Q Do you think the next government should compromise growth to achieve stability? Growth consolidation would likely entail lower taxes, a big development budget and a higher fiscal deficit. Or would achieving economic stabilisation by reversing tax breaks and cutting development spending would be a better approach?

Q How can the next government best address the challenges of the external sector? Can the decline in reserves be contained? How do you view the rising borrowing from Chinese lenders? Do you favour a return to the IMF?

A1: Pakistan’s economy has the capacity to grow at a high rate if it is managed properly. Since 2013-14, exports and remittances contributed $111bn and $98bn, respectively, while the country received $9.5bn in investment inflows. Tax revenues amounted to Rs3.8 trillion last year. All these indicators reflect that the economy has potential to grow without taking foreign aid. However, it takes time and prudent policies to achieve sustainable economic growth.

It will not be possible to finance government expenditure without enhancing the tax base. The current situation reflects that the fiscal deficit will keep widening unless the government creates some fiscal space by raising revenues. The government may not compromise growth while sustainability remains a prerequisite for achieving development.

A2: Pakistan’s reserves are a mix of borrowing and foreign earnings. During the past five years, a gradual slide in the country’s exports cost cumulatively $13.8bn. Pakistan received $23.6bn loans from the IMF during the same period. Pakistan and China have signed a currency swap agreement of approximately $1.5bn to facilitate bilateral trade. But given the trade deficit with China, borrowing from Beijing will not solve this issue.

Pakistan has two options. It can either manage the economy on its own or go to the IMF to achieve stability. However, we observe that the country received both IMF support and foreign investment for mega projects during the past five years. But the macroeconomic situation is still unstable. We have to rely on our own resources and manage the economy ourselves.

A1: Pakistan needs consistent economic growth with stability in its policy and actions. The next government must give priority to the economy and address other political and administrative issues later on. The new leadership must ensure that issues with economic fundamentals are comprehensively addressed in the first two years of the term with input from all major stakeholders, like the Overseas Investors Chamber of Commerce and Industry (OICCI). This will require commitment and participation from all leading political parties so that a change in government every few years does not result in any fundamental change in economic policies.

We think that higher economic growth can be achieved by leveraging technology and promoting digitisation in key economic sectors. The next government should seriously engage with business stakeholders to build a better economic and business environment for the economy to thrive. Transparent, consistent and predictable policies are critical for attracting foreign direct investment (FDI) in manufacturing and key strategic projects with a longer maturity timeframe.

A2: Challenges on the external front are serious, but not insurmountable. Foreign exchange reserves can be boosted through a smart but urgent review of trade policies as well as attracting funds held overseas by the Pakistani community — a process that has already been initiated under the ongoing amnesty scheme. The OICCI recommends that there should be a Private-Public Dialogue Forum headed by the prime minister. It should comprise key stockholders, like the OICCI and government leadership, to periodically review key economic challenges. We expect the new government to introduce a forward-looking, longer-term export policy with significant incentives for the diversified value-added product range and destination, with an increased focus on growing regional trade. The government is advised to engage world-class consultants for assistance on the export diversification strategy and attracting FDI in exportable sectors, including from China. Moreover, there is a need for restricting imports by creating a positive environment to boost domestic production and revise many free and preferential trade agreements in the country’s interest.

We do not favour going to the IMF because of tight conditions it entails. Nor do we favour frequent borrowing from China as it creates a bad precedent and defers tough measures that policymakers need to take. We favour self-sufficiency, which may be painful but dignified. Many countries in the region, including India and Malaysia, have prospered without seeking IMF assistance despite tough challenges. Pakistan should also show determination and good governance to navigate through challenging times.

A1: The next government’s key priority should be to achieve macroeconomic stability, with the twin deficits – external account and fiscal – as the main areas to focus on. There are no shortcuts here, but the first thing that the government must do is to curtail its expenditure. Reversing the tax breaks should be the last option. High rates provide a bigger incentive to evade taxes. The country needs a broader tax base. However, in setting the tax rates for different classes of taxpayers, the globally followed principle is to tax corporations at a lower rate than individuals. Incorporated entities promote higher standards of governance and accountability.

Taxing companies at a lower rate prioritises job creation over consumption, which is already high at 80 per cent of GDP and has encouraged imports and undermined domestic manufacturing due to fundamental flaws. One consolation for the new government is that tax revenues will be bolstered by devaluation. However, an International Monetary Fund (IMF) programme is inevitable.

A2: Successive governments have indulged in temporary fixes, which at best amount to first aid when the economy needs drastic surgery. Relying on short-term loans is not a sustainable solution. China, the provider of such assistance, is also the source of Pakistan’s largest trade deficit — over $15 billion per annum or $1.25bn a month. Short-term loans from Beijing help sustain exports from — and jobs in — China whereas the need is to create jobs in Pakistan for value-added exports and import substitution.

Implemented intelligently, an IMF programme — along with structural reforms to fix fundamental flaws that have undermined domestic manufacturing — will restore the balance on the external account.

Published in Dawn, The Business and Finance Weekly, July 9th, 2018