LIKE its predecessors, the new government will have no option but to address the external-sector woes as its topmost priority.
Finance minister-in-waiting Mr Asad Umar says “the most urgent action” required of the government will be to deal with “a significant current account crisis”. Tapping into diverse sources for relief is necessary because the spiralling dollar needs may not be met by a single source like the International Monetary Fund (IMF) or China.
There is also a need to protect as far as possible the economic growth trajectory from the Fund’s severe austerity programme and contain the consequent social vulnerability. Asad Umar says that recourse to the IMF credit facility would be a “fallback option”.
The estimate of dollars needed vary from the finance ministry’s $23 billion to the IMF’s $27bn.The economy may get a breather by floating “profitable bonds” for investment by overseas Pakistanis if launched quickly. Whether such an exercise will stabilise the national currency to stimulate investment and ease the building up of inflationary pressures is an open question.
For ‘transforming governance’, much depends on expanding e-governance and enhancing digitalisation of the economy, and the challenging job of reforming the civil service
Whereas the China-Pakistan Economic Corridor related investment may be a “game changer” in certain ways, China cannot meet Pakistan’s diverse needs. Though a global economic powerhouse, China could not manage any significant measure to reduce its bilateral trade imbalance with Pakistan.
For the short to medium-term, the IMF programme will send a positive signal to other international financial institutions (IFIs) and global markets. Some pickup in sagging capital inflows from Europe and the United States may be handy to ease the balance-of-payment crisis.
However, even if Pakistan succeeds in getting the urgently needed $12bn for this fiscal from all sources, it would still not be a durable solution. This calls for a hard bargaining with the IMF to dilute the Fund’s patent recipe such as severe austerity measures, import liberalisation, further rupee depreciation and a hike in electricity tariff.
The IMF has to be reminded that its programme should not create hurdles in achieving the United Nations’ Sustainable Development Goals (SDG) to which it is fully committed. Looking at the external sector, the main issue in exports is productivity and for the current account deficit, it is import substitution. Commodity producing sectors —manufacturing and agriculture —which make up the bulk of the exports, have not received the priority in policymaking that they deserve.
Productivity also suffers from the high cost of doing business, including bureaucratic red tape and an extractive tax policy which is driving a wide range of economic activities into the informal sector and discouraging private investment in formal productive channels.
Public limited and listed companies are going out of fashion. The economy cannot be revitalised without revitalising the private sector. Incentivising businesses to move to the formal sector for their organic development is part of the PTI’s agenda and tackling ‘informality’ for taxing purposes is included in the UN agenda for SGDs and supported by the IMF and the World Bank.
Here, the donors may be helpful in providing the right policies, skills, tools and finances. With 80 per cent of the economy largely in the informal sector, Asad Umar laments that direct taxes account for only 10pc of the tax revenue (perhaps excluding withholding tax).
Awaiting the PTI government is a heavy agenda that includes: “transforming governance” to cut bureaucratic red tape, increase direct taxes, reduce cost of doing business, and improve service delivery. The party wants to bring accountability to the core government and turn the civil service into a well-knit and depoliticised cadre of professionals.
For “transforming governance”, much depends on expanding e-governance and enhancing digitalisation of the economy. The PTI proposes to institutionalise e-governance practices in public administration which will improve efficiency, cut costs and reduce corruption.
It is an area where Islamabad can enlist IFIs’ support. However, there are limits to which IFIs can help Pakistan carry out its reform agenda. One of the most challenging jobs on the PTI agenda is civil service reforms.
The party manifesto itself reminds people that 38 civil service reforms carried out over 70 years have not depoliticised bureaucracy or attracted bright young talent on merit or technical expertise. Like the PPP founder Zulfiqar Ali Bhutto, it intends to allow lateral entry into the civil service by induction of competent professionals.
In cases where the ruling coalition government cannot do without a two-third majority in parliament, it needs to develop a national consensus on its reforms’ programme. The PTI-led coalition enjoys a simple majority in the National Assembly, but has a minority in the Senate.
Even at the grassroots, the PTI secured 16.8 million votes only against 20m scored by the PPP and the PML-N combined. For required legislation, the progress in critical economic reforms depends on the support of at least one of the two opposition parties.
While the PTI may enjoy support of the powers that be, making synchronised institutional reforms for a common goal is a challenging job. All major institutions and mainstream political parties have to be on board for reforms to be meaningful and effective.
Published in Dawn, The Business and Finance Weekly, August 20th, 2018