Compromising future economic growth

Published November 15, 2021
If we look at 50-year data of Pakistan’s GDP growth we see that except for once (between 2010 and 2018), the country’s economy never grew consistently higher for even five years in a row. — AFP/File
If we look at 50-year data of Pakistan’s GDP growth we see that except for once (between 2010 and 2018), the country’s economy never grew consistently higher for even five years in a row. — AFP/File

One key indicator of the level of preparedness of a country for consistent, sustainable future economic growth is its progress in meeting targets of Social Development Goals (SDG). A reading of this indicator brings out a bitter truth for Pakistan — the country’s level of progress is just above Afghanistan and way behind that of India, Iran, Sri Lanka and Bangladesh.

Public sector spending — mainly out of annual development budgets —accounts for 90pc of the investment being made in meeting 2030 SDG targets in all 17 selected areas including health, education, women empowerment and environment. This means in the next nine years, our governments will have to earmark huge development budgets — year after year — to meet SDG targets. Slippages in meeting these targets would compromise economic growth not only during these nine years but for a long time even beyond that period, more so because countries with low ranking on SDGs would likely be treated differently by international financial institutions than countries that rank higher — economically and politically.

That is why it is important for Pakistan to dig deeper into the causes of low development allocations (in terms of percentage of GDP) in its yearly federal budgets and to ensure that development spending is not reduced at times of fiscal difficulties. So, let’s start with some basic questions. Why have successive governments in our country made low-level development allocations? Why did they cut the targeted development spending mid-year? And, more importantly, what can they do to avoid all this?

The level of seriousness of Pakistani governments towards expansion in the revenue base is often shaped by their short-term need to balance fiscal books and gain political mileage by implementing some politically-gainful big-ticket projects

The obvious answer is that governments fail to generate enough revenue which leads to a fiscal deficit and to manage this deficit they keep development expenses low and, worse, they even don’t mind reducing them at times of financial duress.

Read more: Spending on defence, development likely to remain flat till 2026

But this simple answer raises more questions: why do governments fail to generate enough revenue? Why does the fiscal deficit rise past the budgeted target year after year? Why don’t governments cut their administrative expenses? Why do so-called austerity drives don’t work? Why can’t the cost of debt servicing be reduced and above all, what can be done to rationalise the “non-combatant” defence budget? Honest soul-searching on these issues may help us determine how our governments can avoid cuts in development spending.

The level of seriousness of Pakistani governments towards expansion in the revenue base seldom arises out of their sense of responsibility towards what is right for Pakistan’s economy. It is often shaped by their short-term need to balance fiscal books — and gain some political mileage by implementing some politically-gainful, big-ticket projects. That is why the measures that are taken to broaden the overall revenue base often lack economic merits.

For example, in its quest for boosting overall revenue, the previous PML-N government launched bearer bonds of high denominations — up to Rs40,000. The idea was to amass huge non-tax revenue and thus increase overall revenues. Everyone knew from day one that this move would contribute to expansion in our already large shadow economy.

Amnesty schemes announced in the name of increasing tax-revenue offer another example of prioritising “what is easy” over “what is right”. Whether these schemes are offered during a democratic setup or by a despot or in the days of hybrid democracy, they carry an opportunity cost higher than what they actually achieve. (The same is true for the so-called austerity drives of successive governments).

Public sector spending accounts for 90pc of the investment being made in meeting 2030 SDG targets

Small wonder then that whenever Pakistan turns to the International Monetary Fund (IMF) for borrowing, the Fund expresses reservations over our “home-grown” revenue-boosting schemes and demands their reversal —like in the case of high-value bearer bonds or fundamental restructuring as in the case of PTI’s ‘amnesty scheme’ for builders and developers.

In the light of the above discussion, the IMF’s demand that the government cut its development spending for 2021-22 from Rs900 billion to Rs700bn makes sense. It is not for the first time the Fund has made this demand — and sadly, it may not be for the last time for it to do so. Whenever we enter into another IMF programme, the Fund officials would again push the government of the day to cut its development budget or to withdraw/ rationalise “unjustifiable” subsidies with high opportunity cost to the economy — or to come clean about ‘amnesty schemes’ or about ‘phoney’ revenue-boosting measures.

Potentially, Pakistan can come out of the ongoing vicious cycle of high fiscal deficit-demanding cuts in development spending and reduced development spending-leading to slower economic growth, lower revenue growth and necessitating another round of cuts in development spending.

But to make that happen, parliamentary democracy must be strengthened and economic policymaking made more inclusive with inputs from all federating units regardless of the political divides. And, annual development plans should not be the only item to be sacrificed during the financial crunch.

Read more: Holes in budgeted, authorised and actual development spending

If we look at 50-year data of Pakistan’s GDP growth we see that except for once (between 2010 and 2018), the country’s economy never grew consistently higher for even five years in a row. There are innumerable reasons for it. But lower development spending as a percentage of GDP is one of them.

The State Bank of Pakistan in collaboration with the government as well as economic think-tanks of high repute may consider launching a study to examine whether and how cuts in development spending in Pakistan affect economic growth in following years.

The same study should also ideally look at the responsiveness of the economy to the level of development spending. That would help find out the threshold level of the development budget. The central bank has conducted a few studies to find out threshold inflation (currently 9pc). A similar exercise in the case of development spending level may hopefully help improve economic policymaking and ensure sustainable, long-term economic growth.

Published in Dawn, The Business and Finance Weekly, November 15th, 2021

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