"The incoming announcement of the Federal Budget for FY14 must not be a run-of-the-mill budget document," stressed former Governor State Bank of Pakistan, Dr Ishrat Hussain while addressing a packed audience at a local hotel during a special interaction arranged by the Pakistan-France Business Alliance, on Monday.
Elaborating on his emphatic demand, the veteran economist said that "the Federal Government must present a detailed economic policy outlining its key focus for the next five years and highlighting short, medium and long-term plans for the national economy along with the budget document."
He listed the energy deficit, inter-corporate circular debt in the power sector, bleeding public sector enterprises, high fiscal deficit and low tax base as the biggest and most immediate challenges that warrant the attention of incoming government. He urged the policymakers to devise comprehensive strategies to fix these problems, insisting that the "government must swallow the bitter pill right now so that the positive effects of these measures can start reaping results long before they head back to the polls in 2018".
Responding to a question he contended that "sound economic policies are good politics". The Dean and Director of the Institute of Business Administration (IBA) drew attention to the example of Turkey. He elaborated that that economy was previously referred to as the "sick man of Europe" adding that economic conditions there were worst than the prevalent situation in Pakistan. "However through the implementation of sound economic policies, Turkey's economy is today faring better than most European economies and Erdogan has been able to get re-elected because of the economic prowess that his government's policies have brought about," he added.
Dr Hussain dispelled the notion that expanding the tax base in Pakistan is predominantly dependent on taxing the agriculture sector. He pointed out that agriculture represents a fifth of the national income while the services sector has grown to 56 percent of the GDP. "Majority of the individuals employed in the agriculture sector make incomes that are below the minimum taxable threshold so relatively little income tax can be garnered from there," he said.
Instead the focus must be on improving collections from "boutiques, private schools, private laboratories, hair salons, restaurants, hotels and a host of other service providers," he said. Dr Hussain pointed out that estimates presented by the Federal Board of Revenue have highlighted that at least Rs 500 billion can be generated in income tax from the services sector.
"Failure to accelerate economic growth will create a disastrous situation in terms of unemployment, poverty and low living standards," he said. However, the former central banker clarified that creating economic activity is not the role of the government rather it must facilitate the private sector by providing an enabling environment. Further explaining his comment, he said that consistency in tax policy and in the macro-economy are prerequisites for attracting domestic and foreign investment to the economy.
He reiterated that government has no business running large corporations, financial institutions and other industry. "Ministers and secretaries use public sector enterprises only to help foot their own bills and provide jobs to their cronies. They are neither capable of, nor interested in ensuring the efficiency and profitability of the PSEs," he added.
Dr Ishrat Hussain stressed that the government must privatise the PSEs including the Pakistan Steel Mills which he said has not produced any significant quantity of steel in the past five years despite sucking up government funding to the tune of Rs 100 billion.
To a question he expressed optimism towards the resolve of the Pakistan Muslim League-Nawaz and its leadership. He recalled that Nawaz Sharif had implemented several economic reforms including privatisation of state-owned enterprises and financial institutions and opening up the field for the private sector, even before India had embarked on a similar path under the leadership of Manmohan Singh. He lamented that those efforts were derailed when the PML-N government was ousted in the past, but stressed that "there is an even greater compulsion to fix the economy."
Dr Ishrat Husain also elaborated the measures needed to rein in circular debt. He said that the stock of the debt "is not a huge issue because the residual amount after settling between the various institutions can be refinanced." But he stressed that the government must address the disparity between the cost of providing electricity and the amounts recovered.
He summed up that the PML-N has received a strong mandate and that the nation has rejected the policies of the previous coalition government. He said that the "first one hundred days are a honeymoon period and the government should use this window of opportunity to implement much-needed reforms."