There's need for macro-fiscal unit

The Adviser to PM on Finance is in a tight spot. The IMF's second review is ongoing. All the binary targets are likely to be met. But the problem is to manage primary fiscal deficit targets in the quarters to come. Ambitious indicative tax revenue target which was elusive from the day one is haunting the Q Block. What are the options to cut expenditure, enhance revenues and manage debt while keeping a delicate macro balance?

In order to get such answers and to have credible and realistic medium-term macroeconomic fiscal framework, ministry of finance needs capacity. What kind of new taxes can be applied? How will the economy to react from change in tax rates? What is the debt trajectory, and optimal financing mix? How much should be domestic debt and what foreign avenues does the government need? What are the options to curtail expenditures and how this could impact public service delivery? Where should be the development priority? How innovative development expenditure could be?

There are many similar questions, but not many research-based answers. The impact of change in tax rates and new taxes is usually determined or presented based on simple linear analysis. There is no heed given to tax elasticities or impact of new taxes on employment, inflation and growth. How many economists and analysts are working in the finance ministry? You don't even need fingers to count. Whatever thin team exits is borrowed from one donor or the other. The debt office has a DG; but in private sector he would have been a fund manager supported by research and risk departments, and a vibrant investment committee.

The finance ministry needs capacity. Some form of macro-fiscal unit is warranted. The IMF in its recent report mentioned the imperative. "In the short-term, staff recommended a focus on preparing the first fiscal risk statement, approving and publishing the budget manual, developing a PFM (public finance management) reform strategy, and establishing a macro-fiscal unit." The timeline for establishing the unit is September 2020.

The SBP does not have capacity problem. In the past two decades, the required capacity at central bank has been developed. The reforms started in the then SBP governor Dr Ishrat Husain's times are yielding fruits. In between, there was a period when successive SBP governors were not of suited profiles, and that led to some brain drain. But now the central bank's functioning is strongly characterised by research and evidence-based policymaking.

No one can say this for the finance ministry. It's not just about Dr Hafeez Sheikh not burning midnight oil like Asad Umar or Ishaq Dar. The adviser to PM on finance is not supposed to run analytics. He is not supposed to come with data-based debt strategy. Similarly, one cannot ask the chairman FBR to compute tax elasticities. It is the job of the team of analysts and economists to do evidence-based research and bring that on table for policymakers to make informed decisions.

Tax policy is one of the most talked-about economic issues. Many say that tax rates are too high and policy is skewed towards indirect taxes. They also argue that it is regressive in nature and fuels inequality. But no one has evidence-based answer to the question on the economic impact of increasing GST rate in the last decade or on the implications of implementing VAT regime. This writer hasn't seen an analysis from MoF on how withholding tax on banking transactions fueled cash economy. The income tax rates on corporate have been reduced in the past few years. The question is what is the economic impact and what is the optimal level of tax rate?

On the debt side, everyone is firing on hot money; but no one is there to tell us how to finance growing public debt. Why government is not issuing Eurobond or Sukuk? What are the options (apart from commercial banks) in the domestic debt market? The debt management needs to go beyond pricing. At this point, the debt office is picking low amounts in long-term debt to lower the yields. In the process, short term debt is growing. What are the implications of rollover risk? What should be the optimal mix? Why foreign capital market avenues are not explored when yields in developed world are rock bottom?

There are developing economies such as Egypt and Thailand where active macro-fiscal units exist. It is about time Pakistan built one. But there is a problem. This might antagonize bureaucrats. The role of macro-fiscal unit is to support finance secretary and other staff. But outsiders are never welcomed. Shuakat Tarin brought Sakib Sherani; but he could not sustain for long. Asad was looking for a finance advisor but he could not find one. Now he is facing a similar problem in planning ministry where chief economist is missing.

There are talks of renegotiating with the IMF on programme modalities. The government cannot meet tax revenues target or reduce circular debt without bringing more inflation. The PTI government is losing political capital to do so. If IMF is to give a waiver or relaxation, it should be pegged with forming a vibrant macro-fiscal unit at MoF.