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January 18, 2011

Politics overriding economics


January 18, 2011

Three years of mis-governance have regressed the economy of Pakistan back to the fag end of the 1990s, when the country was confronted with the challenges of improving the country’s macroeconomic environment; bringing debt situation under control; restoring investor’s confidence; reviving economic growth; and restoring the country’s financial sovereignty. Many economists within and outside the country referred to the decade as the lost decade for Pakistan.
Today the country is facing similar challenges, of course, of greater intensity and magnitude. In other words, the efforts made during 2000-2007 to revive economic activity, reduce the country’s burden and restore financial sovereignty have been wasted. Yet another decade has been lost. Can a developing country like Pakistan afford to lose two decades from its six decades of existence?
Why have we lost another decade of growth and development? Because the economy has remained off the government’s radar screen for the last three years. Consequently, economic growth has slowed, poverty and unemployment have risen; higher double-digit inflation is persisting and putting enormous burden on the poor and fixed income group; the country’s debt burden has reached unsustainable level; the dependence on donors for financial support has grown and financial indiscipline is widespread.
Pakistan is facing the immediate problem of insolvency. Its revenue-expenditure gap is widening and may reach 7.5 – 8.0 per cent of GDP, if correct measures are not taken immediately. How to finance revenue-expenditure gap to the tune of Rs1300 billion on the back of dwindling external inflows is therefore the real immediate challenge. The only option available to the government is to borrow from the State Bank of Pakistan with all its adverse consequences for the economy and the people.
The government is weak and the prime minister is afraid of taking tough economic decisions. The recent withdrawal of the hike in

fuel prices over the pressure of opposition and disgruntled allies and backing away from implementing the RGST simply underscores the vulnerability of the government. A weak and vulnerable government is the greatest threat to the economy and national security.
Inaction towards taking tough economic decisions is adding to inflation, hurting the poor, sapping the confidence of the private sector which is already low, reducing investment, and affecting economic growth and much-needed job creation. Until last month, the external economic environment has been relatively benign. This environment is now becoming inhospitable for all of us. Pakistan is expected to confront yet another challenge of rising fuel and food prices.
The international price of oil is fast approaching $100 per barrel mark. Stronger-than-anticipated recovery in the US and European economies, along with the worst winter are fuelling energy demands. The deliberate US policy to weaken its currency through Quantitative Easing is also likely to increase the price of oil in the international market. Dollar-euro parity and international price of oil move very closely (correlation between these two variables is 0.92). Is the government ready to pass on the rising cost of fuel to domestic consumers? Or, is it ready to repeat the same mistakes of 2007-08 by adopting the policy of inaction? Not passing the higher cost of oil to domestic consumers is not an option.
Political consensus among the major political parties is absolutely essential for salvaging the economy. There would be no politics without a viable economy. It is, therefore, in the interest of the major political parties to build consensus on key economic issues. The consensus should be built around mobilising resources and rationalising and improving the quality of expenditure. In other words, the consensus should be built on maintaining financial discipline in the country.
On the revenue side, the consensus must be reached in broadening the tax bases that include the implementation of RGST, bringing agricultural income under direct tax net; imposing capital gain tax on stock markets and real estate; improving the withholding tax regime; improving and strengthening the tax administration; binding the provincial governments to improve their fiscal efforts; and develop some binding constraints for provinces to generate surpluses in provincial budgets with a view to saving the NFC Award.
On the expenditure side, the consensus must be reached in rationalising and improving the quality of expenditure. In particular, the issue of energy (fuel and electricity) subsidy must be addressed. Should we subsidise the rich by keeping oil prices low or devise some mechanism to protect the poor and vulnerable sections of the society. Should we rely on increasing power tariff alone to address the issue of circular debt or should we look at eliminating free electricity to WAPDA employees; undertaking energy audit to identify fuel guzzler power plant; giving line losses targets to different DISCOs; and strengthening WAPDA’s finance departments?
Consensus must also be built on bleeding PSEs. Should we go for outright privatisation in a transparent manner or should we go for restructuring of these PSEs with efficient management from the private sector? A consensus must also be built on the size of the cabinet as well.
Pakistan’s economy has reached its lowest ebb. The current government and its economic team are weak. Without building consensus on economic issues, no government can run the country and the economy. It is in the interest of all the political parties to evolve consensus for the sake of Pakistan. Economics must override politics.

The writer is principal and dean at NUST Business School, Islamabad. Email: ahkhan

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