The concept of all political parties signing off on a charter of the economy has been consistently raised by the Pakistan Muslim League-Nawaz (PML-N) leadership with the stated objective of prioritizing economic as opposed to political considerations through ensuring consistency/continuity of policies.
The concept of a charter of the economy does not reflect originality as it is almost certainly a spin-off from the charter of democracy signed on 14 May 2006 in London between the then two national leaders in exile - Benazir Bhutto, in the seventh year of her eight-year long self-imposed exile, and Nawaz Sharif allowed to move to London after serving five years in exile in Saudi Arabia.
The overarching pledge of the charter was that neither party would solicit support from the military to gain power – a pledge that many a political pundit is accusing the PML-N of currently breaching subsequent to Nawaz Sharif’s return to the country on 21 October 2023 after a four-year long absence.
To get a consensus on a charter of the economy presupposes what even a freshman economics student would challenge: within a democratic dispensation the long-term economic objective of political parties maybe synonymous - to attain development/growth or deal with a specific issue (rising inflation) or a generic problem (cyclical current account deficit) or to improve poor pervasive governance in major sectors requiring structural reforms - but there are numerous competing policies in economic literature designed to attain any of these specific goals. The selection of one policy over another is what differentiates one political party from another.
Disturbingly, neither of Pakistan’s three national parties has shown any proclivity or indeed capacity to implement policies that could turn the economy around, a claim supported by the steady deepening of the economic impasse over decades to reach the crisis level today.
And, this in spite of all three parties, claiming to appoint “technocrats” as finance ministers. The last three decades have given rise to revolving finance ministers, even the current caretaker finance minister holds the portfolio for a second time, all of whom without exception engage in the futile exercise of blaming their predecessor(s).
Unfortunately, this blame game has not implied abandoning the flawed policies of the past or learning from one’s own past mistakes or taking out of the box measures, structural reforms, designed to lift the economy out of the exciting morass.
Not one of the revolving finance ministers has exhibited any backbone as and when their political masters refused to implement politically challenging conditions, particularly pertaining to tax and power sector reforms by exercising the more honourable option to resign.
To compound the crisis the political masters of our revolving finance ministers refused any input from sector experts before approving a project/policy – examples include Zardari-led government’s decision in favour of rental power projects, Nawaz Sharif’s decision to sign power sector contracts under the China Pakistan Economic Corridor umbrella on take-and-pay basis and 100 percent repatriation in dollars that accounts for the current unaffordable high tariffs and Pakistan Tehreek-e-Insaf (PTI) policy to incentivize builders.
Thus any agreement that ensures continuity in policies should be a source of serious concern as it would relate to only minor adjustments premised on which pressure group is favoured by a particular party.
The list of these minor adjustments includes: (i) incentivising one influential group over another at the taxpayers’ expense – the Pakistan People’s Party (PPP) favours using state owned entities as recruitment centres resulting in overstaffing, a major bane of Pakistan International Airlines and Pakistan Steel today, PML-N supports artificially propping up the rupee value which may understate the budgeted mark-up in any given year but dampens exports as well as remittance inflows through official channels, and the PTI through incentivising the construction industry; (ii) using untargeted subsidies to appease the general public without ensuring that the rich and influential groups do not benefit at the taxpayers’ expense, for example export subsidy to sugar manufacturers, electricity subsidy to exporters; (iii) not slashing current expenditure and routinely relying on massive reduction of the budgeted development expenditure to bring the deficit to sustainable levels (a decision to this effect taken recently by the incumbent caretaker set-up), increasingly relying on borrowing from local and foreign sources to meet current expenditure which at the current 22 percent discount rate has upped the budgeted mark-up component and crowded out private sector credit with a consequent negative impact on growth prospect; and (iv) burdening the populace through a steady rise in reliance on indirect taxes whose incidence on the poor is greater than on the rich (at present these taxes account for over 85 percent of all tax collections). In addition, the petroleum levy is imposed in the sales tax mode (an indirect tax) and is listed inaccurately under other taxes targeted to account for 30 percent of collections under this head in the current year. Indirect taxes and higher utility prices have compromised the kitchen budget of the majority of Pakistanis which explains the rise in poverty levels to 40 percent.
All three national parties have yet to focus on widening the tax net to include traders, rich farmers, the builders, the middlemen (aarthis).
Their focus remains on raising total tax revenue however the tax to GDP ratio has remained stagnant at under 10 percent since 2018 – a decline from the 1990s 13.4 percent and 1980s 13.8 percent.
Pakistan is currently on its twenty-fourth IMF programme, usual duration 3 years which gives only four years out of the country’s 76-year history that it was not on a strictly monitored Fund programme. Fund programmes are approved after a signed pledge from the borrowing country’s finance minister and governor state bank to implement a set of agreed time bound conditions and structural reforms.
Sustained failure to implement these reforms accounts for a visible lack of confidence by multilaterals/bilaterals in the country’s intent to adhere to agreed programme conditions which explains the harsh upfront conditions since 2019.
No preferred standard policy framework envisaging structural reforms has been implemented for the past three decades and the only time painful reforms have been under consideration is when the country is on International Monetary Fund (IMF) programme with standard conditions: full cost recovery in state operated utility sectors (this has implied passing on the buck for sectoral inefficiencies onto the hapless consumers), a discount rate linked to headline inflation, a sustainable budget deficit (achieved through slashing development expenditure with repercussions on growth – a policy decision recently taken by the incumbent Caretakers) and a primary surplus (excluding borrowing costs).
To conclude, a charter of the economy given the policies implemented by so-called technocrat finance ministers and governors of the State Bank (susceptible to pressure from all stakeholders in spite of the autonomy granted by parliament in January 2022) is likely to only further deepen the ongoing economic impasse.
Copyright Business Recorder, 2023