The rightsizing of the two levels of the government then needs be complemented by a move away from the direct provision of some services to just their financing - the actual provision to be outsourced (e.g. education).
Revisiting the size and structure of the PSDP
No additional projects should be added to the PSDP. Only donor assisted and on-going trunk infrastructure projects (inter provincial but not intra provincial) or nearing completion should be funded, treating as sunk investment and writing off those on which less than 20% expenditure has been incurred.
Reforming the civil service
For new and existing civil and military bureaucracies we need to redesign the compensation structure, monetizing all perks and privileges. In the case of the former compensations should be linked to market rates for similar skills. Furthermore, we should embrace a contributory pension system for new entrants to the Civil Service. For existing employees, we should adopt it, protecting pension entitlements attained to date.
The salary revisions, monetization of perks and adoption of a contributory pension scheme can be financed by savings from the proposed reduction in the size of the government and the disposal of prime commercial land held by government and used to provide housing to the civil and judicial bureaucracy.
We should also take away the right of any State functionary to allot any land (including to those in the military).
Easing controls over conduct of business to improve competitiveness
The role of State Institutions is critical, requiring, as argued above, a reduction of its footprint in the economy through deregulation of commercial activities- the software aspect of laws, regulations, procedures and processes to stimulate investment and productivity. Today, a large part of the regulatory framework exists because of lack of clarity on the role of the government and the need for excessive and obsolete regulatory control. New products and instruments are better replacements and more effective mechanisms for achieving the objectives underlying the rules and regulations and the institutional arrangements for their enforcement in areas of market failure.
This move should be complemented by addressing the trust deficit impacting investor sentiment owing to unpredictability of government policies and actions.
Remove distortions in tax structure
As indicated above, there is a need to revamp the tax structure. We need to simplify it-fewer number of taxes and rates. There should be a similar treatment for same levels of income irrespective of source (presently capital gains in equities and real estate are lightly taxed (with real estate made a haven for black money), tax concessions to agricultural income (supplemented by subsidies for fertilizer, irrigation water and electricity for tubewells, with support prices-wheat and sugarcane maintained ate higher than global prices).
Phasing out rentier structures
For improving efficiency and competitiveness of the economy a strategic move needs to be made to establish a level playing field. To this end we need to phase out, in the next 3-4 years (with a clear sunset clause) the vestiges of crony capitalism, reflected in the over-generous concessions/ protection for excessively long periods to several industries referred to earlier.
This shift needs to be complemented by rationalization of the customs tariff and the trade facilitation systems and processes aimed at enabling the participation of efficient enterprises in global supply chains- the producer driven chains (e.g. Samsung, Nike, Adidas, Polo) and buyer driven chains (Wal-Mart, Amazon, Alibaba) and the Services sector (by providing a broader variety of services in a much bigger and comprehensive manner). And as a starting point we need to lower, if not remove, barriers to trade with our neighbours. Admittedly, the role of the private sector will be equally, if not more, important in raising its own productivity and ability to participate in these chains.
Gains from enhancing connectivity and supporting innovation
This being the age of software and connectivity, with the frightening pace of change in technology (AI, 3-D Printing & robotics) disrupting activities of production of goods, services and type of jobs, we have little choice but to reorient government thinking, away from an investor in hardware to being an enabler, creating an ecosystem that supports innovation and transition to a digital economy:
Whereas we already have an expanded and relatively decent network of poorly exploited physical infrastructure (especially roads and presently also Gawadar) compared with our comparators (other economies at similar levels of income and stage of development) both the Federal and Provincial development programs continue to add to its enlargement. Some of these investments need to be shelved and many on which, as argued above, less than 20% has been spent should be discontinued and the expenditure incurred to date to be written off as sunk investment. Some of the resultant savings should be set aside for investments in improving connectivity, partly by reducing the tax on hardware and fibre-optic cable installation. And his approach to enhance connectivity and access to the internet requires that the available Spectrum not be viewed as revenue source.
By facilitating the use of technology we can not only develop regional trade but also augment our capacity to collect taxes, instead of increasing reliance on turnover taxes and withholding taxes which tend to discourage formal commercial transactions and thereby loss of revenue.
Reforms along the lines argued above, complemented by limits on the use of discretionary powers and greater transparency (through expansion of digitization and on-line availability of information on rules, regulations) will also assist in reducing the incentive for holding public office for those with dubious intentions and credibility.
Defence-related reforms
We need to revisit our defence strategy and associated frameworks. Although it is not my area of expertise but it is becoming fairly apparent that it will require some cropping of the size of conventional forces (considering that the annual bill of military pensions absorbs 3/4ths of the pension allocations of the Federal Government) and other non-combat expenditure. Examples requiring an urgent review are: a) the upgrading of a wide range of posts to accommodate the growing numbers of officer cadre; b) the time and expenditure (transportation, marquis, furnishings, food, etc.) incurred on protocols followed on the routine visits of senior officers.
Renegotiation of Agreements with IPPs
The full servicing of our obligations to IPPs looks increasingly unlikely; the issues of currency mismatch, negotiated rates and sovereign guarantees covering even market risk having made the economy uncompetitive and hence a huge constraint to growth and its sustainability. The beneficiaries of these contracts will have to take haircuts. The decision to extend the tenure of the contracts of IPPs set up under the 1994 and 2002 policies was a poor one.
The sustainable choices are to persuade those (the majority being Pakistanis) who invested under the 1994 policy (which has already run its original contracted course), that their generated energy will be procured in rupees and only if it is available at competitive and affordable rates. As for those who established units under the 2002 policy, the government should pay upfront the capacity related obligations for the remaining contracted period (roughly 2-3 years) and thereafter negotiate the contract along the lines proposed for the 1994 policy.
For the GENCOs commissioned by the public sector the approach should be the one adopted for the IPPs founded under the 1994 policy, with renegotiations of the terms (invoicing currency, contract period, etc.) with the lending banks. However, for the Chinese IPPs launched in 2016/17 a different treatment will be required, for example release of some capacity to be freely traded in the market.
Restructuring/rescheduling of external and domestic debt
The servicing of the external and domestic debts confronts us with a similar dilemma. These debts need to be restored to manageable levels.
The servicing of the external debt in the foreseeable future will be a huge undertaking; the stock contracted in the first 67 years since independence has doubled in the last 7 years to reach 40% of GDP. The prospects of the economy generating the resources to discharge the obligations that have to be defrayed in the near future do not look auspicious at all. In fact, the level and servicing of these debts represents an existential threat. So, what are the possible options available for rescheduling or restructuring of this external debt?
Much of our debt is owed to multilaterals (IMF, World Bank, ADB), with a significant proportion at concessional rates. They are preferred creditors and their debts cannot be restructured or rescheduled. In the case of bilaterals, the stock of debt of the Paris Club members that was eligible for rescheduling in 2001/02 is repayable in the latter half of the twenty thirties (2030s). This leaves us with the Chinese and commercial debts to deal with. So far, the Chinese have only been rolling over repayments as and when they become due. As for the commercial debt, it will require the umbrella of the G7 to get negotiations underway—easier said than done.
However, even to be able to seek some write down of the external debt or its rescheduling will, to enable the building of a case, require similar adjustments to be made in domestic debt. And the case of domestic debt is equally stark. The servicing of the interest on this debt (which consumes 90% of the annual budgetary allocations for interest payments) requires mobilization of a primary surplus of more than 5% of GDP! The reduction (or liquidation) of this debt will require a gradual approach, involving a combination of a hair-cut (write-down of its face value), negative real interest rates (in an inflationary environment rooted in shortages, largely attributable to import restrictions and revisions in administered prices) and a moratorium on interest payments for say two years. The second/third best option, although not the ideal way forward, could be a higher tax rate on bank incomes.
The above is, admittedly, a formidable, and politically daunting, reform agenda. Can it be executed in 4 to 6-years? This writer is of the view that more of the same style of governance can no longer be a credible and viable preference. The only serious option left is to adopt some of these reforms for crafting a sustainable growth path for the economy.
(Concluded)
Copyright Business Recorder, 2023