PML(N) Economic Report Card

Dar will soon be presenting his fifth budget running. He started the first by passing the buck of circular debt on the outgoing PPP government. That gave him some breathing space to work on energy structure. He came with a kind of withholding formula, or discrimination between filers and non-filers to instill tax structural reforms, or broad based fiscal reforms. He stuck to sticky currency as a tool for formalizing exchange rate markets structures.

To date, the only ‘structure’ PML(N) has succeeded at is ‘infrastructure’. Four years gone by; Dar has little to no leverage to play. What are the most vital economic indicators for sustained economic recovery? Exports and investments. The sorry state of affairs in both theses areas is well documented.

In the previous tenure (FY08-13), exports to GDP averaged 10.8 percent of GDP. The same in the first three years of this government has averaged 9 percent of GDP. The export problem has exacerbated in FY17 and exports may hover around 7 percent of GDP. One may argue that low commodity price cycle plummeted exports. The argument holds truth as imports are also down. The overall trade balance in FY16, in terms of GDP was similar to that in FY13.

That said, importance of exports cannot be undermined as the sector not only generates foreign exchange but creates jobs as well. In 1992, Nawaz’s pro exports and pro business policies won the heart of exporting industrial belt of Punjab. The legacy helped the PMLN sweep in cities such as Faisalabad, Gujranwala and Sialkot during 2013 elections.

Things have changed and vibes are not good amongst exporters and industrialist in the belt. The refund issues and FBR’s harassment are compelling SME businesses to bring informality in dealings. This kills the dream of becoming big, as informality kills the ability to scale up.

The tax to GDP ratio improved from 9.3 percent in FY13 to 11.5 percent in FY16, the growth is primarily driven by sales tax on services collection by provincial tax bodies. One the flip, FBR is chocking on its limits to generate taxes. Higher forms of indirect taxation and problems in input adjustments are forcing businesses to make informal transactions, even if they have intentions to stay clean.

The tax policies are punitive, regressive and complex in approach. This only works to an extent and beyond that the system becomes counterproductive. The FBR seems to have touched its limits, and it may become counterproductive soon. The need is to use technology and make the tax compliance system easy and direct. Do not expect with-holding agents to collect taxes from vendors, as more than 90 percent of businesses are dealing with vendors in small category, and it is tough for medium-sized companies to collect taxes from them. The policies entice medium-sized companies to become informal. This is a dangerous trend.

The fiscal deficit on average has come down from 6.6 percent of GDP in FY09-13 to 5.2 percent of GDP in FY14-16 and is expected to be around 4.6 percent of GDP in FY17. The numbers are better; but not enough to create private credit space for the economy to sustain over 5 percent growth. The current account deficit averaged at 2.2 percent of GDP in PPP regime and the number is better at 1.1 percent of GDP in first three years of the incumbent government.

Most macro indicators were improving till last year including fiscal, balance of payment and inflation; but are worsening now. The economic growth was hollow and the bonanza may end with reversal in commodity prices, and demand driven economy may continue to grow on Chinese money and other external flows.

Debt has been easier for Dar to fetch and he seems least concerned on pricing as long as dollars are pumping in to keep reserves growing. The debt to GDP ratio inched up from 66.5 percent of GDP to 68.8 percent of GDP from FY13 to FY16. The public external debt went down by 50 bps to 25.8 percent of GDP from the time PMLN assumed government. But the ratio would have been different had the currency floated with its real value.

The external debt increased from $60.9 billion to in June13 to $74.1 billion in Dec16 - an increase of $14.2 billion. The foreign exchange reserves are up by $11.5 billion in the same fourteen quarters. This makes the external scorecard negative.

In terms of growth, investment to GDP was low when Nawaz took over, and has remained unchanged at 15 percent of GDP in the past four years. Without investment, growth will remain hollow. How long can the government run taxi schemes, or provide gas to industry, or expect fertilizer to provide growth momentum? Now the real private sector driven growth has to surface in textile, construction, and other businesses, it looks an arduous task given the stubborn tax policies.

Last but not the least is the energy gap. Clearing circular debt while oil price was low was a blessing and allowed the government curtails power shortage, and preference was given to industries. Government took two years to come up with power generation expansion plans - it kicked the private sector out, and took the onus of RLNG plants itself and left the rest for CPEC.

However, nobody took distribution seriously – there were no reforms in discos. There is nothing on integrated energy ministry and no meaningful expansion in transmission and distribution network has taken place. The proof is in the pudding - this summer demand is not met and heat is testing public temper. It’s a thin time line of ten months for the government to mend the system and fulfill the promises of a load shedding free country. It is doable but not easy by any stretch of imagination.

And did someone say privatization?