Economic stabilisation with a human face: given alongside is the Executive Summary of the programme proposed by a panel of economists

The Panel of Economists is of the view that Pakistan must take decisive action to restore macroeconomic stability, while protecting the vulnerable citizens. This is essential to restore investor confidence, both domestic and foreign, and garner domestic political support to resume robust growth.
2. The current crisis reflects both adverse short-term developments caused by an unprecedented increase in global oil and food prices and the festering structural economic weaknesses that have resulted in bursts of stop-go cyclical growth (viz. a fragile budget, loss of international competitiveness and fragmented social protection). A difficult domestic political transition and taking the fight to the militants has heightened these challenges.
3. Given the size of accumulated imbalances, the needed adjustment in aggregate demand to reduce the trade and fiscal deficits will be substantial. The proposed measures thus will curtail growth and employment and will increase poverty. These adverse outcomes, therefore, need to be cushioned with cost effective and well targeted social protection measures.
4. The panel regards the crisis also as an opportunity to address the core structural weaknesses of the economy. The proposed stabilisation measures have been designed such that, in conjunction with reforms that address the structural weaknesses, economic growth will rebound quickly to a higher and a more stable trajectory in the medium term.
5. In the absence of an orderly stabilisation process, a strong package of reforms and external support, the burden of stabilisation will fall on the exchange rate and inflation will be substantially higher. This will inflict severe welfare loss on the society and a large number of people will slip into poverty. Given the difficult security situation, the adverse consequence of this for the social fabric should not be underestimated.
6. The current economic crisis should not distract from the inherent resilience of the economy. Foreign investors, bilateral donors and International Financial Institutions know well that historically and in the recent past, the economy has responded sharply to investments and economic management, by and large, has been good. We are thus confident that with appropriate stabilisation and reform measures and with adequate financial support, macro-economic stability will be achieved and the economy will resume the growth path consistent with its inherent strength.
7. THE PROPOSED STABILIZATION AND REFORM PROGRAM IS BASED ON THE FOLLOWING PRINCIPLES:
"MOBILIZATION: No effort to be spared to mobilize domestic resouces and cut expenditures to reduce the resource gap to manageable levels. "
PROTECTION: The stabilisation program has to ensure that the vulnerable and the poorest are protected via cost-effective social safety nets."
PRIORITIZATION: Stabilization and the reform program built on it have to demonstrate our ability to utilise domestic and external resources well.
" INTEGRATED STRATEGY: short term measures have to be part of an integrated economic package that can pave the way for sustainable and equitable economic growth in the medium term. 8. The global economic scenario is fast changing and fragile. The Interim Report takes into account both positive developments in terms of reduction in oil and commodity prices as well as the slowing down of the US and other industrial economies which will adversely affect our export prospects. That said, we need to be fully prepared to respond to a more volatile global economy. Flexibility in policy response and a credible financial cushion will thus need to be built-up.
9. The measures we have outlined will cut down our financing gap in the balance of payments in 2008-09 to close to US $4.5 billion compared to US $6.2 billion in 2007-08. In addition, an immediate injection of around US $4-5 billion is required to provide cover of 3 months imports. We believe that with the credible stabilisation program that the panel has drawn up will attract the needed support.
10. The reform program must draw upon broad-based support to ensure national ownership. Parliamentarians, Provincial governments, civil society and the private sector must be taken on board and their counsel sought in monitoring the implementation of the program.
PART I: SHORT TERM HOME GROWN STABILIZATION PROGRAMME: 2008-2010
1.A: PROPOSED STABILIZATION MEASURES
11. Short term stabilisation requires that the large balance of payments gap be reduced to manageable levels. This will require adjusting downward aggregate demand. The key policy instruments for achieving this are: public expenditure and revenue, the exchange rate and the interest rate.
REDUCING CURRENT EXPENDITURE
12. The panel recommends curtailment of current expenditure by Rs 115 billion in relation to the level projected without stabilisation package; this can be achieved with savings of Rs 30 billion in defence expenditure, Rs 30 billion in subsidies, Rs 25 billion in debt servicing and Rs 40 billion in other expenditure.
MOBILIZING REVENUE
13. The panel recognises that many revenue mobilisation measures recommended below will have their full impact in the medium term. None-the-less, implementing them as part of the stabilisation package will begin to capture revenues and will also send the right signal regarding sharing of the burden of adjustment.
14. THE PANEL RECOMMENDS REVENUE MOBILIZATION OF RS 75 BILLION THROUGH ADDITIONAL TAXATION PROPOSALS INCLUDING THE FOLLOWING:
" Imposition of a broad-based regulatory duty on non-essential imports (excluding wheat, edible oil, pulses, pharmaceuticals, fertiliser and POL products) on which such a duty has not been imposed already, at a rate of either 4% on machinery and 8% on other items.
"BROAD BASING OF THE TAX SYSTEM THROUGH THE LEVY OF THE FOLLOWING:
i. Services tax (of the Indian type) by January 1, 2009 on 12 selected services initially
ii. Levy of an excise duty on non-essential consumer goods and durables.
iii. Capital gains tax on properties by provincial governments
iv. Withdrawal of some exemptions from income tax
-- " Development of the agricultural income tax by the provinces (since farmers are now getting world prices)
-- " Equating top marginal rate of income tax with the corporate tax rate
-- " Reduce threshold companies for the purpose of corporate taxation
-- " Reduction of the tax thresholds pertaining to sale taxes.
FINANCING THE DEFICIT AND MONETARY MEASURES
15. Increased reliance on non-bank borrowing to finance up to Rs 250 billion of the budget deficit and to reduce borrowing from SBP will necessitate an increase in the average return on national saving schemes of up to 2 percentage points beyond the recent increase.
16. Enhancements in the SBP Discount Rate in one go by 2 percentage points.
RESTRUCTURING PUBLIC SECTOR DEVELOPMENT PROGRAM, 2008-09
17. In the considered view of the Panel, events since the announcement of the Budget (2008-9) have rendered some of the expenditure proposals unrealistic. These need to be revised.
18. It is proposed that the Public Sector Development Program (PSDP) be reduced in a manner that social programs are safeguarded, and that adjustments in allocations in public projects allow growth to bounce back quickly. The guiding principle is a short sharp reduction in growth in the short term and a quick rebound back to a higher trend growth rate.
19. The required reduction in the PSDP consistent with the macroeconomic stabilisation program is Rs 63 billion (equivalent to 10% of the federal and provincial government PSDP). We, however, recommend a larger cut of Rs 100 billion in this year's PSDP allocations.
This is to allow for a cushion for social protection measures needed to soften the impact of the harsh (but needed) stabilisation measures on the vulnerable citizens and also to protect carefully selected, cost-effective programs in least developed provinces and regions.
20. We also recommend that a review of actual expenditures and new commitments in the PSDP takes place in March 2009 to determine what amount if any is available from the Rs 37 billion "cushion" for reallocation to ongoing projects.
21. THE SUGGESTED CRITERIA FOR RESTRUCTURING THE CURRENT YEAR'S PSDP ARE:
-- " Give priority to projects that have incurred at least 50 percent of total cost
-- " Protect and enhance the refined and fine-tuned Benazir Income Support Program
-- " Give priority to projects for special regions and those that enhance national security.
22. We estimate that Rs 165 billion of current year's PSDP will be used up applying these criteria. The panel recommends that the remaining Rs 106 billion be allocated applying the following additional criteria:
-- " defer all new projects (ie projects starting this year)
-- " give priority to agriculture/livestock, water, power, health and education
-- " prioritise allocation to projects in less developed areas
-- " remaining projects be allocated minimal amount necessary
INSTITUTIONAL REFORMS
-- " Request that a parliamentary resolution be passed renewing its commitment to the Fiscal Responsibility and Debt Limitation Act (2006) and enacts an amendment limiting the extent of government borrowing from the State Bank of Pakistan.
-- " Strengthen financial management by completing ongoing reforms on priority basis concerning the flow and utilisation of funds in various line ministries. " Establish an independent Federal Bureau of Statistics (FBS) headed by a professional that directly reports to the Parliament and not to the government.
-- " Establish independent panel of experts to engage in the consultative process in the design, implementation and monitoring of donor supported projects critical to the medium-term economic recovery. This will ensure transparency, rigour and relevance.
1.B: MACROECONOMIC FRAMEWORK AND IMPACT OF THE PROPOSED MEASURES
23. THE PROPOSED STABILIZATION MEASURES WILL HAVE THE FOLLOWING IMPACT ON THE ECONOMY:
-- " GDP growth will fall to 4.4 percent in 2008-09 (compared to 5.8 percent in 2007-08) against 5.5 percent planned for 2008-09. This will increase to 5.1 percent in 2009-10.
-- " Balance of payments gap reduced to US $4.5 billion in 2008-09 (from US $6.2 billion in 2007-08) and be largely eliminated in 2009-10. Growth of exports will take exports to $23.5 billion by 2009-10. Imports are expected to decline to $31.4 million in 2008-09 from the target of $35.4 billion in 2008-09. Remittances will continue to show rapid growth, foreign investment is expected to fall in 2008-09 and rise once again in 2009-10 to $5 billion.
-- " Fiscal deficit falling to 4.5 percent of the GDP in 2008-09, from 7.4 percent in 2007-08 and further to 4.0 percent in 2009-10.
-- " No real growth in PSDP 2008-09 (as compared to 2007-08) resulting in a nominal reduction of Rs 60 billion in current PSDP in 2008-09 (covering both federal and provinces).
-- " Unemployment increases to 6.5 percent in 2008-09 (from 5.3 percent in 2006-07) adding 1 million to the number of unemployed.
-- " Poverty incidence increases, mainly due to high inflation and higher food prices.
-- " Price inflation (CPI) is estimated at around 22 percent in 2008-09 falling to below 17 percent in 2009-10.
-- " Exchange Rate is expected to depreciate over 2008-09 and remain stable in 2009-10.
1.C. PROTECTING THE VULNERABLE: THE HUMAN FACE OF STABILIZATION
24. The recent down turn in economic growth rate with its adverse repercussions for employment and the unprecedented hike in price level, particularly of food items, has had a severely negative impact on the lower income strata. The proposed measures in the stabilisation package will also lower GDP growth and employment.
Thus those at the margin of poverty will fall below it. Initial estimates suggest that the increase in the number of poor will be about five million. 25. Allocating adequate funds for social protection thus will be critical. The PSDP restructuring discussed above provides a cushion of resource to achieve this, and also suggests restructuring expenditure to give priority to employment intensity.
26. Given the multiple dimensions of uncertainty in the global, national and household economy, it is essential that the highest priority for protection be afforded to the most vulnerable segments of the household economy where uncertainty can lead to irreversible damage - in the shape of high morbidity and mortality, decline in the nutritional status of children and women, and withdrawal from school.
27. The programs announced by the government-Benazir Income Support and the Punjab Food Support programs- cover about 5 million households. The program will have to increase from Rs 56 billion to about Rs 84 billion to mitigate the impact of the stabilisation program and reduce the number of people below the poverty line.
The expansion of the BISP should be conditional on a review and improvement of its targeting and implementation mechanism to ensure coverage of the poorest. The additional resources could become available from the reduction of PSDP
28. In addition there is an urgent need to tackle the rise in unemployment. The proposal is to start employment intensive public work programs initially in districts with high poverty levels. Given resource constraints these need to be made part of the existing People Works Programs in an operational way on which Rs 28 billion have already been allocated.
29. The government may need to allocate initially around Rs 10 billion from the PSDP for a national employment guarantee programs in poor districts at a wage below the market wage so as to target the poor. 30. Existing rules for the design of public works programs (in the PSDP) can be reviewed to increase the visibility and verifiability of the employment generation component of these projects. PSDP rationalisation should take into account the intensity of casual labour employment in projects.
31. Funding for existing nutritional support programs must be ensured and enhanced. Pilot school nutritional support programs can be initiated in districts/regions identified as being vulnerable to nutritional shock. This will require an adding 500 million, up from 100 million already allocated in the budget. The program design is already there. It needs to be expanded, perhaps to the poorest districts.
32. Incentivise microfinance and housing finance credit lines, by commercial banks through a special tax credit on the quantum of annual lending.
33. There is need on an urgent basis to build-up a National Social Policy Platform that must be used to implement targeted social protection measures, based on the principles of targeting from a well-defined universe using transparent, verifiable and dynamic criteria with in-built channels of beneficiary exit.
The preparatory work for the National Social Policy Platform must begin in financial year 2008-2009 with support from donors who have already expressed an interest in improving the governance of social policy measures in Pakistan. The basic infrastructure of the National Social Policy Platform will be in place by the end of the stabilisation phase (2009-2010), when its activities can be diversified to improving the implementation and accountability of all social policy measures.
PART II: GROWTH RECOVERY AND DEVELOPMENT PRIORITIES
II.A. RESTRUCTURING THE PUBLIC SECTOR DEVELOPMENT PROGRAMME (PSDP)
34. Consistent with this Panel's view that the current crisis is also an opportunity to correct endemic distortions. We recommend a more comprehensive framework be adopted for the prioritisation of projects in the PSDP.
This requires a restructuring of the existing portfolio of projects to reduce the throw-forward to five years or less. In addition, in any given year, at least 70% of the budget allocation for the PSDP should be for ongoing projects.
35. The guiding principles for restructuring and inclusion of new projects in the PSDP should be: High growth impact, Employment intensity, Social protection and human development, Export intensity, Regional equity and Inter-sectoral harmony.
36. An over-arching principle should be maximum leveraging of scarce public resources by exploring all potential avenues for public/private partnerships in the public development program.
37. The Panel recommends that fiscal policy to level the playing field between tradable and the non-tradable sectors; the current incentive structure favours investment in the non-tradable sectors. This should be corrected by expanding the tax net to include the services sector, make property taxes realistic and levy capital gains tax to prevent asset price bubbles in the non-tradable sectors.
II.B: PROMOTING INTERNATIONAL COMPETITIVENESS
38. A core structural weakness of the economy highlighted by the current crisis is the lack of international competitiveness that retards an export-led growth strategy.
A large part of the lack of competitiveness is embedded in relative prices that encourage consumption over production for export. The proposed exchange rate adjustment as part of the macro-economic stabilisation program will help remove one critical relative price distortion making it profitable for firms to export rather than import.
39. The Panel strongly recommends that other relative prices also be reviewed comprehensively to remove systemic discrimination against industry, especially those with export potential. The review should span energy pricing policies (that currently favour consumption over production), policies for the transport sector that favour passenger traffic over cargo and credit allocation priorities in the banking sector.
40. ADDITIONAL, MORE MEDIUM TERM MEASURES PROPOSED BY THE PANEL TO MOVE TO A HIGHER GROWTH TRAJECTORY ARE:
-- " The structure of incentives to promote export-led growth needs to be revised; the guiding objective here should be the promotion of higher value addition in exports and, to that end, incentives should be linked to the rate of increase in exports rather than the level; exports at the low value addition end of the spectrum such as yarn and gray cloth should be ineligible for rebates.
-- " Government's role in providing marketing information and producing to international standards needs to be revamped; the potential for twinning arrangements with private marketing firms with local knowledge of potential export markets should be explored and utilised.
-- " Within country logistics costs should be reduced which will require investment in upgrading infrastructure and institutional and regulatory reform; public/private partnerships should be the guiding principle in designing the infrastructure upgrading program.
-- " Worker skills are critical to give our firms a competitive edge in international markets; programs for skill upgrading need to be modernised adapting, where relevant, similar experience from East Asia; a combination of public subsidy and a levy on firms provides the financing of the skills development fund; firms receive vouchers for utilisation of training funds, accredited private/private training institutions provide the training and receive payments from the fund upon submission of vouchers.
-- " the current debilitating power shortages have to be redressed quickly and a well thought through medium term power plan needs to be in place that provides reasonably priced and good quality power to industry; a communication strategy should be in place to inform industry as to when improvements in power can be expected.
II.C. ACCELERATING AGRICULTURE GROWTH WITH EQUITY AND EMPLOYMENT
41. Given our natural comparative advantage in agriculture, ie the world's largest contiguous canal irrigation system, diversity of agro-climatic zones, good soil conditions and cheap labour with a centuries old farming tradition, poor crop yields and absence of high value added agricultural exports, is a glaring example of unfulfilled promise.
Maintenance, modernisation and expansion of key rural infrastructure spanning water, roads and electricity is in urgent need of policy and institutional reform. A separate task force has been assigned the responsibility of designing a program for the country's food security. The focus of this Panel is on promoting agricultural growth with greater equity and employment generation even in the short term. To that end we recommend, as an immediate policy focus:
-- " An initiative is proposed to establish the institutional framework for accelerating the growth of small and medium farms (less than 5 acres and 5 to less than 12.5 acres) where there is considerable potential for increasing yields per acre and employment generation.
At the same time, through a public-private partnership, an initiative may taken for providing credit, refrigerated transport and market access be provided to the small and medium farm sector for the development of milk, livestock, and high value added crops such as vegetables, fruits and flowers.
-- " replacing the existing out-dated and inefficient provincial agricultural marketing acts with a modern legal and regulatory framework that allows greater room to the private sector to develop agricultural markets, particularly for fruit, vegetable, meat and dairy in a way that ensures internationally accepted phyto-sanitary requirements.
-- " to catch up with the rest of the world in adopting new seed technology to increase yields and value addition on a priority basis, partnerships with major international seed companies need to be forged: the recent agreement with Monsanto for large scale adaptation of BT cotton is a step in the right direction and should guide other similar agreements for other crop seeds.
-- " Agricultural research and extension should be guided by a farming systems perspective to modernise agriculture rather than the current four major crop specific approach. This will improve the design of interventions and increase their cost effectiveness.
This approach will facilitate the focus on small and medium farms while designing interventions (the current crop specific focus does not) and thus will increase system-wide productivity growth and will also help achieve equitable growth.
(To be concluded)
THE PANEL OF ECONOMISTS CONSISTS OF THE FOLLOWING

1. Dr Hafiz A. Pasha (Chairman)

2. Dr Rashid Amjad (Convenor)

3. Dr Akmal Hussain (Member)

4. Dr Akhtar Hassan Khan (Member)

5. Dr Naved Hamid (Member)

6. Mr Riaz Riazuddin (Member)

7. Dr Kaisar Bengali (Member)

8. Dr Ali Cheema (Member)

9. Mr Haris Gazdar (Member)

10 Dr Asad Sayeed (Member)

11 Professor Muhammad Tousif Akhtar (Member)

12 Dr Aisha Ghaus Pasha (Member)

13 Dr Naseer Ali Khan (Member)

14 Mr Saqib Sherani (Member)

15 Dr Rehana Siddiqui (Member)

16 Dr Ijaz Nabi (Member)

17 Dr Faisal Bari (Member)

18 Dr Qazi Masood Ahmed (Member) Co-opted Members of the Group

1. Dr Azam Chaudhry

2. Dr Ather Maqsood

3. Syed Kalim Hyder Bukhari

4. Mr Muhamad Sabir

5. Mr Savail Hussain.