PTI's long bet

The economic reform package announced by the Finance Minister last week was more of a sentiment booster and was by no means an intervention to curb fiscal deficit. Most of the steps announced have negligible revenues implications. Any meaningful revenue impact of any measure(s) would be implemented in next fiscal year. One may wonder the purpose of the whole exercise of creating a stage of budgetary session.
Perhaps, Asad played to the gallery. The steps definitely are a confidence booster for business community, especially the corporate sector. The Pakistan Business Council and other associations have been criticizing, albeit subtly, Dar's way, which was purely based on short-term revenue generation while the long-term industrial manufacturing and SME promotion were compromised in the process.
The Razak-Asad duo is trying to undo it, and the direction appears right. There is a sense of urgency in terms of announcing measures to win heart of businesses and public at the same time. The government is apparently reacting to stern criticism on economic management emanating from opposition and various other circles.
It is a difficult situation and government's reaction is not totally uncalled for. The need is to assess the situation once the dust is settled. All the efforts of economic team are aimed at gaining time for revival of the economy and in the process bridging in the external and fiscal gaps through costly borrowing - be it domestic or foreign.
The thought process seems to revolve around gaining time for the economy to recover. The government does not have many options but to carry on borrowing on external front.
In simple words, the government is buying time for revival of the economy by not imposing any additional taxes and trying to ease the process of doing business. One of the fundamental horizontal policy instruments for reviving competitiveness in the domestic manufacturing sector is macroeconomic stability. Within it, fiscal balance is at the core.
The revival of exports and expansion of domestic industry by import substitution is the prime objective in the short to medium term. In the process, much needed taxes for lowering the fiscal deficit in the short to medium term are missing. The government is betting on the long race horse; by putting most, if not all the eggs in the manufacturing sector basket.
The policy is right as apparently the government has a resolve to correct structural imbalances. The economic team, unlike Dar's, is not averse to criticism; and is seemingly open to change if media, industry, policy think tanks and others are able to convince Asad and his man Razak. That is a good omen, the process is learning by doing. That said, the risk is huge. If the economy does not revive in three years as perceived by government, then it could be a nightmare. What if the J curve does not move up 2-3 years down the line? `
However, without taking such bold steps, there is no way to come out of the rut of going back to the IMF - by lowering the frequency of boom bust cycle. An easier option for PTI could have been to go to the IMF right at the onset, as suggested by leading and experienced economists. The next step would have been to come up with a 'mini-budget' - by increasing GST to 18 percent, enhancing or keeping super tax along with other measures to create immediate tax revenues.
That is what happened when PPP assumed power in 2008 and later similar steps were taken by Dar in 2013. But all these were short term measures and reliance on indirect taxes and skewed taxation on existing payers hampered the economy to attain its potential, and any revival was hinged upon the foreign savings.
One may argue, that reliance on foreign savings is what is happening even today. So how is this any different? The difference is to create space for the private sector, mainly manufacturing, to grow. Since, there is no room for fiscal incentives, softer reforms are in place to make the environment conducive for private sector to grow.
The private sector in Pakistan is loaded with cash while the government is cash strapped. The solution is for private sector to invest and government to facilitate. The thinking is there to do so. The challenge is in execution and for that, requisite capacity is missing. Asad is no superman; he has to understand that he needs to create a vibrant team under him, to minimize the risk of policy capture by a few business groups.
The government has a period of 2-3 years to fully implement the reforms and for economy to revive. Without doing so, the situation would change from bad to worse. The loans from friendly countries, promissory notes issuance against refunds - similar structure to come for resolving energy and commodity circular debts, Pakistan Banao Certificate without Diaspora discount and others are to create space for 2-3 years. Eventually this all has to be paid and for that, fiscal and external space creation through private sector stimulus is the solution. It is a curvy road ahead - let's see where it leads.