‘Plan B’!

EDITORIAL: Federal Finance Minister Ishaq Dar’s repeated claim that the Ministry of Finance has a ‘Plan B’ in the event that the International Monetary Fund’s (IMF’s) ninth review remains pending was echoed for the first time by Minister of State for Finance Aisha Ghaus Pasha on Wednesday albeit with a caveat that not without involvement of the IMF — a plan that neither has shared with the general public to date.

Economists fear that failure to share ‘Plan B’ may at worst reflect a display of bravado rooted in the country’s politics rather than in the state of the economy and at best comprise of continuation of existing flawed policies that are violative of the ongoing Fund programme; notably, controlling the rupee-dollar parity that prompted the Mission Leader to issue a statement on 30 May that engagement with the Pakistan authorities will “focus on the restoration of foreign exchange proper market functioning.

”Even more disturbingly the Fund statement may be viewed as an indictment against the current economic mismanagement that would require “overcoming the present economic and financial challenges” through “sustained policy efforts and reforms for Pakistan to regain strong and conclusive private-led growth.”

While Business Recorder would hope that ‘Plan B’ is up and running and the budget documents for 2023-24, reportedly shared with the Fund, do constitute measures with components of ‘Plan B’ yet based on statements by economic team leaders there is a fear that the budget contains measures that are traditional in nature rather than any out of the box measures.

Two reported proposals under consideration are taxing the assets and capital formation created from an income that has already been taxed which would have serious negative repercussions on the large-scale manufacturing sector which registered negative 8.1 percent growth July-March this year against plus 10.6 percent in the comparable period of the year before – a trend that is worsening with each passing month, given that in March 2023 it experienced negative 25 percent growth.

This sad state of affairs has been compounded through government policy of heavy borrowing from the commercial banking sector which accounted for crowding out private sector credit, which declined by 80.4 percent July-April this year compared to the year before.

To make matters worse, the government continues to appropriate private sector savings from the National Savings Centres, savings which ideally should be allowed to be tapped by the domestic corporate sector as stated by the IMF Mission chief “to regain strong and conclusive private sector growth” – savings that are severely compromised in any event due to a steady rise in inflation calculated at 36.4 percent in April 2023, which has triggered higher consumption of disposable income. The money borrowed by the government is being pumped back into the economy to meet its current expenditure with development expenditure slashed by 27.2 percent July-March this year compared to the year before.

One can only hope that the economic team leaders acknowledge that the massive borrowing by the government at the cost of private sector investment is untenable and a policy decision is urgently needed to reverse this trend.

The government, one would hope, is considering a major cut in its budgeted current expenditure, up to 2 trillion rupees for 2023-24. This can be achieved by deferring taking politically challenging but economically necessary decisions till after the elections but implementing the oft-repeated proposals that have formed part of the manifestoes of all national parties but have never been implemented and which include: (i) state-owned entities must no longer be eligible for budgeted funding/support and those unable to carry on operations without funding must be shut down.

Privatisation preceded by first turning the entity around is perhaps best deferred till the economic climate becomes more conducive to such measures; (ii) devolved ministries in 2010 after the passage of the eighteenth amendment must be wound up at the federal level so as to avoid duplication and curtail expenditure of the federal government; (iii) revenue measures must reduce the tax rates likely to encourage more to file their returns while at the same time widening the tax net rather than raising taxes on existing tax payers.

In addition, there is a need to shift from the high dependence on indirect taxes whose incidence on the poor is greater than on the rich and tax incomes of people on the ability to pay principle; and (iv) there is a need to contain all non-operational expenditures for next year — be they in the civilian or military domain.

The economic team’s ‘Plan A’, reliance on the IMF that would trigger other donors to disburse funds, while necessary given the current state of the economy has been the favoured plan for decades; however, what is required now are structural reforms, not those that imply passing on the buck to the hapless consumers but those that seek to improve governance in perennially poor performing sectors starting with energy and tax sectors.

Copyright Business Recorder, 2023