Economic revival

News reports have indicated that the prime minister has asked his economic team to draw up an economic revival plan. This is a surprising turnaround in the government’s assessment of ground realities in the economy.

The description of the situation given by special assistant to PM Ms Awan after a cabinet meeting was startling: “The cabinet observed that businessmen were afraid…. They are neither investing their money nor depositing it in banks. In fact they are hiding their cash under their mattresses.

“The federal cabinet observed that business activities had stopped and the economy had crippled….. prime minister was informed, that local and foreign investment has come to a halt and bureaucrats are not signing files and have stopped decision making….”

To be sure, the government was in denial that the economy was going through one of the slowest periods in its history. All key leaders had been trumpeting the mantra that things were in good shape and a turnaround was just around the corner. This change of heart is a welcome move and we would encourage the government to cultivate this thought so that it may take economic decisions purely on their merit.

Talk of economic revival would be meaningful only if it is confined to constraints that are the government’s own making. There is an IMF programme in place and it has charted a three-year course for economic policy. With that framework in place it would a folly to think of new initiatives that would be in conflict with the programme. However, we feel many of the actions within the programme are such that they would stimulate economic activity and, additionally, one can find space for new initiatives.

First, the interest rate has been raised to a level that is nonsensical. The last increase of 100 bps was not an IMF requirement and thus was done without essential need. An immediate rollback of the increase would have salutary effect. It should not wait until the next meeting of the MPC in late September as the time to act is now. The inflation outlook is transforming on the expectation that oil prices are declining and this could be the golden moment for this government as it had helped the last government in November 2014 onward.

Second, the friction with taxpayers should be resolved without further loss of time. All actions that have led to massive resistance from taxpayers should be evaluated from the point of revenue generation versus documentation. There is no point in taking pride in raising the number of income taxpayers to 2.2 million in a year when tax collection has declined (the most dismal tax collection performance) compared to a year earlier. Pragmatic handling is needed to close these frictions. None of these is part of the IMF conditionalities. Even if it sounds like a rollback of announced initiatives, it is still better to let the economy move and some tax collected compared to a hold-over that is taking a toll in the form of reduced tax collections.

Third, the two sectors that need immediate revival are the stock market and real estate. Both have been deeply affected by budgetary measures. The hike in the interest rate has sucked the steam out of the stock market. With such phenomenal returns on fixed income securities, investors are flocking to banks and government savings schemes, even as they take hits on their existing investments in the stock market. The recent revival of the market, which allowed it to regain nine percent of its lost value was attributed to the extension in the term COAS. This is testament to the fact that the market badly needs good news that signals stability and peace. The real-estate sector has been hit by an unusual increase in the level of taxation in the form of capital gains tax. Even when it was considered an under-taxed sector, there had to be a gradual approach.

From a tax regime that was aimed at taxing capital gains from speculative transactions, which imposed 10 percent tax for properties held for less than a year and none for properties held for three year or more, it has moved in the direction of ‘ability to pay’. All capital gains in varying degrees are taxable at a much higher rate. Consequently, the real-estate market has dried out even for long-term investors. With this, the key industries of iron-steel and cement and many more related to building materials are facing a slump.

Fourth, the cabinet decision to remove the fear factor is a positive move that should be operationalized at the earliest.

Fifth, the privatization programme must be fast tracked to encourage foreign investment. The process was earlier rolled out for the LNG-based power plants but was later abandoned. It should be dusted-off and a signal of government seriousness should be sent to the market that it is committed to conclude the deals.

Sixth, a request should be made to the IMF to relax the limit on government guarantees as it would lead to serious consequences for the public sector’s ability to settle circular debt and help the needs of the development projects. This is a condition that should not have been accepted as it contravenes with the fiscal law of the country, which allows issuance of such guarantees not exceeding two percent of GDP inclusive of renewals during the year of old guarantees. In fact, CPEC revival would be impossible with such uncalled-for limitation.

Finally, the resolve and commitment to successfully implement the Fund programme has to be unwavering. Doubts are fast emerging for a number of reasons that the fiscal side may be slipping by a long margin, particularly from the tax collection side. Under the circumstances, the government would either be asked to take additional tax measures or show decreased expenditures.

In this backdrop, suggestions for enhanced development spending would be a tricky proposition on the plea that it would help lift the sagging fortunes of the construction industry. The need to conserve expenditures in the face of slow revenues is imperative. Unless resources are there, how can anyone demand to spend them? This is the fundamental lesson of prudent economics which the government would ignore at its own peril.

The writer is a former finance secretary. Email: waqarmkn@gmail.com