INSIGHT
Now that the amnesty scheme has failed, the government’s focus is still on fiscal stabilisation instead of growth, with heavy borrowing from the commercial banks to run the day-to-day financial affairs.
When the current financial year ends, the government’s borrowing from the commercial banks is expected to surpass last year’s figure of Rs1,335 billion. The same was Rs106 billion in 2013-14 which amply suggests the government still prefers to seek heavy borrowing from the commercial banks.
Why these banks provide happily to the government is a valid question, mainly being asked by the business community. It is simply because the commercial banks get higher interest rate by investing in the government’s papers and bonds. They are simply unconcerned over the business community’s appetite for borrowing to expand businesses and thus a better GDP.
It was in this backdrop State Bank of Pakistan Governor Ashraf Wathra and his chief economist hinted that the corporate sector should divert Rs3.7 trillion invested in treasury bills and Pakistan Investment Bonds (PIBs) in other avenues with a view to promote the subdued growth.
It would have been more appropriate if the advice came from the central bank officials to the government to borrow less from the commercial banks and divert their resources to the private sector which is crying for help. The reason is the government still wants to go for fiscal consolidation at the behest of the IMF by borrowing more and more from all sources. It is still shying away to help the private sector.
“Growth is not the preference of the government as it cannot come out of the IMF mode that seeks undue fiscal consolidation at the cost of the national economy,” says renowned economist Dr Ashfaque Hasan Khan.
All efforts, he said, are being made by the finance minister and his incompetent economic team to improve budget deficit and show higher growth rate through fudged economic figures. “They continue to work out fudged numbers to satisfy the IMF officials who are only concerned about recovering their loans from Pakistan rather than genuinely helping the Pakistani economy to take off.”
He said independent economists have been urging government after government in Pakistan to concentrate on growth without which the overall economy cannot improve. “But the present government has a particular mind set up of following the dictates of the IMF officials to neglect growth and prefer fiscal consolidation which is nothing but to stop progress and development,” Dr Khan said.
Independent economists have advised the governments to follow growth oriented and growth promoting policies. The present government is often alleged to be employing verbosity by always talking in the future tense: this will be done and that will be achieved while Chinese and the East Asian governments talk in past tense by saying this has been done and that has been achieved.
However, it is good to know that governor central bank and his Chief Economist Dr Saeed Ahmad have for the first time talked about Rs3.7 trillion parked in the T-bills and PIBs – a risk-free investment for the corporate sector. It would have been better if the central bank officials had also talked about the commercial banks’ amount parked in the TBs and PIBs.
“I am of the firm belief our struggling energy sector along with cement and other infrastructure can enormously benefit from the new investment, including the big investment parked in various government maturities,” said Mr Wathra.
Talking about the private sector, he said the central bank is encouraging and facilitating sustainable investment by improving contract enforcement procedures, reduction of bureaucratic hurdles, consistency of policy reforms and tweaking regulatory framework to ensure best international practices. “If you ask me I am pretty confident that central bank’s prudent monetary management in the backdrop of declining inflation is helping the investors to borrow working finance and meet their capital expenses on low interest rates,” he said.
He said growth in fixed investment loans has more than doubled this year as the manufacturing, construction, automobile assemblers, fertiliser producers and manufacturers of oil and ghee are borrowing actively to finance their expenses.
But there is no denying the fact that investment environment is still to be largely improved. It is despite China’s great favour of investing $46 billion in China-Pakistan Economic Corridor (CEPC) that also includes energy projects in the country.
However, the security situation is still something to be worried about, as Bed Wear Export Association President Shabbir Ahmad said, “A senior French embassy official was in the city and I invited him for a lunch. When I picked him up from his hotel and reached the road we were stopped by a gunman who asked us to hand over all our belongings, including cell phone and cash. This was too terrifying for the embassy official, but thank God, the gunman took everything including my car key, and ran away. I then called for another car and took my guest away which was a nightmare for him.”
Though the security situation in the provincial metropolis has greatly improved, such incidents do become a matter of concern especially for the foreign investors. The good thing is the diplomatic community in the capital is not reportedly painting a negative picture of the city for their investors.
PML-N Senator Anwar Baig, who maintains regular contact with diplomats on behalf of the ruling party by inviting ambassadors and senior officials of important embassies at his place said this was certainly an isolated incident due to the strong vigilance of the Rangers and other police departments. “I am saddened to learn about the incident, and I am sure law enforcement agencies are looking into it as we cannot afford to have such incidents repeated in the Karachi, which is the backbone of our economy.”
It is good to hear from the central bank governor that the weak policy frameworks are drastically being improved to encourage investment and thus spur growth in the economy. Enough resources are available to fuel growth but who does not know that unless these resources are tabbed and properly channelised, things could not greatly improve in terms of creating a positive investment environment.
Many people believe that investment targets cannot be achieved by cutting development budgets and the government will have to ensure timely disbursements to the provinces and the ministries. Why should domestic borrowing be consumed by the government for managing rising current expenditure?
The government is currently spending on plugging fiscal deficit which shows that it is paying just lip service to growth, and for all practical purposes is implementing the IMF agenda of fiscal consolidation.
Part of the problem is that the much needed structural reforms, particularly in the revenue and the energy sectors are still being delayed. The government has learnt that neither the tax amnesty scheme help increase revenues nor did it contribute to enhancing the number of taxpayers and tax filers. This may force it to strictly enforce 0.6 percent withholding tax on retailers, who are largely doing cash transactions not through banks.
Nevertheless, the good thing is that July-March 2015-16 figures show 17 percent growth in revenue –Rs1,862 billion against Rs1,590 billion in the corresponding period last year. Similarly, Foreign Direct Investment (FDI) rose by five percent in eight months of the current financial year - $751 million in July-Feb compared to $716 billion last year. Still it is a long way from the $5.5 billion FDI in 2007-08.
The government must accord preference to growth over fiscal consolidation to achieve real turn around in the economy. However, this will not help without increasing the development budget and improving the country’s decaying infrastructure - not merely metros, orange lines and expressways, but also by setting up new industries to promote greater investment other than that of CPEC.
The writer is a senior journalist based in Islamabad