the last four years, FBR revenue has increased from Rs 1,964.4 billion to 3,367.9 billion which has not only helped in increasing development spending (PSDP) from Rs 348.3 billion to Rs 733.3 billion, but also provided a cushion for increased transfer to provinces from the divisible pool. Likewise, the budget deficit has reduced from 8.2 to 5.8 percent in this time.
Ofcourse, this is not to say that all has been well during the last four years, we also observed certain indicators deteriorating. Before discussing them let us compare the average performance on economic indicators between 2008-2013 and 2013-2017.
During the PPP tenure, the GDP grew at an average of 2.82 percent, whereas average GDP growth in the last four years stands at 4.47 percent. Average industrial sector growth during the PPP tenure was down to 1.20 percent, and it remained at 5.13 percent in the PML-N tenure. The average service sector growth in the last four years was 5.09 percent, whereas in the PPP tenure it was 3.60 percent. The average fiscal deficit during the PPP tenure was 7.20 percent, while it has been 5.33 percent during the last four years. A significant change was observed in inflation (11.83 percent to 5.04 percent), average credit to private sector (Rs 96.20 billion to 457.15 billion) and average transfer to provinces from the divisible pool.
One must be mindful that when the 2008 government was formed, most economic indicators were much worse than in 2013. Keep in mind that besides other problems, two important factors affected PPP’s economic performance very badly. These were the floods of 2010, 2011 and the unprecedented rise of oil prices in the international market.
One must be mindful that when PPP formed its government in 2008, most of the economic indicators were much worse than what it left for the PML-N in 2013
Having said that, in the end, economics is a numbers game. In Pakistan’s case, the numbers clearly tell that on most counts, the PML-N government fared well. However, the PML-N government has been unable to capitalize on all the exogenous and endogenous factors that helped it on the economic front during the last four years.
One such challenge is the balance of payment meant to honour debt servicing commitments, as well as meeting essential import demands. It is expected that external debt and liabilities could touch $93 billion by December 2018. On top of this, in the July — February 2018 period, the current account deficit has expanded to $11 billion.
Another challenge is falling exports (which have increased during the last quarter) which has led to a $23 billion trade deficit. Energy circular debt, and loss making public sector organisations are also some of the areas where the government has failed.
The question arises, what is it that the government can do in its last sixty days and through its last budget which is planned to be presented on April 27.
Some say the government should not present a budget at this stage as article 86 of the constitution provides for the caretakers to authorise expenditures for 120 days. However, if the government wants to go ahead with its plans then its last budget should try to contain fiscal and current account deficits.
The proposal to bring overseas assets to Pakistan may help in improving our foreign exchange reserves. However, it will not be enough to manage our balance of payments (BoPs). To take care of BoPs, in the short run, the following measures can be taken;
The debt management strategy should focus on persuading our creditors to restructure the debt servicing liability. This is easier in the case of official programme lending. More energetic diplomatic efforts could also result in rescheduling of the $ 1.5 million owed to the Paris Club and non-Paris Club creditors.
The government can also curtail the import and inflow of three key items; non-essential food, armoured and luxury vehicles, and smartphones through the finance bill. This could result in $6-7 billion in savings.
Third, the Pakistani diaspora should be encouraged to send more remittances through official channels. The Federal Board of Revenue (FBR) and Ministry of Finance need to slash down on taxes, including withholding taxes on banking transactions to encourage remitters.
In the medium term measures, the government can encourage exports through consolidation and rationalisation of taxes. The refunds of exporters stuck with the FBR since 2010 need to be immediately cleared to allow greater working capital. The SBP’s export finance scheme and long term finance scheme need to be tailored for SMEs, so that more exporters can benefit.
Pakistan’s dollar-denominated transit trade can increase if shipping, transport and container rates are made competitive. Currently a large volume of dollar-denominated transit trade previously routed through Pakistan and destined for Central Asia and Afghanistan is now being serviced by Iran.
Pakistan should expedite four key structural reforms in taxation, energy, public sector enterprises and the reorientation of the Ministry of Finance and other economy related ministries. The latter is important to benefit from emerging regional blocks under OBOR and CPEC.
Going forward, the Prime Minister, who will now be chairing the ‘Economic Advisory Council’ as well, should try to get a political consensus on the ‘Charter of Economy’. The structural problems facing our economy can never be resolved if we keep on politicising them. The International Monetary Fund (IMF) will never succeed in bringing structural reforms to Pakistan. It is the political parties who have to agree on certain reforms and then stick to implement them whether they land on treasury benches or on opposition benches after the next general elections.
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The opinions expressed in this article are the author's own and do not necessarily reflect the viewpoint or stance of SDPI.