IMF programme: focus on stabilisation increases unemployment, deepens poverty: Pasha

The government must now pursue the strategy of economic revival, as focus on stabilisation under the International Monetary Fund (IMF) program has increased unemployment and poverty in the country. Dr Hafeez Pasha, an economists and Managing Director Institute of Policy Reforms (IPR) stated this while giving the IPR's proposals for the federal budget 2015-16 and revival of economic agenda here on Thursday.
He said that the government's focus on stabilisation under the IMF program comes at the cost of growth of the economy. Unemployment and poverty have both increased in the last six years. Reduction in development expenditure, increase in indirect taxes, high cost of external debt, and increasing circular debt have depressed growth and added to the difficulties of the people. It is time for the government to take measures to revive the economy.
Pasha added that the GDP growth for fiscal 2014-15 will fall well short of the government's target of 5.1 per cent. The actual rate would likely be close to 4 per cent. Growth in large-scale manufacturing has been a paltry 2 per cent for the period July to February 2014-15 and this was also because of some production by Pakistan Steel Mills (PSM). He said that Pakistan must now get out of the 'low growth trap' for the benefit of the people. He suggested that the government must adopt a 'radically different' approach of moving from the stabilisation mode to revival of the economy in the coming fiscal year and set growth target of 5.5 per cent for 2015-16. As this is most appropriate time to make a shift in the policy with a certificate of good health from the IMF, following the build up to foreign exchange reserves to almost $13 billion and the fall in rate of inflation to below 5 per cent.
He said that a combination of policies will increase growth, which fiscal stimuli, tax reforms, an expansionary monetary policy, and a competitive trade policy. Dr Pasha recommended that there must be no new tax in the next fiscal year and the current tax rates must not be enhanced. The government must send a positive signal to the private sector by reducing the corporate tax rate from 33 to 30 per cent but suggested to the Finance Ministry to go for capital gain tax both for property and stocks shares. He also suggested a quantum jump in federal public sector development programme to Rs 750 billion and Rs 580 billion as has been proposed by Finance Ministry to absorb the Chinese money. At the Federal level this is necessary to absorb financing from China for infrastructure projects in the Chian Pakistan Economic Corridor (CPEC). Pasha said that the government must find ways to reduce non-development expenditure and increase tax collection. One way to control expenses is to reduce subsidy on electric power. Higher gas allocation for power will reduce overall cost of power and along with it the amount of subsidy. To increase tax revenue, the Federal Board of Revenue (FBR) must broaden tax base focusing not only on individuals, but also on companies. There are leakages also in collection of the GST and the government fails to realise larger revenues from it because of the fake and flying invoice problem. He maintained that in order to show growth in revenue, refunds to the private sector are held up. There is need to study the case for switching to a single stage sales tax regime, preferably at the point of final consumption. In addition, the government must continue with this year's policy to withdraw SROs on import duty and GST because of suspected under invoicing of imports, there is a strong case to introduce minimum import prices. He also recommends that State Bank of Pakistan (SBP) may bring down policy rate to 7 per cent and allow concessionary credit at 5 per cent for exports. The government was asked to limit borrowing from commercial banks to 2.5 per cent of the GDP and enable more diversion of credit to the private sector. With respect to trade policy, Pakistan has not made full use of the GSP plus scheme. This is because of an overvalued rupee exchange rate. The exporting countries in recent months have been competing to reduce the value of their currency in a tight global market. On the other hand, Pakistani exporters have suffered because of the high value of the rupee. He also recommended a reduction by 10% in the value of the rupee. Hafeez Pasha also agreed to a participant that the country was experiencing deflation with low interest rate, less demand of credit by private sector and almost flat industrial growth. Humayun Akhtar Khan, Chairman IPR, said that the weak economic performance of recent years had increased the burden on the people and it is important to look at the economy's growth potential rather than focus on the limited criteria of reduced fiscal deficit and increase in foreign exchange reserves. He added that high cost external borrowings have increased foreign reserves.