When it comes to economic management, these first ten months of the Imran Khan led government have been quite tumultuous, to say the least. Heads have rolled (all the way from the Finance Minister to the Finance Secretary), tenure posts have been made a mockery of (governor central bank, chairmen board of investment and FBR, etc.) while the economy in the meanwhile has plummeted: revenues down; exports down; expenses up; borrowings up; interest rates up; inflation up; growth down; unemployment and poverty levels up; stock market down and the Pak Rupee landing itself at historically the lowest level ever. In its defense if one listens to the government’s rhetoric, one is told that how it has finally managed to insert the right men at the key jobs and surely things going forward will become much better. These initial hiccups should be regarded as nothing but a ‘house cleaning’ exercise to set things in order, an exercise, which was not only inevitable but also necessary. However, to an average observer (or the common man) who stands as the main victim of such mayhem, the obvious questions that comes to mind are that will things really improve in the coming months and is there really a method to this madness? The answer, unfortunately: Apparently not, at least not in the short-run!
Never mind the conspiracy theories on how the new imported (key) economic managers do not have any long-term interest in Pakistan, an element that is bound to reflect in their policies or that they simply work on a specific agenda of being deal makers with the international financial lending institutions and their presence basically serves as the surety these institutions need for implementation of their loaning pre-conditions or that given their limited domestic experience they simply do not understand the real underlying nuances cum sensitivities of the Pakistani economy, and hence will not be able to deliver any visionary cum long-term sustainable solutions for Pakistan, the real fear though is that after 3 years of the current IMF program, we may yet find ourselves an economy, which has possibly paid its looming/urgent debt obligations, but has done so at the expense of fracturing its core underlying economic structure responsible for shouldering manufacturing competitiveness, investments, job-creation and for rendering growth with equitable distribution. This will now be our 13th IMF program since 1988, and after going through the basic conditional ties of all these thirteen programs, one struggles to find any significant difference between any of them; albeit with the only exceptions being that this latest one in comparison faces the most grim situation ever and tends to be more front loaded then the previous twelve. Thus, basically raising two concerns: a) Will this program even be successfully completed, because one fears that the pain may just prove too much for the common to bear for 3 long years or for that matter the quarterly review may simply not be a tenable pre-condition, since 3 months is too short a period for economic indicators to take shape and b) What makes the PTI government so sure that this time the ultimate outcome of a completed Fund program be any different than before? Ironically, a cursory look at IMF lending over the last 5 decades and we do not find a single Asian or South Asian example where a country emerged as an economic tiger post an IMF program?
Since all these points are now mostly moot, as the initial agreement with the Fund already stands signed and only time will tell on how things play out over the next three years, however, it will be fair to say that the real challenge to manage the economy will only manifest itself once the pain from the IMF program begins to take root. And such a challenge relates to the very ability of the present managers to craft policies – amidst an on-going economic slowdown – that not only mitigate the fall outs from the Fund’s dictates (on high discount rates, devaluing currency, removal of across the board subsidies, raising tariff, stoking inflation through the supply side and oft undertaking arbitrarily revenue drives), but also inspire confidence of the people to keep them calm by keeping their hope alive (an area where the government has miserably failed thus far).
So what exactly is required to be done? First and foremost, talk to the stakeholders to accommodate their genuine concerns, as the present uncertainty is simply killing. It is adversely affecting the investors, businesses and industry, traders and services providers, and with it the economic activity itself – markets are stagnating, which can never be good for business. The new FBR Chairman must be a very clever and pragmatic person, but the fact remains that 1.4 trillion rupees are being proposed in new taxes and no matter the tall claims on finding new tax payers or restraining the tax collection machinery from harassing the existing taxpayers, the reality is that this new burden (at least for now) of taxes will once again fall on both, the existing tax payers and the average consumer through a spike in indirect taxation. Given the existing draconian tax laws and the arbitrary powers that still remain vested in the tax collector, undertaking such ambitious revenue drives without first ringing the long awaited reforms in the current tax collection–mechanism, will not only be foolhardy but also counterproductive, since it would further erode the trust of the taxpayer in the government, as new stories of harassment, extortion and corruption unfold. The greater public fear though is not just limited to this imminent intrusion, but goes far beyond to all sorts of other additional proposals that seem to be doing the rounds on the government’s behest. Like, for example, abolishing of the present zero-rating facility on the 5 principal export sectors of the country; subjecting the ‘expenses’ entries to scrutiny, currently exempt under section 115(4) that allows the exporters a full and settlement of their tax liabilities by deduction at source and once the zero-rating is finished, going on to impose, as high as, 17% GST on the exports’ sectors. Needless to say that these concerns should be quickly and properly addressed, because such levies will not achieve much for the national exchequer, but result in tying up scarce liquidity of the exporters and increase their costs, thereby making our exports uncompetitive – e.g. 70-75% of the production in textiles is meant for export and only around 25% gets consumed locally. The trouble is that for anyone who has little or no practical understanding or the sensitivities of the Pakistani economy, it is difficult to understand that it has a peculiar way of working. Over the last 40 or 50 odd years in many ways the informal and formal sectors have become intertwined where they complement each other by cutting corners cum costs at different stages of the manufacturing chain and today a large portion of our export competitiveness is driven by the low cost structures of the undocumented sector – For example, the ready made garmenting sector, which by the government’s own admission is our fastest growing (by nearly 29%) export sector, would suffer immensely if suddenly its entire supply chain was to put under a sales tax regime.
Now one is not against documenting the economy, but only saying that key supply chain structures cannot and should not be changed overnight. Any brash cum knee–jerk actions like suddenly abolishing the zero–rating of the 5 main exporting sectors of economy or burdening the home manufacturing disproportionate to regional realities, runs the risk of dismantling the entire economic system of the country and with it whatever little manufacturing based exports that we have at the moment. Any change to bring the informal sector into the documented domain needs to be gradual and through incentives and not coercion. In recent history, Bangladesh, Vietnam and now Myanmar have shown that how targeted facilitation in sync with the larger vision (in their case promotion of exports) can work miracles! The trouble is that the new economic managers do not have a domestic track record businesses can relate to and hence there is this unsaid trust deficit between them and stakeholders. Despite the recent tall claims by the government that they now have the situation under control, regrettably, there seems to be little light at the end of the tunnel. The main problem one feels is in the approach or the warped mindset that everyone is a thief. A flawed thinking that naturally manifests itself in policymaking by reflecting in an operational approach based on negative energies of witch-hunting and coercion, giving an impression that this government is after everything that one has earned or possess. This in itself is very dangerous, because it gives a message that instead expanding one would be better off contracting one’s activities. What is needed today is for the government to restrain itself from sucking liquidity out of the markets and instead focus on seeking revenues through growth and by ringing inclusive reforms that incentivize a tax culture based on reciprocity. Time for the economic managers is to move beyond the mere IMF agreement and look for real answers on why the Economy is not responding and what exactly needs to be done. ‘Change’ Management requires a clear vision, strategy and an effective implementation. Instead what we see is confused signaling where the actions invariably tend to differ from the rhetoric. Obvious follies of the past, against which this party struggled for 22 years, are creeping back in: poor human resource choices; untamed bureaucracy; naked corruption, and in taking the easy way out by burdening the consumer instead of improving operational efficiencies; all elements that are adding to the uncertainty and stifling hope. The brewing situation takes us to the Second part: to quickly re-think the policy choices taken thus far in the 10 months.
Investment - A major failure of the previous government was it’s over reliance on State-to-State investments and in the process failing to spur investment from the private-sector (both, domestic and foreign) that invariably is based on sustainability rather than any other considerations. While state-to-state investment may occasionally have a strong rationale based on: the project’s sheer magnitude or in targeting promotion of a specific sector that the government prioritizes but is unable to penetrate on its own or for it to simply serve as a confidence booster cum catalyst in kick-starting the investment climate, however, by and large such investments tend to be counterproductive as majority tend to be based on factors other than pure market principles. Naturally the state’s patronage and the extra ordinary concessions that accompany such projects result in promoting rent seeking in an economy, thereby not only distorting the market itself, but also resulting in accumulation of large unserviceable debt.
We have witnessed this in recent years from CPEC related projects and similarly the refinery proposal now coming in from Saudi Arabia may not be too different! Ironically in our case, these state-to-state investments have even failed in their complementing purpose of serving as a catalyst to investment: FDI in April ’19 was clocked at a paltry $132 million – lowest in recent memory – and LSM on latest figures shrunk by more than 10%. Also, it is debatable that with a shaken investors’ confidence and a general slow down in the economy, whether it is even the right time for large state-to-state investments to take place, since our economy at present may just lack the capacity and depth to absorb such large capital inflows. The government will instead be better off facilitating the domestic investor in a way that locks directly into industrialization, which in-turn can go on to boost our exports and generate employment. One only have to look as far as Bangladesh to realize how they have cleverly encouraged smaller FDI inflows and have allowed only those investments that bear synergies with its larger vision of making Bangladesh a supply-chain powerhouse of the world. In contrast, Bangladesh’s FDI from $700 million in 2009, has merely gone up to $2.58 billion in 2018, and almost all of it has gone into manufacturing that helps Bangladesh bolster its ever rising exports – the thumb rule being that every such $1 investment to be allowed only if it results in a minimum increase of $3 in annual exports.
To be continued…
(This news/article originally appeared in The Nation on June 12th, 2019)