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August 5, 2018
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Moving forward

Opinion

August 5, 2018

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Government procurement: The magnitude of government procurement is around $60 billion a year (19.8 percent of GDP). Estimates vary widely, but up to 50 percent of goods and services procured are said to be ‘substandard’ and ‘over-valued’. A 25 percent improvement in this sector will yield $15 billion per year every year. For the record, we have had 21 IMF programmes since 1950, and the potential savings in government procurement are more than any IMF programme.

What is wrong with our external sector? One: we maintain an artificially overvalued rupee, and in order to maintain the artificial rupee-dollar parity, we draw-down SBP reserves. For the record, SBP reserves came down from $16 billion in July 2017 to $9 billion. And as we continue to draw down SBP reserves over an extended period of time we end up with a currency crisis.

What is wrong with our external sector? Two: we are too dependent on global oil prices – when the prices are down the economy performs well and when oil prices start climbing up we end up with a crisis. According to the US Energy Information Administration (EIA), Pakistan’s total shale oil reserves are estimated to be 227 billion barrels, of which 9.1 billion barrels are technically recoverable with the existing technology. Interestingly, the Directorate General of Petroleum Concessions hasn’t awarded any major oil or gas exploration lease over the past five years.

What is wrong with our external sector? Three: there is no transparency about CPEC loans, their rates, maturities and the terms and conditions of payback. No one in the government has done a sustainability analysis of these loans. We must prepare ourselves to get these loans rescheduled.

What is wrong with our internal sector? One: too much discretionary authority and no accountability always results in widespread corruption (the famous Klitgaard formula). Two: the government simply lacks the capacity to maintain ‘smooth financial operation’ and ‘long-term fiscal health’. Three: the energy sector needs to be reformed, or it has the potential to melt down the entire financial system. Four: 190 entities, euphemistically referred to as Public Sector Enterprises, lost a whopping Rs3.7 trillion over the five-year period starting 2013.

We need to do three things. One: incentivise exports. Two: allow exporters duty drawbacks through the banking system. Three: reduce taxes on fuel in order to reduce the cost of doing business. Four: renegotiate energy contracts. Simultaneously, we need to do two more things. One: increase presumptive taxes on importers. Two: broaden cash margin requirements on imports.

Dealing with the IMF: There is no way out. Sooner or later we would have to bow to the IMF. China does not have a monitoring programme, neither does Saudi Arabia. The World Bank does not have a monitoring programme, neither does the Asian Development Bank. There is no way out. Sooner or later we must restructure. The IMF is the only entity that has a monitoring programme. Our demand will have to be a front-loaded IMF programme (money first and then restructuring). The IMF will insist on a back-loaded programme (restructuring first and then money). The IMF will insist on a ‘debt sustainability analysis’ of CPEC loans. Why should we not have an ‘affordability scorecard’ on CPEC loans and projects?

Around 16.8 million people have voted for Imran Khan’s tabdeeli. It is now time to move forward.

The writer is a columnist based in Islamabad.

Email: [email protected] Twitter: @saleemfarrukh

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