Economic policies: consensus still elusive

Pakistan Business Council has highlighted the need for continuity in policies as a key factor in enhancing domestic as well as foreign investment. There is no doubt that policy change with a change of government has been and remains a major impediment to economic development of this country; and yet a lot remains the same. As the most obvious case in point the Pakistan People's Party (PPP), whenever in power in the Centre, has not only used state-owned entities (SOEs) as recruitment centres for its loyalists thereby generating losses that require ever-rising budgetary allocations but has also resisted efforts to improve governance of the SOEs through empowering independent members of the board of directors to take decisions based on financial as opposed to political considerations. The PML-N on the other hand has ideologically always supported privatisation as a means to not only generate additional resources, marked for debt retirement as per the party's manifesto, but has also supported measures to improve governance through empowering the board of directors (a companies ordinance to this effect has been passed by the National Assembly).
Be that as it may, it is unfortunate that the outcome so far of these two divergent policies has not been different on the finances of the SOEs. The Sharif administration had earmarked 65 entities for privatisation approved by the Council of Common Interest (CCI) in the first letter of intent (LoI) it submitted to the International Monetary Fund (IMF) under the 6.64 billion dollar Extended Fund Facility; however, that target remains a pipedream which accounts for negligible proceeds from this policy during the past three years and a half. The evident reason for this is the reluctance of both the PPP and the PML-N to desist from interfering in the selection process of senior officials which has led to rising losses - over 700 billion rupees this year - of the three biggest white elephants in the public sector arsenal notably Pakistan Steel Mills, Pakistan International Airlines and Pakistan Railways. And sadly, the Supreme Court's directive to set up a committee staffed by people of integrity for the selection of senior SOE personnel, initially supported by Prime Minister Nawaz Sharif, was abandoned six months later when his appointment suggestions were not entertained. There is therefore an urgent need for all major political parties to come to the table and agree on a transparent process for senior appointments.
What is unfortunate is that the PPP (in 2008) and the PML-N (in 2013) took the country on an IMF programme and both times Fund staff pointed out to the authorities the need for: (i) taking informed decisions and improving governance as well as raising utility rates to meet costs - a policy rhetorically supported by both PPP and PML-N though governance remained appallingly poor in the power and road sectors and decisions were made and continue to be made for political as opposed to economic considerations (Metrobus project trumps construction of water reservoirs and energy generation projects are supported without an equal focus on transmission network development that has the capacity of transmitting only 16500MW at best); and (ii) improving the business climate and yet eight years later, the economy's performance has worsened as reflected by the fact that factory closures, with many relocating to Bangladesh, are rising, exports are declining as is domestic and foreign investment. The Sharif administration has lowered the rate of return as an investment-friendly policy, however, with an overvalued rupee, exports continue to decline and higher private sector borrowing is reflective of borrowing to retire past debts rather than supportive of a rise in asset/capital investment.
The government informed the Fund that it had formulated a pro-business policy in February this year but unfortunately as in the past, it focused on one-window facility that remains unimplementable due to bureaucratic resistance. One would hope that all parties come on the same platform on this matter and no doubt those parties in opposition would take the opportunity to warn the government that its heavy reliance on borrowing to strengthen the foreign exchange reserves, keeping the rupee overvalued to understate the external debt repayments and reducing the return on national savings scheme to reduce domestic debt repayments would simply reduce savings thereby further fuelling borrowing and hurting growth.
There is also a need for a consensus on the way forward in terms of tax revenue sources as reliance on indirect taxes continues to outpace direct taxes that are based on the ability to pay principle. Withholding taxes on goods and services which are in the sales tax mode are currently placed under direct tax collections, which is simply not correct. And one can hope that all parties come together to agree on the way forward for tax reforms.
To conclude, there appears to be a growing trust deficit between the centre and the provinces on a variety of economic decisions being taken ranging from giving an ever-rising unrealistic figure for provincial surplus to meet the federal government's budget deficit, refusing to allow for input-output sales tax adjustment on services, requesting an increase in the federal government share of the divisible pool under the guise of security - a deficit that has been further fuelled by the government's reluctance to have a CCI meeting once every three months as mandated by the constitution.