The way forward for Pakistan

“Rather than going cap-in-hand asking for new finance, the new government and its backers in the establishment and business would need to design first their own plans worth investing in, by the International Monetary Fund (IMF) and others. The only approach that can succeed is the one that redirects resources towards a more outward-oriented and less distorted economy, and an economy that serves the many, not the few.”(Stefan Dercon, Professor of Economic Policy at the Blavatnik School of Government, Department of Economics, Oxford University)

What Pakistan truly requires is not a larger handout, but a clear vision focused on harnessing domestic resources to address the current crisis and shape a future where the financial framework not only advances but also empowers both industries and individuals towards self-sufficiency and progress.

This comprehensive strategy must encompass tax restructuring, the recently negotiated IMF agreement (now in its 24th iteration), boosting exports, the privatisation of state-owned assets, providing support to existing investors (both local and foreign), and implementing strategic reforms to bolster these areas.

In the nation’s 76-year history, Aurangzeb steps into the position of Pakistan’s 45th Finance Minister. Top of Form

His track record of successfully navigating financial hurdles on the global stage, pioneering excellence in his prior roles, and consistently embracing innovation rather than adhering to conventional approaches inspires confidence in his ability to be up to the task. Pakistan requires a leader with both strategic foresight and innovative thinking, qualities that he has adeptly demonstrated.

Overall, Pakistan’s reserves are USD 13.37 billion, of which SBP’s (State Bank of Pakistan’s) reserves are USD 8.04 billion, while the commercial banks’ reserves are USD 5.3 billion. All developing economies are confronted with the new fiscal landscape, but what Pakistan faces is a question of survival.

The nation’s foreign currency reserves are at best, modest, while the loan repayment obligation by end June this year is USD 24 billion. The external debt is of USD 130 billion, almost one-third of the USD 340 billion economy. With inflation surging above 20% and a currency depreciation surpassing 50% over the last two years, the finance minister has his hands full and his top priority is to secure a multi-year loan from the IMF.

Establishing a comprehensive long-term policy framework is integral to the success of any development plan, and finance is one field that affects and determines the health of all projects that contribute to the health of the economy. Aurangzeb has been hammering on the needed structural reforms, fiscal discipline, and leveraging technology to foster sustainable growth and development.

His focus on ready projects is almost tangible, as not an opportunity goes by without him deliberating on the lack of readiness for Foreign Direct Investment (FDI). As an experienced banker, he understands the need for local investors with reference to an enabling environment, and the ideal infrastructure that would attract foreign ones.

During a recent gathering on the Pakistan Stock Exchange in Karachi, Aurangzeb delineated several specific initiatives, including measures aimed at augmenting tax revenue by addressing leaks, instituting a track-and-trace system, and modernizing operations for enhanced transparency and efficiency.

He emphasized the critical necessity of addressing all sources of leakage within the tax collection entity– the Federal Board of Revenue (FBR)– which encompasses exemptions benefiting the privileged for political reasons, internal malfeasance, and legislative loopholes exploited by recipients of patronage.

Rectifying these issues holds the potential to significantly bolster revenue, thereby reducing reliance on regressive indirect taxes that disproportionately impact the less affluent. He has been vocal on the urgency of resolving pending tax cases worth PKR 1.7 trillion within three months and has also elaborated on plans for digitizing the tax system and FBR operations.

IMF’s Managing Director Kristalina Georgieva’s recent comment can help us see the clear link between what Aurangzeb is planning and how well-aligned it is with the international perspective. She said that “there are very important issues to be resolved in Pakistan; the tax base, how the richer part of society contributes to the economy, the way public spending is being directed, and, of course, creating a more transparent environment.”

The debate on including agricultural fields in the tax ambit has been long and, so far, ineffective. Aurangzeb’s vision for ‘Zarai’ banking and understanding its potential has helped HBL (Habib Bank Limited) launch an entire scheme related to exploring and developing this sector. Pakistan is an agrarian country; therefore, a consolidated plan is required to make agriculture profitable, while ensuring its contribution to the economy and the tax net.

Technology is the new paradigm for finance. Digitalization has already enabled the banking industry to expand their outreach to unprecedented levels and they hope to be able to convert Pakistan’s undocumented economy into a documented one. The renewed focus on digitalization and transparency in tax operations marks a significant stride towards modernizing Pakistan’s public sector into an efficient and transparent system. This shift towards technology will streamline tax collection, reduce corruption risks, and boost revenue.

Economic stability is what Pakistan primarily needs, at both the macroeconomic and microeconomic levels, unless we wish to continue with the status quo and live with the uncertainty of external sector crises. It requires prudent management of external debt, productive borrowing, with the caveat that returns on investment exceed borrowing costs, and the effective utilization of development assistance can help us reach our economic goals faster.

Given that Pakistan’s debt has surged to 91% of its GDP, it is imperative to advocate flexibility within the IMF programmes to effectively address unforeseen economic shocks and potential slippages. Measures such as modernizing the IMF prescriptions and advocating financing mechanisms will be needed to address debt sustainability challenges.

To ensure Pakistan’s success, however, it is imperative to have the Finance Minister chair the Cabinet Committee on Privatisation (CCoP) for expedited fiscal support and remain a strong part of the Council of Common Interests (CCI) to see to the action plans and determine the best way forward in the national interest.

The Federal Minister for Finance and Revenue will need to be empowered with the authority to steer a steady course and receive facilitation and backing from all stakeholders. It is crucial for everyone involved in national governance to adopt the perspective that best represents Pakistan’s interests and unite in establishing an optimal collaborative framework involving both the public and private sectors and the military leadership.

Copyright Business Recorder, 2024