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With PM keen on stabilising economy, prudent policies bear fruit

Peshawar

August 8, 2020

Things are moving fast on the economic front, especially as Prime Minister Imran Khan mobilises the state machinery to ready Pakistan for new opportunities.

This has not been the result of mere chance: a close analysis of the government's economic policies reveals that the Pakistan Tehreek-e-Insaf (PTI) has been burning the midnight oil for two years now to steer the country out of multiple challenges on the economic front, including a recession, debt retirement, a current account deficit, money laundering, power generation and deficiency of housing units. A number of initiatives can be seen at the micro and macro level focused on agriculture, manufacturing, services, taxation and other sectors. A special focus has also been given to mega water projects, power generation, construction of houses for the poor, the Ehsaas social security programme, and an austerity drive.

Building from the ground up

The situation which the then newly-elected government inherited in 2018 was marked by rampant corruption, which had been hindering economic progress in the country. The PTI government decided to take the proverbial bull by its horns and diligently pursued an agenda of accountability to cleanse society of corrupt elements.

When the PML-N government had concluded a $6.64 billion programme with the International Monetary Fund (IMF) in 2013, Christine Lagarde, the managing director of the Fund, had advised the then government “to continue strengthening resilience by building fiscal and external cushions to be adequately prepared for future economic shocks.”

Unfortunately, the PML-N had been more focused on the upcoming elections and had been in no mood to follow the IMF's advice. Instead, it went on a spending spree whose bills the country is still struggling to pay.

Therefore, on August 18, 2018, when Imran Khan was sworn in as the Prime Minister, he was confronted with a Hobson's choice: either allow an immediate default, or take on another IMF programme designed to stabilise the external haemorrhaging.

This was a very hard pill to swallow for the new government, and for almost a year it tried to raise the needed cash to avoid an economic crash.

Yet, despite massive support from Pakistan's friends and stringent home-grown measures, the country still needed an IMF package.

Meeting its obligations

After the start of the IMF programme, Pakistan has met its quarterly performance targets set by the IMF. It has been able to slash the current account deficit to a negligible level, weathered a tsunami of inflation and more or less stabilized the rupee at around 164 rupees to the dollar. Exports have started a long journey towards growth, reserves are building up, interest rates have peaked and recently been slashed and investment is recovering.

CPEC has moved into a new phase that comprises investments in agriculture, manufacturing and services. Long-delayed mega water projects have been kick-started. A very favourable free trade agreement has been inked with China, which gives Pakistan unprecedented access into the vast Chinese market. Trade relations with European Union and the United States have been strengthened and the economy has started moving back from the edge of a precipice towards a recovery, with investment opportunities for both export promotion and import substitution.

The path ahead

The real challenge is progress on economic reforms at the micro level. These long-delayed reforms are critical for Pakistan's economic development and prosperity but are intrinsically intertwined with the accountability process and hence very difficult to implement. Fierce political resistance from the status quo forces slows down the accountability process and hurts the credibility of the reform effort.

Fortunately, PM Imran Khan has not bowed to any pressure and is determined to wipe out the cancer of corruption in economic decision-making at the highest level of government. He firmly believes that a system distorted by corrupt practices is at the root of Pakistan's debt crisis and economic difficulties. Furthermore, he is convinced that regulatory and decision-making processes have been undermined, distorted and compromised to facilitate rent seeking, kickbacks, money laundering and tax evasion.

The government has realised very quickly that to liberate the economy, supply chains have to be deregulated, processes simplified and competition has to be enforced and cartelisation of the economy not to be allowed.

Wiping the slate clean

An entrenched, corrupt system is fatal for Pakistan and had put it on a path of destruction. Reforming the system is thus a lynchpin of the prime minister's commitment to the people of Pakistan.

The PM has commissioned several economic, administrative and criminal investigations on a number of burning issues involving public debt, power tariffs and sugar and wheat crisis. The objective was to get answers, break the nexus between corruption and decision making and fix responsibility.

Documenting the economy

On the revenue generation front, the FBR has succeeded in expanding the tax net and boosted tax collections while the prime minister took on the gigantic challenge of reforming FBR and the national tax administration.

A rapid transformation of the informal economy into a formal economy —through unpopular, but necessary reforms to document the economy and create a new tax culture in Pakistan — is now underway.

Government, traders and the business community are deliberating on a suitable tax system which is fair and equitable and can finance the development of the country.

Conquering COVID-19

The COVID-19 pandemic severely disrupted the urban economy in Pakistan, and manufacturing and services supply chains faced shutdowns.

The government moved decisively to create the NCOC, and mobilized it to equip and strengthen health facilities across the country. On the other hand, it provided billions of rupees in direct cash transfers to millions of affected poor families, preventing wide scale hunger and devastation.

By instituting a policy of smart lockdowns, with effective trace and track arrangements, it also managed to cushion the economic impact of disruptions and market shutdowns. To further cushion the economic fallout of the coronavirus, the PM was also able to arrange debt relief from G7 countries and took the lead in developing global consensus over debt restructuring and relief for developing countries in general.

In a move to create massive employment opportunities to compensate for job losses during the pandemic, the government incentivised the construction and housing value chains in the country to boost their demand for workers.

Poised to seize the future

With all this experience, Pakistan is now ready to seize the moment. Even now, weekly meetings are being held under the personal leadership of the prime minister to remove the regulatory burden on the construction industry. As a result, the sector has seen more 'ease of doing business' reforms and deregulation in the past five weeks than in the last fifty years.

These reforms have been institutionalized all across the value chain — from urban master planning and unlocking of land banks, to digitalising approval systems for quick and automatic approvals. Sustainable systems for construction and mortgage finance by the SBP have also been implemented.

Measures like streamlining the availability of utilities for development sites, reviving REITs financing and tax rationalization, creating incentives for low-cost housing and facilitating home ownership across the count have also been introduced to get the ball rolling.

This model of applying fast track reforms under the leadership of the prime minister and involving the administrative machinery of both the federal and the provincial governments is now all set to roll out across other major value chains, especially in manufacturing, services, agriculture and the knowledge economy.

The homework has been completed and reforms packages are ready for implementation by mobilising the government machinery and public-private partnerships.

Analysts say Pakistan can benefit from new global opportunities, especially in terms of relocation of production centers, if it can become more competitive with other regional countries. Cognisant of the upside of such opportunities, the prime minister is moving forward briskly to boost Pakistan's image and international rankings in investment, productivity and competitiveness from the bottom quartile to the top quartile in the next three years.

The writer is a macro economic consultant