The end of 2019 has brought some stability in key economic indicators, giving a sigh of relief to the PTI government. Many would argue that the delay in resort to International Monetary Fund (IMF) and painful adjustment measures now being adopted should have started from the first day the government assumed power. However, the inexperience of the government showed in the lack of decisiveness during the early months, costing the economy and people of Pakistan dearly.
On the back of the IMF programme, the country has now witnessed decline in the gap between record high import payments and export receipts. The former has particularly seen a large decrease which has also helped in saving the much needed foreign exchange reserves. The high policy rate maintained by the central bank has attracted portfolio investment. Other development partners most notably the Asian Development Bank (ADB) have also come forward with pledges.
The future trajectory of inflows which could help foreign exchange reserves is now looking promising. It is, however, unlikely that non-debt inflows such as exports, foreign direct investment, and remittances could see a sharp jump in the near future. Also the room for complacency is limited as the country has high debt servicing to manage in the coming months.
As seen in the aftermath of most stabilisation programmes, micromanaged by the IMF, the local investor sentiment is gradually recovering. The Moody’s Investors Services has elevated Pakistan’s credit-worthiness rating from negative to stable. After several months of bearish trend, Pakistan Stock Exchange has seen recovery in November 2019. This now provides a chance to secure better interest in the forthcoming launch of Sukuk and Eurobonds. The government strategy here is two-folds: a) continue to procure debt on economical terms to repay the maturing debt, and b) help the reserve building exercise at the central bank.
The government’s fiscal discipline was also seen improving in 2019. The large fiscal deficit which kept the government borrowing high in the past may not be an option under the IMF scrutiny. The tax revenues have seen an increase. However, the targets set by Federal Board of Revenue (FBR) could not be met in the past two quarters. This, in turn, prompted the government to significantly increase the non-tax revenues, often termed regressive — owing to a proportionately greater burden on low-income and fixed-income groups. This increase in non-tax revenues resulted in halving the fiscal deficit to GDP ratio in the first quarter of 2019-20 compared to the same period in 2018-19.
The government will continue to find raising tax revenues difficult in an environment of low economic expansion. This year saw the government locking horns with those operating in the wholesale and retail sector, with the traders prevailing and leaving the table with no agreement on how to widen the tax net in this sector.
What is also missing is a comprehensive understanding by the current economic team about a growth roadmap for Pakistan. An example of this was seen in the government’s poor handling of China Pakistan Economic Corridor (CPEC). Many believe that the organisation responsible to take timely steps towards the next phase of CPEC i.e. Ministry of Planning, Development & Reforms could not deliver. In the end, this has given rise to a new entity called ‘CPEC Authority’. One wonders why such an authority was not required during 2014 to 2018 when early harvest programme of CPEC was in full swing?
The Ministry of Planning, Development & Reforms also has the mandate to deliver on poverty reduction goals. However, a slow progress on this has led to the creation of new Ministry for Poverty Alleviation and Social Safety. The IMF mission has also lately shown concern that Public Sector Development Programme (PSDP) of the federal government and Annual Development Programme (ADP) of the provincial governments suffered from slow releases in turn reducing prospects of economic growth in the short term. The IMF has also stressed on the expansion and expedient disbursement of allocations under social safety nets and social protection programmes.
As per the constitution and past practices, the bodies responsible to approve growth strategies and national development plans include Council of Common Interests and National Economic Council. This year, perhaps, these bodies were found missing in capacity to deliver on large scale growth-oriented initiatives — an assessment which eventually gave rise to another approval body i.e. National Development Council, which included chief of army staff among other members.
The PTI’s capacity to undertake legislative reform continues to be tested. In the coming days changes have been promised including: legal changes (as desired by Supreme Court of Pakistan) to regularise the extension in tenure provided to the army chief; bring necessary changes to laws related to autonomy of the central bank; amend law for National Electric Power Regulatory Authority (NEPRA) to better manage circular debt; strengthen mechanism for price oversight to check inflation; amend laws governing National Accountability Bureau to insulate the business community from the ambit of this body. Many of these laws could have implications for both political stability and economic growth in the country.
Perhaps a key disappointment has been on the trade and investment promotion front — an area where the PTI government was expected to perform better than the predecessors. The government’s promise of delivering a medium-term trade policy, industrial policy, and a policy for small and medium enterprises (SMEs) could not materialise in 2019. Such complimentary policies are required if Pakistan wishes to benefit from the trade diplomacy efforts including the recently negotiated China-Pakistan Free Trade Agreement (FTA).
Opening up to the world for trade and investment is a pre-requisite for growth in the modern world. However, this goal now faces another challenge in the form of state’s inability to move fast and comply with the demands of Financial Action Taskforce (FATF). There are major capacity and coordination gaps at economic regulatory bodies some of which have been yearning for attention from political leadership.
The PTI government has already confessed that there are difficulties in meeting demands by International Cooperation Review Group (ICRG) and Asia-Pacific Group (APG). The former has been more critical of the government’s laid back approach to reform in this area despite the grace period allowed. The government also confessed that it is only partially compliant on 22 of the 27 points in the action plan and non-compliant on five targets of the ICRG. This score card hasn’t been seen favourably by the reviewers at FATF and IMF. There are now reports that Pakistan could remain in the grey list beyond February 2020.
This certainly is not a good news for long-term investors who wish to see improved financial integrity and risk profile of Pakistan economy. The Pakistani diaspora and business associations of Pakistanis abroad who had expressed desire to invest in Pakistan are now reluctant as financial transfers to Pakistan could be seen with suspicious in their host countries. This financial sector which was once pushing for reforms in the areas of crowd-funding and venture capital, which would have assisted startups, has also withdrawn from its position as it is expecting much higher burden of compliance until the time the country remains in the grey list.
This year also saw Pakistan taking some abrupt measures in trade with neighbours. The private sector in several sectors witnessed loss of competitiveness as trade with India came to a complete halt. What many didn’t realise in the government was that some major industries needed time to make alternate arrangements and source inputs from other trading partners. These industries also needed a publically announced timeline before closing borders. The mistake was only realised when hospitals and patients pointed out that lifesaving drugs were now not available in the market! There is already evidence from businesses in several sectors indicating that such abrupt closure of trade gate leads to rise in informal trade and even smuggling of goods.
The economic team also needs to communicate its actions and long-term vision. The focal persons appointed in the economic ministries to perform this job are perhaps not trained to undertake a marketing role. The government is in the habit of finding solutions to most service delivery problems in the setting up of new web portals. Pakistan Citizen Portal which was to act as a grievance redressal system connecting all government organisations both at federal and provincial levels has come under embarrassing critique.
Similarly, to bring greater transparency in income and asset information and tax records, two online portals were launched. Tax payers complained of: fee being charged to access otherwise freely available information; gaps in information available about their incomes, assets, and expenditures; less than satisfactory measures to protect the online data and privacy of 53 million citizens; no indication regarding the timeframe with in which discrepancies on the portal will be addressed.
Also, it is now important to evaluate why investors who have visited Pakistan during the past few months have not actually decided to invest in the country. Their feedback will be important to put in place a course correction strategy for attracting future investments. Citizens would also like to know the fate of large infrastructure sector investments promised by Saudi Arabia and United Arab Emirates. Or was the government too quick to announce things which were not signed-off?
Small but quick successes are important for the PTI government in the ongoing year. Better management of prices of essential items, and execution of schemes which could render quick jobs, for example Naya Pakistan Housing Programme, could certainly give the government a breather.
The PTI is also present in three provinces where it can demonstrate strong tax revenue mobilisation efforts. Some major progressive tax bases now rest with the provincial governments including agriculture, property and transport. The provinces also have control over general sales tax on services. A growth in provincial revenues can lend provincial budget surpluses which in turn can support the rising demands of the federal government’s expenditure.
Finally, SMEs are responsible for 60 percent of total jobs, 30 percent of total national income, and 25 percent of export receipts. It remains a struggle for SMEs to access necessary financing at start-up and scale-up stages. Even more difficult for them is to arrange trade finance if they wish to become exporters of goods and services. Over the past decade, share of SMEs in overall private sector credit offtake in Pakistan has declined to 7.5 percent compared to 20 percent in Bangladesh. The government has not taken enough ownership of agenda to support SMEs.
There is no evaluation of why central bank could not push the commercial banks through regulatory measures to take a risk on entrepreneurship. This discussion should perhaps top the agenda when the prime minister chairs the next meeting of recently-launched Pakistan Regulatory Modernization Initiative.
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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.