Thursday April 18, 2024

A new economic direction?

By Hussain H Zaidi
May 26, 2018

Confident of winning the upcoming polls, the PTI has unveiled a roadmap for governance. In a word, the roadmap seeks to put in place a welfare state. It is an eye-popping promise, but, as always, the devil lies in the details.

After coming into power, the PTI will create 10 million jobs, build five million housing units for low-income people, stimulate economic growth by providing tax and other incentives to businesses, and restructure the Federal Board of Revenue (FBR) to make it corporate-friendly. A ‘pro-worker’ labour policy will be introduced to build the capacity of the workforce. State-owned enterprises (SOEs) will be reformed. All these measures will be executed during the five-year term of the government.

All this sounds felicitous, but only on paper. By the time the new elected government takes office, the economy would have gone into a tailspin. This is borne out by the eye-watering key economic indicators as they are at present: $30 billion trade deficit, $14 billion current account deficit, Rs1.48 trillion fiscal deficit, depleting foreign exchange reserves, a rapidly falling domestic currency, Rs16 trillion domestic and $76 billion external debt, a narrow tax base (11 percent tax-to-GDP ratio), and loss-making SOEs. The dismal state of the economy will constraint the choices available to the government.

As happened in 2008 and 2013, one of the first prickly decisions that the new government will be required to make will pertain to striking another credit agreement with the International Monetary Fund (IMF). All the major and minor, political parties are in principle averse to drawing the begging bowl. No one wishes to be cast as a mendicant. But once they are in the saddle, it dawns upon them that seeking foreign assistance is a necessary evil. The PPP realised this painful truth in 2008, and the outgoing PML-N government did so in 2013. Both inked multi-billion dollar loan deals with the IMF within a few months of assuming office. What will the PTI choose?

Imran Khan has always styled himself as a leader for whom national honour and dignity outweigh other considerations. Such leaders in principle prefer eating grass to borrowing from abroad. This suggests that the PTI, if it is voted to power, may not like to do business with overbearing multilateral donors, which have the reputation of tightening up on the debtors. Be that as it may, in a recent interview with an international media house, he didn’t rule out the possibility of signing an agreement with the IMF; he said he would look at the content of the proposed deal and decide accordingly. This seems to be a logical stance.

However, as a rule, an IMF package presents an economy like Pakistan with Hobson’s choice. Save for minor changes, either the deal is to be accepted as it is – a sort of a single undertaking – or there is not going to be any agreement at all. Therefore, it may not be possible for the PTI, or any other party that forms the government, to have their cake and eat it too. They will either borrow the much needed capital from the IMF on its terms or will look elsewhere. We need to wait to find out how the PTI overcomes this dilemma.

The assistance from the IMF, or from any other source, offers at best a respite when the chips are down. In the end, a nation has to set its own house in order to navigate a difficult economic situation – a task which has stumped the present and previous governments. Would it be a tall order for the PTI as well? To begin with, the promise to generate millions of jobs is premised on a quantum leap in public and private-sector investment. Increased corporate investment will swell the government’s kitty and thus, enable the PTI government to step up social expenditure. However, this seems to be a case of easier said than done.

In Pakistan, during the last five years, total investment has gone up 42 percent, slightly above eight percent a year. The reasons for the sluggish growth in investment include low savings caused primarily by low incomes and low interest rates, the government’s overwhelming reliance on bank borrowing to finance fiscal deficit, and the reluctance of the private-sector to commit its resources on a long-term basis to productive ventures. The businesses’ preference seems to be for speculative and quick yielding investment, such as sale and purchase of stocks and the real estate. How the PTI government will induce a change in private firms’ behaviour is anybody’s guess. Any attempt to drive up the interest rates will be opposed tooth and nail by the corporate sector.

The paramount need to contain the burgeoning fiscal deficit will for sure throw a wrench into the new government’s intentions to scale up development related spending. Debt servicing, defence, general administration, pensions and grants, and transfers to provinces together soak up more than 75 percent of the federal government’s total budget, leaving it with a narrow fiscal space to pursue its development agenda. Will the new government cut back on defence expenditure or refuse to service loans or pay pensions? The only way to widen the fiscal space is to shore up public revenue.

Over the years, Imran Khan has made corruption the leitmotif of his politics. Tax revenue is low, he has argued, because the government machinery is mired in corruption from top to bottom. When citizens are convinced that their hard-earned money will be misappropriated by the people in power, they evade taxes. Logically, the PTI’s roadmap entails FBR restructuring. However, the proof of the pudding is in the eating. Therefore, at present it is premature to state whether the PTI, if elected to power, will be able to clean the Augean stables of political and bureaucratic corruption – again an area in which others have cut a sorry figure.

The argument that graft underlies revenue shortfalls is valid, but only up to a point. If the economy does not grow fast enough, even an up and running tax machinery will be hard-pressed to meet revenue targets. The assumption that citizens are otherwise committed to paying taxes is also up the spout. Lack of a tax culture in which everyone is willing to contribute as per their income is as powerful a cause of revenue slippages as a corrupt government. Promoting such a culture, which is more of a social than an administrative issue, will be an enormous challenge for the party which lands in the power corridors in the wake of the elections.

In a market economy, it is firms, and not the government, that are the major players on the economic scene – domestic as well as international. All over the world, entrepreneurship has been the single most important driver of economic development. However, Pakistan’s corporate culture has been markedly deficient in entrepreneurship. Keeping wages low and drawing upon state subsidies is widely regarded as the only means of becoming or staying competitive. The PTI’s roadmap also provides for giving subsidies and other incentives to businesses, which means it will perpetuate the rent-seeking business culture. An economic turnaround will remain a pipe dream in such circumstances.

In sum, the belief that key economic indicators will bound ahead with the changing of the guard is as much a pie in the sky as the notion that anyone who jumps on the PTI bandwagon becomes a paragon of virtue overnight. But on a positive note, it will be no small achievement if the next government sets a new direction for the conduct of economic policy.

The writer is a freelance contributor.