EDITORIAL: There is mounting evidence of macroeconomic mismanagement coupled with a failure to proactively formulate and implement out of the box solutions that the Pakistan’s economy desperately needs which has left the door open for the International Monetary Fund (IMF) to emerge as being more focused on reforms than the economic team leaders.
Many dismiss the Fund’s prior conditions for the ongoing programme by citing Nobel laureate Joseph Stiglitz who contended that, “finance ministers and central bank governors have the seats at the table, not labour unions or labour ministers.
Finance ministers and central bank governors are linked to financial communities in their countries, so they push policies that reflect the viewpoints and interests of the financial community and barely hear the voices of those who are the first victims of dictated policies.”
However, what is extremely disturbing is the fact that the elite capture of our resources and expenditure has been the hallmark of all our finance ministers – those with or without the academic background in economics.
This is reflected by the following policy measures that persist to this day: (i) revenue collection from indirect taxes, whose incidence on the poor is greater than on rich, accounts for nearly 72 to 75 percent of all collections, which includes withholding taxes levied in the sales tax mode but inaccurately credited under direct tax collections, that are based on the ability to pay principle; (ii) current expenditure accounted for 91.5 percent of total budgeted federal expenditure in the current year, a percentage likely to rise as development expenditure is slashed to bring the budget deficit to a relatively less unsustainable level (development expenditure that is documented as a major contributor to growth and therefore to exports as well as employment opportunities); subsidies on wheat exports or on electricity for exporters or indeed all other untargeted subsidies benefit the rich equally while those targeted to the poor not only have an extremely poor delivery system as seen by the multitudes surrounding trucks distributing free wheat flour to the poor these days (strengthening the IMF’s call for channeling assistance to the verified Benazir Income Support Programme beneficiaries) but the amount is simply insufficient to meet the needs of the growing numbers being pushed below the poverty line: (iv) power sector continues to perform very poorly with a mounting circular debt and sadly the only way to resolve this for decades has been to up the tariffs rather than to implement reforms that would reduce the flow and stock of debt; and (v) finally the ever rising dependence on external debt that has gathered momentum since 2013 when the then finance minister opted for not only borrowing from abroad by rationalising that the interest rates abroad were less than half those in the domestic market (without taking account of the future capacity to repay these loans in dollars) coupled with overvaluing the rupee to understate the external debt repayments.
These disastrous policies led to the Khan administration inheriting the largest ever current account deficit of 20 billion dollars.
The issue with the delayed ninth review is not only because friendly countries have yet to disburse pledged assistance but more disturbingly because the projections for equity borrowing through issuance of sukuk/Eurobonds agreed with the Fund have not been realised due to the country’s rating downgrade by all three major international lending agencies starting from October 2022 to almost junk status today.
Thus the optimistic projection of around 7 to 8 billion dollars from this source has not been met by a wide margin with under 300 million dollars generated from this source till today.
The multilaterals support targeted budgeted subsidies channeled through a foolproof mechanism with a considerably reduced possibility of misuse or abuse as opposed to untargeted subsidies, especially those that are not budgeted, which are available to all and whose incidence like indirect taxes entails a larger percentage of the income of the low income group than the rich.
BISP is a well-respected programme by multilateral and bilateral donors as beneficiary verification is an annual process and it would have been appropriate to channel any pro-poor subsidies through this programme however the positive political fallout of this may not have favoured the PML-N (Pakistan Muslim League-Nawaz) electorally.
Be that as it may, given the ongoing economic impasse this is not the time to subordinate economic policies to politics and it is little wonder that the IMF has requested for details after the announcement of the recent subsidy on wheat (free for the poor) and petrol (cross subsidy envisaged).
It is, however, quite baffling why the economic team in particular and the government in general is taking policy measures that are deepening the economic crisis further other than to acknowledge that a change at the helm is critical to staving off default and for some out of the box thinking.
Copyright Business Recorder, 2023
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