For more than a decade, the entire PSDP (Public Secotor Development Programme) is based on foreign loans, which increase debt. PKR is printed as a credit entry and spent mostly on construction.

The incoming USD is used to pay previous debt apart from the fact that development expenditure on construction projects creates demand for imported steel, subsidised energy, other imports, fuel kickback economy, subsidies, political capital and speed-up urbanisation.

As they are never completed on time, the cost over-runs in terms of supplementary grants add to fiscal deficit. Their direct contribution to exports in the short to medium run is minimal, except artificially raise yearly GDP growth and maintain low open unemployment level.

In order to stabilise the fiscal deficit, public investments at the federal level in new construction, including grandiose white elephant projects, need to be shelved for the next 5 years.

Time for ‘radical’ and fast-paced economic reforms–I

A cut-off point of less than 25 percent completion for those under construction should be put on hold for the next 3 years till healthy primary surpluses are generated.

In any case reconstruction of flood-hit areas if implemented with transparency will substitute for shelved public investment with all its above-mentioned backward and forward linkages active for the next 3 years.

Instead whatever little of domestic funded PSDP remains, it be devoted to increasing education and health budgets, TVET (Technical Vocational Education and Training), IT (Information Technology) infrastructure and IT human capital.

The fourth radical reform is in agriculture. Low-hanging fruit for making it export oriented in the shortest possible time of 5 years is increasing exportable surpluses of ‘fruit’ (whether in fresh or mildly processed form) and livestock thanks to our population explosion, moral obligation to share wheat with our Muslim brothers in Afghanistan, elite capture of agriculture land, reduction in average farm size and resultant low yields per acre, forget about exportable surpluses in many agriculture items except in times of good weather or when GOP subsidises its exports.

Sugar cane is the biggest threat to our agriculture, precious dwindling water resources and environment. Since the time of Field Marshal Ayub Khan, every elected PM or military dictator is/was most likely advised on the first day in office, not to touch the entire chain of sugar mafia, otherwise look at the fate of the dictator.

Times have changed, and fortunately there were no riots on the streets when the price of sugar went up recently from an average of Rs 50-60 per kg to Rs 80-100 per kg in a matter of weeks, even with/without the collusion of elites.

The real value of sugar may still be between PKR 5-10 per kg, since the 1960s far lower than its shadow price. The radical reform needed in agriculture is to shift the land from sugarcane production to cotton and/or fruit growing and/or livestock production, given the need for efficient utilization of scarce water resources.

A combination of a) reinventing pricing mechanism affecting growers of sugar cane to seths of sugar mills based on international practices, b) reorganising under a war-footing the agriculture extension services and time-bound price incentives to reintroduce cotton and other export-oriented crops and c) buy-in from provincial governments is urgently needed in the transition period.

Running after votes of urban population to satisfy their sweet tooth, artificially raising the growth rate of Quantum Index of Manufacturing (QIM) due to its heavy weight in the QIM for 4 months in a year and strengthening elite capture will have to be sacrificed to let agriculture and livestock contribute in exports based on our land resource.

The last radical reform suggested is not novel, very painful in the short to medium run, hated by the masses/elites and often repeated in economic gurus writings, is to shift to direct taxation, eliminate all subsidies and tax expenditure (revenue loss due to exemptions).

For FY21-22, subsidies and tax expenditure is estimated to be PKR 2 trillion and keeps growing, so radical reforms in structure of taxation within 3-5 years cannot be undertaken without bearing the cost of elevated inflation and loss of populism.

In the last 30 years the only meaningful structural reform GOP adopted to increase exports, was to reduce import tariffs at the behest of IMF (International Monetary Fund) programme in late 80s. To offset the reduction in custom revenue, GOP failed to broaden the direct tax regime and control deficits resulting in higher domestic/ foreign debt, depreciated currency with the consequence that we have nullified the structural reform and are back to the starting point of nearly 50 percent of tax revenue from custom duties plus the deficit is held hostage to increasing imports at any cost.

As a percentage of total direct tax collection, the share of wholesale and retail trade mafia (WRT) and agriculturist is in low single digits compared to 17.6 and 21.2 percent share in GDP respectively.

Removal of inter-provincial and intra-sectoral water, electricity, fertilizer, bank credit subsidies to agriculture are justified on equity grounds when most of these freebies are going to big landlords-cum-industrialist who do not pay any income tax and reap international prices under the “law of one price” for their output.

Removal of subsidies hostage to ‘food security’ is merely an elite slogan to bleed the economy when in each passing year, it is elusive under an unsustainable population growth rate, porous borders and stagnant yields per acre.

Finally, after 30 years of foot-dragging the POS (point of sale) in WRT (wholesale retail trade) was beginning to take hold, which has been rolled back due to voting mafia. The rate at which it was implemented, it may have taken another 15-20 years to cover the existing size of WRT leave alone its expansion with population, urbanisation and undocumented incomes.

The WRT mafia is so strong that they may even be unwilling to accept lower single digit GST rates, and rather keep their incomes undocumented at any cost and subject the economy to 30 percent inflation tax (via higher fiscal deficit and rising GST rates).

If India, Bangladesh and Sri Lanka can adopt nationwide VAT why can’t we sacrifice our services sector at the altar of hunger for votes. One reason for default by Greece was that self-employed sector was least taxed.

There is no way out, than to complete services sector documentation in the next 3-5 years.

Needless to add, sweeping austerity reforms in public current spending are critical to balance the budget during this ‘shock and awe’ period. Lastly, if one is ideologically or politically not committed to the above reforms as it will generate fair amount of transitory open unemployment and negative growth for the next 5 years, then laws of economics will force more currency depreciation and continuous bouts of inflation as in Egypt, Argentina and Turkiye in a relatively Washington Consensus era, otherwise we can go back to the ZAB (Zulfikar Ali Bhutto)-era of economic policies, and watch replay of its consequences. It is time to pay for our love affair with shallow growth rate/votes and painfully embark on a road to sustainable growth.

Copyright Business Recorder, 2023