Daily Times

The balance of payment crisis has somewhat been averted post assistance from friendly countries and the upcoming IMF loans agreement. Although there is no immediate panic situation, there needs to be a potent macroeconomic management policy to address structural issues of the economy and create financial cushions in future to avoid worrisome situations. Pakistan incurred the highest-ever current account deficit of $18 billion in the last fiscal year, which eroded its foreign exchange reserves. Hence there is a need to formulate a coherent economic policy that promotes long term macroeconomic stability through exports growth, sustainable debt management, and taxation reforms.

Firstly, the balance of payment crisis points towards declining exports and rising imports particularly fuel related items. The government will need to incentivize exporters particularly in the labor intensive sectors such as exports to boost foreign reserves in the country as well as employment for domestic workers. CPEC can play a pivotal role in this.

CPEC project since its inception has already made a significant contribution in form of the addition of 10,000 MW to the generation capacity in Pakistan in a span of four years. Electricity outages had earlier cost the economy about 1.5 to 2 percent of GDP.  CPEC projects have not only boosted energy production capacity of the country but also holds great employment potential (700,000 jobs as projected by ILO). Hence, with declining energy shortages the industries and export related sectors can utilize their increased capacity as well as benefit from technology transfer among Chinese counterparts.  There needs to be a greater emphasis on reviving export industries such as textiles and also identifying new potential sectors such as dairy and meat products, cosmetics, gemstones etc.

Secondly, the much hyped debt dynamics of the country are being regarded as troublesome for Pakistan’s economic stability. Undoubtedly, Pakistan’s debt level has risen considerably in the past few years where public debt has soared beyond the constitutional limit of 60 percent debt to GDP ratio. However, Government Debt to GDP ratio in Pakistan averaged 69.30 percent from the period 1994 until 2017. Moreover, it reached an all-time high of 87.90 percent in 2001, and a record low at 56.40 percent in 2007. The country’s debt is projected to touch 74 percent of the GDP by the end of the current fiscal year.

There has to be a less distortionary taxation policy that is more progressive in nature. Instead of increasing tax rates particularly on indirect taxes and putting burden on ordinary people there is a need to broaden the tax base. IMF delegation has recently requested the government to increase the general sales tax (GST) to 18 percent

Christine Lagarde the Managing Director IMF pointed out regarding loan negotiations at the onset that the IMF would like to have a complete understanding and absolute transparency about the nature, size, and terms of the debt. Experts had already warned Pakistan that its budget deficit, which hit 6.6 percent of economic output in the last year, was unsustainable.

The question arises, is this debt situation so alarming for Pakistan that it should be the crux of economic policy of the federal government? Absolutely not. It is not the burden of debt that is ominous for financial stability but the management of debt liabilities. The structural issues in the economy need to be addressed with prudent macroeconomic management so that the economy keeps growing and is also able to overcome financial burdens. Many countries both developing and developed countries have very high debt to GDP ratios (Japan at 253 percent in 2017). However, many of these economies have been growing, have positive credit ratings and receive huge FDI flows.

None of these countries have experienced spiraling inflation or very high interest rates as is commonly feared when government’s fiscal deficits rise. In fact, Japan is facing just the opposite deflationary pressure and a zero interest rate.

Thirdly, there has to be a less distortionary taxation policy that is more progressive in nature. Instead of increasing tax rates particularly on indirect taxes and putting burden on ordinary people there is a need to broaden the tax base. IMF delegation has recently requested the government to increase the general sales tax (GST) to 18 percent.

The PTI led government on the other hand had pledged not to increase indirect taxes further. Hence it will need to take the Parliament into confidence to overcome this quandary. The IMF is demanding Pakistan for a steep fiscal adjustment as it wants to see the budget deficit at around 3.5 percent of GDP at the end of the programme. The authorities are relying mainly on tax efforts to cut the deficit as there is a little room on the side of expenditures. Agricultural income particularly coming from big landowners will have to be brought under tax net. Both provincial and federal government needs to adopt a harmonized system that raises revenue collection and enhances compliance in a transparent manner. Tax policy should aim at moving toward a system of easily administered taxes with broad bases and moderate marginal rates.

Enhancing both domestic and foreign investment through easing bureaucratic processes and business friendly policies will be highly desirable for incentivizing higher investment. Not only would a stronger economy make the deficit lower it would broaden the nation’s capacity to handle a large debt. A higher development expenditure on education, technical training, infrastructure investments in backward regions, overcoming energy shortages, supporting industrial development and SEZs will certainly help in achieving higher economic growth and development.

Unless structural reforms and sustainable economic development agenda is not pursued it will be hard for Pakistan to end this perpetual cycle of debts and deficits. It is clear that the incumbent government needs to capitalize on the success of ongoing CPEC and other development projects and mobilize domestic resources and focus on improving major sectors of the economy.

The strategies for sector specific growth should focus on removing distortions that impede growth in a particular sector. In addition, government needs to implement policies that will empower the poor and create conditions that would permit them to move into new as well as existing areas of opportunity. The objectives of such policies should include creating a stable environment and level playing field conducive to private sector investment and broad-based economic growth; removing the cultural, social, and economic constraints and increasing the human capital base of the country.

The author is a freelance writer and an Economic Analyst based in Lahore

Published in Daily Times, November 23^rd 2018.