Pakistan economy shadowed by IMF would be a disaster

We are just 7 or 8 days away from general elections with lot of controversies and attacks by terrorist groups led by some within Pakistan. No doubt USA and India can be behind these attacks but actual enemies lie within our own people.

Another factor that is tarnishing election results is the Interim Government Finance Minister decisions for advising to knock at the door of IMF and recently 1% increase in discount rate with immense depreciation of PKR reaching to Rs 130 per dollar with going to touch Rs 150 per dollar in no time. This all looks like an already designed plan.

In a meeting with Mr. Zafar Sheikh former part of Senior Management of SBP, than MD of Debt management Office and National Savings organization, finally nominee to be the Governor of SBP and now President/CEO of Securities Investment Bank, the current situation of Pakistan came under discussion.

He was highly opposed for knocking at the door of IMF as is being proposed by the current Finance Minister Dr Shamshad Akhtar. To his point it would be a disaster for Pakistan economy and its currency. His points were crystal clear that out of total export/Import of Pakistan valuing around $ 50 billion we are getting negligible revenue. If we just assume 10% tax at the amount than at least we should get $ 5 billion that means at least Rs 600-700 billion revenue. Further it needs to bring import figures close to export figures of $ 25 billion by excluding unwanted imports.

Further by over invoicing and keeping exporter’s money outside is resulting in placement of foreign currency outside Pakistan. Recent examples are Mr. Hussain Lawai admissions in the courts.

In addition the money changers and big business entities are smuggling huge amount of FX to Dubai or other centers. This amount is above $ 10 billion. So with these policies how one can keep the Pakistan economy workable. The PKR is sliding and SBP is doing nothing. In this condition they should have frozen the exchange rate at Rs 116 per dollar.

Current figures for FY 2018 depict that for government expenditure of Rs 7,300 billion, revenue availability is only Rs 5, 400 billion with a gap of Rs 1,700 billion. What Dr Shamshad is doing for its rectification nobody knows?

Now SBP has increased its discount rate by 100 bp that means country has to pay Rs 240 billion further on floating debt existing now in July 2018 of Rs 2,400 billion. Take it granted it would result not in bringing inflation down and bringing foreign investment in Pakistan as Dr Ashfaque and others are saying. They lack knowledge about realities of Pakistan and depend only on their bookish knowledge. So if we accept their versions than whole burden would come on people of Pakistan.

In fact Dr Shamshad and figures like (even) Dr Ishrat went to USA on scholarships, stayed there and on advice of multilaterals came to Pakistan to distort its economy. Even Dr Ishrat wasted the dollars came in Pakistan after nine elven through personal financing giving benefits to big business entities.

So there role in governments have always raised questions and presence of Dr Shamshad Akhatr in the interim government is also raising many questions.

Earlier it was said that high GDP growth in Pakistan will help to control the inflation but whether it is happening, the answer is no. Increase in macro sectors of the economy with massive CPEC investment was anticipated but that required improvement in security and power supply that has never remained perfect.

The loan repayment obligations are highly scaring. Pakistan may find itself back in the IMF fold but that would be a disaster as it would bring policies against people of Pakistan.

There seems to be an uptrend in the global oil market now at $ 60-70 and that has brought further pressure on external sector of Pakistan.

Already we are on the path what IMF wants .The IMF has recently said that the positive trend will require strengthening the economy’s with greater exchange rate flexibility, fiscal discipline, and an adequately tight monetary policy and the same is happening, making the future of Pakistan highly smoky.

In an update of its twice-yearly economic report, the World Bank has already warned that the economic uptrend this year was temporary. Pakistan is expected to witness a 5.5 percent GDP growth driven by strong domestic consumption. The domestic demand was driven by powerful credit growth and investment but would soon get down.

Illango Patchamuthu, the World Bank’s country director, says: “Pakistan will need to continue with economic reforms and pursue policies that make the country compete better in global markets.” But the same are altogether missing.

The World Bank believes that aggregate consumption, one of the key determinants of GDP, will grow because of a marginal recovery in remittances and higher government expenditure due to the election cycle.

Remittances from the Gulf countries amounted to 62.6 percent of total inflows in 2016-17. Growth in remittances would be subdued going forward, the World Bank says, as Gulf nations make gradual economic recovery.

Finally one can say that with current setup of the power corridor in Pakistan it looks that it is not poised to bring economy of Pakistan in favor of its people but contrarily it is working in favor of international powers and their nominees in Pakistan.

However for any government coming after elections following issues existing already would require planning, legislation and implementation strategy.

To bring fixed exchange rate regime at Rs 116 per dollar for the time being.
The most significant challenge is the energy/power crisis. According to some estimates the growth in Pakistan is 1/3rd off to the on-going power shortage.
Opening up of markets and encouraging trade. The country is surrounded by resource rich countries and it should take advantage of the complementarities that can arise in through the labor market, or through trade.
Investment in human capital. First is to improve general education outcomes across all levels. Second is to improve the skillset of the Pakistani labor force.
Land reform: Land is very central to industry and to urbanization (which has been uneven). Land issues remain central to what happens to the urban space. Property rights also need to be established while agglomerations are to be thought over. Most importantly the writ of the state to introduce a new system is essential. However land reform without financial market is useless
Currently only 14 percent of Pakistanis have bank accounts; hence access to finance is very limited. The financial sector needs to be reformed with a keen focus on who it lends to, on what conditions, to what end and how it can be made more accessible across a wide array of stakeholders including individuals, the private sector and the public sector. System of creating/providing credit to these people engaged in small medium enterprises is very important. They require access loans bigger than what microfinance banks offer.
Legislation on government borrowings should be brought forward from current Act framed in 1944. SBP has worked on it when I was Director there. The draft can be made available as and when desired.
Improving Health and Education sectors.
To carry on the War against Terror, Sectarian attacks and general law and order situation.
n State owned enterprises are also in a crisis like PIA, Steel Mill, and Railway etc. They need to be put on workable state.
The regulatory framework needs to be improved. Legislative and empowerment measures must be taken to strengthen existing institutions such as the Federal Board of Revenue and the Competition Commission of Pakistan.
As unemployment among the youth is rising, direct intervention is warranted. Employment guarantee schemes like in other countries can be implemented in Pakistan.
The state has to play a role to incentivize private sector to grow as private sector savings need to be mobilized to bring the economy back on track. At the moment private sector confidence is zero due to the circular debt issue. Conditions don’t exist in Pakistan to allow the private sector to lead infrastructure led-growth.
Employment as a percentage of population has declined. Industry and formal sector Jobs are not being created and should be a deep area of focus. Several things are important under this. First female rates of participation are essential as they form 50 percent of the demographic dividend. Secondly employment creation through small scale manufacturing can be critical. Thirdly need to look at success stories such as lady health workers program that has created over 10,000 jobs and has had the greatest impact in terms of women’s empowerment, fertility rates, malnutrition etc.
Restoring the tax base is essential to any effort at tax reform. It is also important to ensure mechanisms to tax the very rich in the country. If you can demonstrate states’ credibility, willingness to pay taxes will increase. Hence service delivery needs to be improved.
Develop a tax directory. All tax-payers return and assets should be put on a tax directory as a first step towards transparency.
Clear Tax laws should be prepared and passed through parliament for Services, Agriculture, Wholesale and Retail sectors.
n Revamp the Board of Revenue: Set up a new autonomous revenue authority with no link with the government and hire employees at market wages. The board of revenue is one of the most important organizations for Pakistan’s economy. Practical lessons can be learnt from Latin America.
Bringing the informal economy into the tax bracket: Small scale informal sector is engaged in unrecorded or undocumented economic activity and hence remains unregulated and untaxed. This sector ends up using resources from other sectors and not paying back. They need to be taxed.
Asset transfer from the rich to the poor can occur through taxation, so taxation should be made mainly through direct taxation.
Governance Reform should be made through well-functioning civil service that monitors, evaluates and calibrates and knows when to exit when an intervention fails. They need to work with industrial units just like in Malaysia and Korea. Hence any industrial policy without attaching it to the core element of reform will make it difficult to implement.
Industry interventions need to be context specific and detailed. There are certain clusters, industry or geographical clusters that have a lot potential. This can be addressing bottlenecks of each industry. Such as the soccer ball industry in Sialkot. China and Thailand has new technology. Sialkot needs time to get these resources by becoming efficient and reducing costs. The Gujarat fan industry for instance has issues with labor contracts. So productivity can be enhanced by improving labor contracts. Such interventions have pay offs in the short run.
Across the board policy framework for manufacturing is also needed.
Review the tariff structure.
It seems as if Pakistan’s economy is stuck in a state of multiple equilibrium and in order to get out of this exceptional adjustment needs to be made. Political coalitions must be strengthened, as they are required to push reform. Any reform that is passed must be accompanied by legislative reforms by provincial governments. There must also be a clear political calculus on how to change and bring reform. All of this needs to be strategically thought out by the parliament.

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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