How to fight with economic challenges of Pakistan

With Pakistan’s gross foreign currency reserves at an alarmingly low level at $10 billion (SBP), a trade deficit that touched its peak, and external financing needs projected to be around $11-15 billion a year, the country has to work out to get away from a huge crisis.
In this situation Pakistan Tehreek-i-Insaf (PTI) is now gearing up to form the government.
The new government under new Finance Minister Asad Umar has to undertake given issues within its first 100 days.
1. How to cover external deficit?
2. How to reduce Public Debt?
3. How to get Pakistan out of FATF grey list?
4. How to bring back Pakistani assets and money lying in foreign countries?
5. How to deal with state-owned enterprises (SOEs) i.e. PIA and Steel Mill etc. in huge losses?
6. How to get away with Circular debt?
7. How to raise revenue through tax net?
8. How to reduce inflation?
For first issue that is to cover external deficit at least by getting $ 12-15 billion, Pakistan can go either to Non Resident Pakistanis through donation or various schemes. The other way is to get bilateral loan from friendly countries. The third way is to approach IMF. In first two ways Pakistan would not be able to get requisite amount and that too at higher cost. Hence approaching IMF seems most probable. Some other multinationals can be approached like Islamic Development Bank is willing to extend some of finance but it must be remembered that like 1999 when Pakistan got such loan the rates were too high. This is the same situation with China from where Pakistan can get some of its funds at higher cost. IMF lends money in SDR whose valuation in US$ is provided in Form1. Pakistan whether takes loan or not but has to pay price for membership of the IMF. In 2017 and 2018 it has paid SDR 75,164,939 and SDR 44,633,642 to the IMF.
Pakistan has been approaching International Monitoring Fund (IMF), intermittently, since 1988. The last programme was successfully completed during the period 2013-16. However, within a short period of time we are back to a situation where without seeking Fund’s support the country may be facing a risk of default.
The reason for such is Economic instability that leads to seeking IMF programme emanating from the fiscal deficit that leads to current account deficit that in turn poses the need for foreign resources beyond what is available through foreign investment and loans from other sources. Financing the current account deficit from reserves is a clear signal that economy is heading for a situation of default. The rising fiscal deficit is the symptom of both the failure of taxation system to generate the required funds as well as government’s inability to reign in its expenditures within the available resources.
It is not infrequent that the Fund imposes unrealistic conditionality and shows inflexibility in modifying it, based on mutual consultation. Often the mission would tend to discount the difficulties inherent in implementing structural policies. In this sense, the Fund has to share jointly the responsibility of program’s failure.
The ownership of the IMF programme has always been lacking as economic managers were not sufficiently concerned with the need for developing a sustainable economy. When facing dire needs, managers are ready to accept all conditions and even implement if disbursements are withheld but as soon as such exigencies are eased, they return to their familiar ways of managing the economy.
The leadership has to understand that they don’t have unlimited resources to spend, even if in the domestic currency, because that also inevitably leads to external account imbalance. Unless this tendency is curbed, our drift towards the IMF at regular intervals would continue like a business cycle. Hence in case of approach to IMF Pakistan would have to carry out lot of structural reforms like raising revenue, cutting expenditure, reducing subsidies etc. etc. The governments have always remained hesitant in doing that. Let us see with what structural reforms PTI government would like to proceed.
To reduce Public Debt, Government should first of all replace Public Debt 1944 with new Government Securities Act 2007 formulated by the writer when he was heading FSCD SBP in 2007. If PTI government desire than on behalf of CAIF and Editors Club we are ready to work with the government. After bringing new legislation government than have to show resolve to work within the framework of new Act i.e. not to borrow above 60% of GDP and not to borrow from SBP in any case.
The FATF is a Paris based group that has put Pakistan to its grey list on June 27 2018 , deeming the nation’s financial system to be a risk to the international financial system because of “strategic deficiencies” in its ability to prevent money laundering and terror financing.
Other nations on the grey list include Iran, North Korea, Ethiopia, Serbia, Sri Lanka, Trinidad, Tobago, Syria, Yemen and Tunisia.
The FATF has urged Pakistan to improve the identification, assessment and supervision of risk of terrorist financing; demonstrate remedial actions against money laundering and terror finance cases; apply the law against illegal money transfers; and implement controls on the movement of individuals carrying cash for terror financing
Before adding Pakistan to its grey list, the FATF had asked Pakistan to implement the measures that would have discouraged money laundering and terror financing, but “Pakistan had not taken the warning very seriously,”.
For this banks must enforce a “know your customer” policy and report to the Federal Investigation Agency and State Bank of Pakistan any persons or companies believed to be involved in money laundering and terrorism financing, .
For bringing back Pakistan $ 500-1000 billion lying outside (only $ 200 billion is reported to be lying in Swiss Banks), government has to formulate a team to negotiate with countries where money is being reported like Switzerland, UK and other countries. They have to work differently on money transferred through illegal ways or just to get away from tax deductions. This can take time and can involve lot of political and other institutional figures. Some countries like Nigeria have got success in it but in Pakistan this is like to touch group of wasps (Bhirs).
Currently state-owned enterprises (SOEs) are running into heavy losses and adding to the tax burden. Pakistan Steel Mills and Pakistan International Airlines – once giants in their area – are classic examples of the failure of previous governments in running and then ruining their profit-and-loss accounts. The financial condition of PSM has continued to deteriorate over the years, and now its losses stand at a whopping Rs 200 billion. Same, if not worse, is the case with PIA, which is incurring losses worth Rs 406 billion.
Addressing the need to improve state institutions, PTI aims to create a wealth fund and depoliticize these institutions. The idea of a wealth fund is modeled on the concept of Khazanah in Malaysia, which is a sovereign wealth fund of the government. It holds and manages selected commercial assets of the government and undertakes strategic investments on behalf of the nation.
“We will launch transformation programme for SOEs by appointing and empowering non-political and autonomous boards, signing performance contracts with boards and agreeing on Key Performance Indicators (KPIs), selecting outstanding professional CEOs on merit through boards.” Says PTI.
In case of circular Debt when consumer finds relief of 75% reduction in load shedding from 12-15 hours in the past to 3-4 hours now; the news of Circular Debt starts rising to higher levels. This creates confusion about the performance of the power sector and an uncertainty about sustainability of the improvement achieved so far.
The Circular Debt is the amount of cash shortfall within the Central Power Purchasing Agency (CPPA), which it cannot pay to power supply companies. The overdue amount is a result of: (a) the difference between the actual cost and the tariff determined by National Electric Power Regulatory Authority (NEPRA) which is the Distribution Company’s loss over and collections under that allowed by NEPRA, (b) the delayed or non-payment of subsidies by government, and (c) delayed determination and notification of tariffs.
While we can see the impossibility of achieving the target of 100% recovery in Pakistan’s current security and socio-economic conditions, it does not in any way absolve the DISCOs from their responsibility to strive to improve performance towards best possible targets of collections and losses.
What can we conclude from this ? All the three elements of Power Sector in their cash flows have to be made through their contributions for smooth sailing of the sector. The performance by the power companies must sustain the improvements achieved in 2015 and 2016 and further consolidate it; tariff setting by the regulator must be based on ground realities, not on idealistic assumptions; and subsidy budgeting should be according to the quantum of benefits passed on to various consumers by DISCOs under government policies. Unless this happens, the Circular Debt cannot be washed away.
For raising tax revenue government needs steps including legislation and some practical steps including overhauling of FBR. Currently it is less than 11% of GDP in comparison to India and other developing nations where it is around 15-17% of GDP. Hence Pakistan needs to bring it close to 15% of GDP i.e. Rs 6.5 trillion at least. This would plug its fiscal deficit that always stands above 5%. I.e. close to Rs. 1.5 trillion. This can be done first by bringing clear legislation regarding tax recovery from Services, Agriculture, Whole sale and Retail sectors. Secondly for recovery, it should not rely on withholding tax on banking or other transactions as it culminates cash based transactions in the country. For raising tax directly, FBR can use NADRA data.
What is important here is that government should know how much potential income, citizens have and whether they are covered under tax net through proper legislation. With that information, governments can spread the burden of collecting taxes in an equitable and efficient way. For instance here we can report through some research’s that corporate sector in Pakistan conceal 60-70% of their profit every year. This is one example. In this way mostly Feudal, Doctors, Engineers, Lawyers are not present in the tax net.
Now about inflation, that has risen in 2018 to 5.6% from 4.5% in 2017 on monthly average basis. This has occurred due to external and domestic deficits. Inflation has direct relation with job creation that PTI government is committed to create each year in millions. For this SBP, where monetary policy is framed needs to be brought in to the hands of some notable economists. This is highly sensitive matter as with keeping inflation down job creation becomes highly difficult.

Chairman Centre of Advisory Services for Islamic Banking and Finance (CAIF), former Head of FSCD SBP, former Head of Research Arif Habib Investments and Member IFSB Task Force for development of Islamic Money Market, former Member of Access to Justice Fund Supreme Court of Pakistan.

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