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Monday February 26, 2024

A chronic state of policy errors

April 02, 2023

Pakistanis are living in an era of shocking price hikes, staggering inequality, volatile markets and oligarchic politics. The country faces intractable inefficiencies in almost all sectors including energy, agriculture, finance, education, and health. These are complex problems to solve. They require serious effort to break the mould of consistently pursuing ill-conceived policies.

Truth be told, Pakistan has adhered to endless policy errors in critical areas with consistency and across successive governments. My sense is that the most concerning policy error has been expanding an inefficient public sector and shying away from privatization. This has led to Pakistan having 212 state-owned enterprises (SOEs) operating in all key sectors of the economy. The public-sector footprint in the commercial arena is quite astonishing with 85 SOEs spanning power; oil and gas; infrastructure transport and communication; manufacturing, mining and engineering; finance; industrial estate development; and wholesale, retail and marketing sectors. The story continues with 44 non-commercial SOEs (Section 42) and further 83 subsidiaries of the commercial SOEs.

In my view privatization, especially of energy-sector SOEs, can make a remarkable difference to the economy by improving efficiencies and reducing quasi-fiscal losses. Pakistan since 2015 has virtually followed a policy not to privatize.

We continue to run sizeable fiscal deficits – almost as an intended decision. The period since FY08 is interesting to consider as it coincides with a democratic transition and two programmes with the International Monetary Fund (IMF). From FY2008 to FY2022 the country clocked a near 7.0 per cent fiscal deficit on average barring the period when the country actively adhered to an IMF supported programme between FY2014 and FY2017 when the deficit averaged near 5.0 per cent.

Sadly, within the fiscal framework, another consistent policy has been a reliance on indirect taxation rather than increasing the share of direct taxation. Tax collection from indirect taxes, whose incidence is higher on the poor and middle-income groups, accounts for more than 70 per cent of all collection, once we include withholding taxes levied in the sales tax mode. It is regrettable that two-thirds of the tax collected in the last decade is in the form of indirect, regressive taxes.

There is an amazing persistence in our policy and political decisions to shy away from adequately taxing agriculture income or traders or urban immovable property. It is by deliberate design that we promote unproductive investment in real estate by repeatedly giving real-estate amnesties creating perverse incentives; making investment in real estate lucrative by requiring less documentation; and eliminating capital gains with a five-year holding period. With such policies we provide an enabling environment for a grey economy and avenues for stashing of illicit wealth, rather than encouraging a move to a cashless digital economy, where we can track and audit financial transactions. Time after time we have missed the opportunity to change course and move to progressive taxation.

Moreover, on the expenditure side in the budget we continue with misguided policies of unfunded pensions, untargeted subsidies, and a non-result-based framework of development spending. We continue to err in making less optimal economic policy choices.

Successive governments promote a policy of creating growth through fiscal and monetary stimuli and borrow capital to fund large-scale capital expenditures. This fuels consumption and pushes higher imports, entangling the country in a perpetual cycle of balance of payments crisis and taking Pakistan repeatedly to the doors of the IMF.

With due respect for leaderships and policymakers, it has been hard to convince them that this cycle of pumping money into the economy creates illusory improvement, but in the end hurts the economy more than it helps. Pakistan remains glued to a policy cycle of boom and bust. This is no way to run the economy.

It would not be an exaggeration to mention that governments have been consistently neglecting a most fundamental policy reform of raising domestic productivity growth. We have collectively failed to convince the people of Pakistan that we cannot purchase success from the outside, success must be nursed internally.

As a policy we have allowed markets which can allocate resources efficiently, to be manipulated by a small class of influential to their benefit. A consistent policy has been to ensure protection to specific sectors and industries from competition. Resultantly, the private sector, with few exceptions, offers little dynamism to innovate. A consistent policy of poor urban planning prioritizes cars over public transport, cyclists, and pedestrians and leads to traffic congestion and unbreathable air quality.

Pakistan has had a policy of wavering on worthwhile civil services reform. Consequently, we are underpaying civil servants, teachers, and healthcare workers. There is no incentive structure and remuneration is not tied to job performance. The worst policy we have stuck to is promotion by seniority instead of evolving a reliable way of measuring performance and rewarding it.

Those of us who have had a chance of observing the work at ministries have highlighted the lack of domain knowledge of the officers as a key issue. Yet the country hesitates from instituting any policy reform to address this issue. The country is unable to move to a model of much needed continuous recruitment at all levels or give up on a lifetime guarantee of job security to the bureaucracy. Creating a responsive and modern civil service in this atmosphere is looking less hopeful than ever.

My personal experience has been that inducting talent from the outside for even short stints is still less tolerated in government. This has led to an unfortunate policy of outsourcing the country’s thinking and policy formulation to external counsel. Building inhouse resources like the professional unit I put together at the Ministry of Finance are a pipedream.

Economic diplomacy is still addicted to Pakistan’s age-old tactic of leveraging our geo-strategic importance to find dollar inflows. This policy has been consistent for decades, irrespective of the government in power. As I write this piece, the country is running from pillar to post to shore up our dwindling dollar reserves. Whereas inflows may help in the short run, they keep us intoxicated and averse to real reforms of our economy, essential for the long run. The country is always looking towards the next bail-out.

My own experience as a policymaker at the Ministry of Finance over several years shows that the notion of finding easy monies, combined with the need for endless firefighting, consumes most of the bandwidth of the few burning the midnight oil at the economic and energy ministries. This leaves little room and political capital for putting together and implementing deep structural reforms important for changing our model of growth.

I would argue that we have systematically created and followed policies which have gotten us to where we are – this has not been a random act. The way we have managed our affairs has brought us to the brink of default. This is not an encouraging story. A policy reset is now almost inevitable if Pakistan has to have a real chance of coming out of the deep economic malaise in which we find ourselves. It seems clear that expunging this consistency of bad policies is a necessary condition for policymakers to deliver Pakistan’s better years.

The writer is former adviser, Ministry of Finance. He tweets @KhaqanNajeeb and can be reached at: khaqanhnajeeb@ gmail.com