THE so-called mini-budget, or the economic reforms package, comprising an array of tax incentives and administrative actions placed before the national assembly last week has provoked highly polarised commentary on the suggested measures that seek to boost economic activity and investment.
The supporters of the six-month-old PTI government contend that Asad Umar, the finance minister, who laid down the proposals for the assembly’s approval through the second amendment in the finance bill 2018-19, has ‘nailed it’, arguing that implementation of the package will facilitate industrial growth, and stimulate a sluggish economy and stagnant exports forthwith.
The critics of the government appear to have taken the other extreme position, insisting that the measures will put more money into the pockets of the rich (which government hasn’t done that before?).
They have focused more on what wasn’t part of the proposals: a plan to control growing fiscal deficit, mounting inter-corporate debt in the power sector and widening current account gap.
The government’s economic team took its time in rolling out its economic strategy, but the argument that it does not have a clear policy direction does not hold water
Many have argued that the government of Prime Minister Imran Khan has clearly demonstrated the lack of a plan or direction to address these ‘macro issues’ by not tackling them in the mini-budget. Some say the lack of a strategy to drastically document the economy and increase the tax revenues will hurt Pakistan’s position in ongoing negotiations with the International Monetary Fund (IMF) for a bailout loan deal.
Any government action, policy or decision has to anticipate criticism. Yet the PTI government has attracted more than its fair share of criticism for its economic and financial policies owing to a number of political and economic factors, including growing political division and declining business confidence in the country.
Indeed, the government’s economic team took its time — in certain cases longer than expected — in rolling out its economic strategy, but the argument that it does not have a clear policy direction does not hold water.
Given the fact that the PTI had inherited a broken economy on coming into power — the fiscal deficit was mounting, an external sector propped up on expensive foreign debt was fast unravelling, inflation was going north and so on — it was but natural for it to take some time in rolling out its economic and fiscal policies to stabilise the collapsing economy. Last week’s economic reforms package also needs to be seen in this context.
Ever since it took over the reins, the Imran Khan government appears to have worked on a two-pronged strategy to steer the economy out of the deep mess the previous PML-N government had left behind, without immediately turning to the IMF for its funding needs in an attempt to avoid its strict conditions.
On the one hand, it went out to stabilise the external sector in the short-term by arranging much-needed cash from the Gulf States and China to finance the country’s widening current account gap, and implementing measures to compress aggregate demand in the economy, mainly through new curbs on imports, massive currency devaluation and higher interest rates.
On the other, it is trying to pursue a policy that it believes will help unshackle the manufacturing potential of the country, boost investments in new industrial projects and increase exports, thus unleashing growth in the medium to long term.
The latest tax and administrative reforms package for the industry and agriculture is but a part of the second prong of the government strategy to deploy supply side, business-friendly and pro-growth policies to improve market sentiments and put the slowing economy back on the track to recovery and sustainable growth.
The government has been able to provide some fiscal space for industrial growth and fresh investment because it did not rush for a bailout from the IMF as many of us wanted it to. Had it gone for the Fund programme, it would have found its hands tied as in the case of the previous two governments.
However, it would be naïve to expect the new policies to yield immediate results. Economic growth is unlikely to pick up pace in the next couple of years. Also, it will be wrong to assume that enough has been done to clean up the mess.
The government will have to follow up on the measures so far announced in the next budget through more reforms aimed at pushing investment in the manufacturing industry, broadening the tax net and rationalising unproductive public expenditure, and stabilising the external sector.
A break, however short it is, can reverse the impact of the whole effort.
Published in Dawn, The Business and Finance Weekly, January 28th, 2019