Macroeconomic Alternatives

The caretaker government had reportedly prepared possible policy options for the incoming PTI government to deal with unsustainable budget and current account deficits - budget deficit estimated at 7.1 percent of GDP and the current account of 18 billion dollars in 2017-18 - dwindling foreign exchange reserves (projected at 6.3 billion dollars by 31 December, less than a month of imports), an overvalued rupee that continues to act as a disincentive to exports and an incentive to imports, and a low rate of interest that is unable to mop up excess liquidity and is "overheating" the economy. Extremely disturbing as these statistics are, the situation is much worse with senior Ministry of Finance officials claiming that they would be happy if the budget deficit for the last year is contained at 7.5 percent, the current account deficit widened during July, the first month of the new fiscal year, and this no doubt was the reason why the then caretaker finance minister warned that key policy decisions which she was not mandated to implement be taken within weeks, if not days.
The assumptions were therefore based on available data that Business Recorder, backed by independent experts, had persistently claimed was 'heavily manipulated' to show a better performance during the five years of the PML-N government than was in fact the case. Hence the urgency to begin to implement reforms is all the greater. The caretakers, understandably, focused on short- to medium-term measures given the state of the economy. To bring the unsustainable budget deficit down to 5 percent of GDP would require 1.6 percent adjustment estimated in total terms at 612 billion rupees. The suggestion was to cut expenditure by 460 billion rupees. This may be done by reducing Public Sector Development Programme from 850 billion rupees to 350 billion rupees by limiting it to ongoing China Pakistan Economic Corridor (CPEC) projects and construction of Diamer Bhasha dam and Mohmand dam. The CPEC projects came under much criticism during the tenure of the previous government for their lack of transparency in funding terms (investment or loan and on what terms) as well as project components with the then opposition parties, including the Pakistan Tehreek-e-Insaf (PTI), clamouring for greater transparency inside and outside parliament. In this context, it is noteworthy that Asad Umar, the Finance Minister, altered his party's stated position when he stated recently that the PTI would not reveal the terms of agreements signed by the previous government but would adhere to transparency in agreements signed during PTI's tenure. This position is all the more galling as China's One Belt One Road vision of which CPEC is a small component has been challenged in numerous countries, based on the financing arrangements, the use of Chinese unskilled labour instead of local labour and the priority attached to the project which is not a reflection of the needs of the economy, a challenge that was also made by Mahathir Mohammad recently, a man much admired by Imran Khan. The Chinese government offered the caretakers measures to facilitate trade with Pakistan, (our FTA favours China massively) which must be welcomed. Business Recorder would strongly urge the major stakeholders, civilian and military, to voluntarily take measures to reduce their expenditures significantly. Prime Minister Imran Khan has announced major austerity measures during his address to the nation and one would hope that other stakeholders who receive a significant portion of the country's tax money follow suit.
Secondly, set up a mechanism under the Council of Common Interests to deduct upfront 215 billion rupees as provincial surplus. This maybe opposed by Sindh where the PTI is in opposition; however it may be remembered that the projected revenue under the divisible pool is rarely ever realized; for example, in 2017-18 the budgeted net allocation to provinces was 2.531 trillion rupees, however, 2.430 trillion rupees was disbursed under revised estimates, thus the centre must link any upfront deduction to actual releases to the provinces under the divisible pool.
The caretakers recommended increasing Federal Board of Revenue's (FBR's) tax target to 4.5 trillion rupees which incidentally was unrealistically projected at 4.88 trillion rupees in the budget by the Abbasi-led administration - an estimate that was challenged by the FBR which claimed that actual collections would be 91 billion rupees lower than calculated by the Ministry of Finance due to a reduction in income tax rates and other incentives. The advice to the PTI government: reversal in the income tax rates for individuals, reducing petroleum levy from 300 to 200 billion rupees, through lower taxes that would fuel output, and additional revenue measures of 180 billion rupees. These measures would reduce the deficit but raise the rate of inflation to 7.4 percent.
Without any hesitation, this newspaper fully supports measures to first bring about an in-house change rather than to rush for a bailout package from the International Monetary Fund (IMF), which would require raising taxes to 4.9 trillion rupees and introduction of wealth tax with total tax effort equivalent to 560 billion rupees. Asad Umar is on record that the government would increase revenue through levy of a wealth tax or a minimum alternate tax defined as a tax on assets and income. However, Business Recorder does not support this proposal. The fourth schedule of the constitution which all parliamentarians pledged to uphold does not allow the federal government to tax capital value of immovable assets. Therefore the capital value of only movable assets can be charged and this would penalise investment and savings to the exclusion of real estate.
To conclude, the country and all sectors - be they in the private sector or under government control - must come together voluntarily in this crisis to assist the new government to extricate the economy from its current dire prognosis. The task is monumental and unlikely to be achieved in a couple of years though signs of improvement would be visible in less than a year but once achieved, its fruits would be available to all Pakistanis.