Another bailout!

INSIGHT

The choices, available to Pakistan to cope with emerging economic challenges, are limited and if no miracle comes to pass then the upcoming regime will have to swallow the bitter pill of engaging the lender of last resort, the with Washington-based International Monetary Fund (IMF), to steer clear of an economic collapse.

It is a fact, conceded by finance ministry high-ups in their background discussions that the decision of reaching out to the IMF would be taken by the next elected government. They argued that it was not the mandate of caretakers even to hold an article IV consultation with the IMF so it had been left to the incoming government to negotiate a deal with the fund.

It won’t come as a surprise if an IMF team is also in the same building where the oath-taking ceremony of the upcoming elected premier is likely to take place. The phase of macroeconomic instability is heading towards a fully-blown crisis where the country’s economy was in for unlimited deterioration, if no countermeasures were taken.

Some recent episodes have demonstrated that exchange rate fell sharply because it was not possible to keep rupee overvalued through artificial tools. The rupee slumped to Rs 130 against US dollar. There was an argument that the rupee was kept overvalued by Rs12 to 20 percent during the tenure of Ishaq Dar as finance minister but when macroeconomic instability gripped the country the foreign currency reserves depleted sharply, nose-diving by $12 billion in the last 20 months.

The unprecedented hike in twin deficits - the budget and the current account -has left no other option for Pakistan but to seek another bailout package from the IMF.

The budget deficit was expected to go up to 7 percent of the GDP for July-June period of the last fiscal year, ended on June 30, 2018.

The finance ministry gurus are undertaking a hectic exercise to postpone certain expenditures for restricting the budget deficit below in the range of 6.8 to 6.9 percent of GDP for the last fiscal year. This figure of 6.9 percent, on account of budget deficit, has not incorporated the monster of circular debt and piling up liabilities of commodities’ operations, which if added simultaneously could go up to Rs1500 to Rs1700 billion.

There are some structural issues confronting this economy as the NFC Award, finalised in 2010, has been creating fiscal problems for the Center consistently. In its light, the Center was supposed to generate resources and then distribute them among the provinces. Unfortunately, the provinces got into the habit of spending those resources like easy money without enhancing capacities -in the aftermath of 18th constitutional amendments.

The NFC and 18th constitutional amendments were amazing accomplishments by the last Pakistan People’s Party (PPP) led regime; however, there are some catches. The first and the foremost was its wrong sequencing. As per the prescribed order, the resources were distributed among provinces by rendering a major chunk and the responsibilities were handed over to them later on. Ironically, the federating units relished the resources but were reluctant to shoulder the responsibilities. This sequencing must have been the other way round. They should first have been given responsibilities and then resources.

Now the provinces have become so habitual of it that it will not be an easy task to slash their share and under NFC Award nothing could be decided without evolving consensus among all stakeholders.

The incoming government also faces the challenge to deal with this thorny issue. One thing that needs to be done as part of the agenda is that those provinces which increased their share in resources should be linked with their own resource mobilisation efforts in a bid to give them incentives for jacking up their contribution in dismally low tax-to-GDP ratio.

The budget deficit shot up close to 7 percent of GDP for 2017-18 (although officially ministry of finance has not yet released official figure to this effect) mainly because of massive revenue shortfall being faced by the Federal Board of Revenue (FBR) even in achieving its revised tax collection target of Rs3,935 billion. The non-tax-revenue collection also fell short of target by a large margin.

Economists like Dr Nadeem Ul Haq have always criticised the expenditure side, arguing that this bureaucratic structure was not meant to luxuriate at the expense of national exchequer. He also identified a continuous overlapping of ministries both at federal and provincial levels, even after 18th amendments, which he said was only aimed at enjoying perks out of national kitty.

So expenditure reforms should also need to be done on priority basis.

Pakistan requires reforms on both revenue mobilisation as well as expenditure side with the rationale that bureaucratic structures need to be overhauled for improving the lives of common people of this country.

When the budget deficit increased to 6.9 percent of GDP in last fiscal against 5.8 percent in 2016-17, it revved up demands for increasing imports, resulting in an unprecedented import bill of around $60 billion in a year.

On the other hand, the exports could not be improved so sharply in the wake of a shrinking manufacturing base, mishandled Free Trade Agreements (FTAs), and an inflating overall cost of doing business in the country.

Now it will be an uphill task for the next government to negotiate the best deal with the IMF. A deal that not only allows Islamabad to undertake all important projects like China-Pakistan Economic Corridor (CPEC) at desired pace to spur growth but also enhance country’s capacity to increase revenue collection by Rs1000 to Rs2,000 billion in a year. It must be noted that the so-called reforms have excluded over 1 million taxpayers from the list after the government increased the limit of taxable ceiling and reduced the tax rate from 30 percent to 15 percent in one go.

On exports front, Pakistan requires to get exportable surplus as early as possible because without having surplus no country can boost exports.

So we will have to diversify our products and markets to take a quantum leap.

Shallow slogans and politicking will not solve our economic problems as it requires serious and a well-thought-out strategy, otherwise the economic miseries are bound to multiply down the line.

The writer is a staff member