Eco­nomic re­form agenda

Enterprise - - Contents - By Dr Ash­faque H Khan

The con­ven­tional macroe­co­nomic poli­cies ad­vo­cated by the IMF have al­ways fo­cused on sta­bi­liza­tion in the nar­row sense of re­duc­ing bud­get deficit, bring­ing debt un­der con­trol and keep­ing in­fla­tion low. The re­cent ex­pe­ri­ences of sev­eral Euro­pean coun­tries have forced global lead­ers to re­think sharp fis­cal adjustment and the as­so­ci­ated so­cial costs and hu­man suf­fer­ings aris­ing out of aus­ter­ity pro­grammes. They ar­gued for strik­ing a bal­ance be­tween sta­bi­liza­tion and de­vel­op­men­tal roles of macroe­co­nomic poli­cies as en­shrined in the for­ward- look­ing macroe­co­nomic poli­cies and well doc­u­mented ES­CAP Survey 2013.

Pak­istan is cur­rently fac­ing the prob­lems of deficit, debt, de­vel­op­ment and growth which are more or less sim­i­lar to those faced by the Euro­pean coun­tries. Aus­ter­ity pro­grammes alone have not worked in Europe, there­fore, a bal­ance be­tween sta­bi­liza­tion and de­vel­op­ment needs to be well ar­tic­u­lated by the gov­ern­ment. Ad­dress­ing long de­layed struc­tural is­sues and strength­en­ing macroe­co­nomic poli­cies must form the key el­e­ments of a re­form agenda to elicit support from in­ter­na­tional fi­nan­cial in­sti­tu­tions and friendly coun­tries.

A broad- based eco­nomic re­form agenda must in­clude: i) re­form­ing the tax sys­tem and tax ad­min­is­tra­tion; ii) ex­pen­di­ture re­form; iii) man­ag­ing fis­cal de­cen­tral­iza­tion; iv) re­struc­tur­ing and pri­va­ti­za­tion of pub­lic sec­tor en­ter­prises ( PSEs); v) re­form­ing the en­ergy sec­tor; vi) en­act­ing re­forms in the cen­tral bank; vii) im­prov­ing the in­vest­ment cli­mate and viii) pro­mot­ing in­clu­sive and sus­tain­able growth.

Tax sys­tem and tax ad­min­is­tra­tion re­forms are vi­tal for get­ting support from friendly coun­tries. Th­ese coun­tries have al­ready made it clear to Pak­istan that un­less it taxes its rich and pow­er­ful, it should not ex­pect any fi­nan­cial support from them. Broad­en­ing of the tax base will be the most crit­i­cal re­form un­der the tax sys­tem. Pak­istan will have to bring all eco­nomic ac­tiv­i­ties un­der the tax net, which have ei­ther re­mained un­taxed or un­der- taxed. For ex­am­ple, in­come orig­i­nat­ing from agri­cul­ture has es­caped di­rect tax­a­tion thus far. The gov­ern­ment must change that. There are many ser­vices that have also re­mained un­taxed or un­der- taxed. For ex­am­ple, beauty par­lours, in­ter- city bus ser­vices, doc­tors, lawyers, etc., which need to be brought un­der di­rect tax net.

Im­prove­ment in with­hold­ing the tax regime will also be a ma­jor source of rev­enue. This is an is­sue of taxes be­ing col­lected but not de­posited in the gov­ern­ment trea­sury. Bridg­ing the gap be­tween taxes col­lected and de­posited may gen­er­ate Rs250- 300 bil­lion in three years. Po­lit­i­cal dif­fi­cul­ties may ham­per the im­ple­men­ta­tion of full value added tax; there­fore the gov­ern­ment may con­sider cred­i­ble al­ter­na­tive rev­enue mea­sures

in­clud­ing a mod­i­fied GST.

Re­mov­ing ‘ man­u­fac­tur­ing de­fects’ of the NFC Award will be an es­sen­tial el­e­ment of the tax sys­tem re­form. In the pres­ence of the ex­ist­ing NFC Award, no mean­ing­ful fis­cal pol­icy can be im­ple­mented. Pak­istan’s tax au­thor­i­ties – the FBR and provin­cial tax de­part­ments – have been weak­ened to the core. No mean­ing­ful tax re­forms can be im­ple­mented un­less we strengthen tax ad­min­is­tra­tion through train­ing and in­sti­tut­ing the mech­a­nism of re­ward and pun­ish­ment. The gov­ern­ment will also have to im­prove the re­source mo­bi­liza­tion ef­forts of the provin­cial gov­ern­ments.

On the ex­pen­di­ture side, there are many ar­eas that need im­prove­ment. Un­tar­geted sub­sidy is a bad eco­nomic pol­icy. The gov­ern­ment needs to look at the sub­sidy pro­gramme care­fully. The to­tal amount of sub­si­dies ( power, food, PSEs, etc.) has crossed the coun­try’s de­fence bud­get. The power sec­tor sub­sidy must be faded out in a three to five years frame­work by im­prov­ing gov­er­nance as well as by rais­ing tar­iff. The gov­ern­ment may con­sider pri­va­tiz­ing dis­tri­bu­tion com­pa­nies ( DIS­COs), un­der­take the use of gas and coal to gen­er­ate elec­tric­ity, com­plete the on­go­ing con­struc­tion of dams on pri­or­ity ba­sis and strengthen the fi­nance depart­ment of Wapda.

The pri­va­ti­za­tion of bleed­ing PSEs will be a crit­i­cal el­e­ment of fis­cal con­sol­i­da­tion in Pak­istan. Should we re­struc­ture first and then pri­va­tize or go for out­right pri­va­ti­za­tion is a decision that needs to be ur­gently taken by the gov­ern­ment. It should be ab­so­lutely clear that it is not the job of the gov­ern­ment to be in the business of run­ning steel mills, air­lines, rail­ways, gro­cery stores, etc. The sooner th­ese rot­ten PSEs are off­loaded from the gov­ern­ment’s bud­get, the bet­ter it is for the in­sti­tu­tions as well as for gov­ern­ment fi­nances. The gov­ern­ment can save sev­eral hun­dred bil­lion ru­pees which can be used to im­prove the coun­try’s in­fra­struc­ture, ed­u­ca­tion and health.

In sum, the above listed re­forms on the fis­cal side do not ad­vo­cate lax fis­cal pol­icy or en­cour­age fis­cal in­dis­ci­pline. Rather, it gives greater em­pha­sis to do­mes­tic re­source mo­bi­liza­tion through tax sys­tems and tax ad­min­is­tra­tion re­forms on the one hand and gives greater em­pha­sis to the qual­ity and com­po­si­tion of ex­pen­di­ture by al­lo­cat­ing more re­sources to­wards ed­u­ca­tion, health, so­cial pro­tec­tion, and in­fra­struc­ture on the other. Fis­cal re­duc­tion path must be a mea­sured one spread­ing over three to five years. Sharp fis­cal adjustment may bring pain and hu­man suf­fer­ings, which will be coun­ter­pro­duc­tive as well as dif­fi­cult to im­ple­ment.

Like­wise, in the case of the mon­e­tary pol­icy, there has to be more care­ful scru­tiny of the di­rec­tion or dis­burse­ment of credit rather than ag­gre­gate credit it­self. Ac­cess to fi­nance is among the top five business im­ped­i­ments for 93 per­cent of the coun­tries in the Asia- Pa­cific re­gion. Ac­cess to fi­nance is crit­i­cal for small and medium en­ter­prises ( SMEs) and agri­cul­ture as they de­pend solely on the bank­ing sec­tor for ex­ter­nal fi­nanc­ing. The cen­tral bank can play an im­por­tant role in de­vel­op­ment by re­duc­ing en­try bar­ri­ers and pro­mot­ing fi­nan­cial in­clu­sion through changes to the reg­u­la­tory frame­work to en­cour­ag­ing banks to ex­tend fi­nan­cial ser­vices to the poor and marginal­ized. Fi­nan­cial in­clu­sions can go a long way in re­duc­ing poverty and in­come in­equal­ity and in­creas­ing fe­male em­ploy­ment. The gov­ern­ment must con­sider strength­en­ing the board of direc­tors of the SBP by in­duct­ing pro­fes­sion­als.

Fi­nally, im­prov­ing the in­vest­ment cli­mate will be es­sen­tial for pro­mot­ing in­clu­sive and sus­tain­able growth for which more re­sources will need to be al­lo­cated to­wards strength­en­ing the coun­try’s in­fra­struc­ture, ed­u­ca­tion and health. Tax pol­icy re­forms will also help in im­prov­ing the coun­try’s in­vest­ment cli­mate and con­stant in­ter­ac­tion be­tween pub­lic and pri­vate sec­tor will help re­store in­vestors’ con­fi­dence.

The sug­gested re­forms are needed to res­cue the coun­try from the eco­nomic morass it cur­rently oc­cu­pies. Of course, the onus is upon the gov­ern­ment to en­sure the suc­cess of th­ese re­forms by in­duct­ing a team par ex­cel­lence of pro­fes­sional econ­o­mists as well as the bright­est civil ser­vants. A com­bi­na­tion of bu­reau­crats and tech­nocrats is re­quired to im­ple­ment and mon­i­tor the re­form agenda.

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