Spearhead Opinion – 08.01.2019
By Farrukh Karamat
Senior Research Coordinator, Spearhead Research
The economy of Pakistan is confronted by some major challenges as highlighted by Dr. Farrukh Saleem in his recent article – Alarm Bells. Four key takeaways were:
- Net international reserves stand at a negative US$11 Billion.
- The rupee has fallen by 30 per cent and exports have fallen from US$1.968 Billion in November 2017 to US$1.843 Billion in November 2018.
- As of August 2018, the highest-ever budget deficit of Rs.2.26 Trillion or 6.6 per cent of GDP was booked.
- Circular debt has gone up from Rs.1.14 Trillion in August 2018 to a current figure of Rs.1.4 Trillion.
These are worrisome signs that have triggered a spate of debates about the financial and economic viability of Pakistan, with some eminent Economist’s taking an extreme position and some media ‘gurus’ are suggesting that Pakistan is Bankrupt and should declare an economic state of emergency. The fact that these issues were highlighted by Dr. Farrukh Saleem, who till recently has been a part of the PTI government and a strong advocate for them. is all the more troubling. These voices of dissent point to the fact that those within the PTI camp are starting to feel that the government is proving to be incapable of managing the economic situation in an effective and timely manner.
While there has been much fanfare around the sale of state-owned luxury automobiles, buffaloes, and restricted use of state residences these have all been mere optics that have contributed very little to the state exchequer. The ‘meagre’ assistance from KSA has been much hyped, but is insufficient to meet the financial requirements of Pakistan. Similarly, UAE, Malaysia and China have not provided the kind of support that the PTI government was expecting or needed, and the question that begs to be answered is: why should they provide the economic support to Pakistan? The Governmemts pre-election hype about attracting Billions of Dollars through expatriate and overseas Pakistanis appears to have fallen flat as well. The negotiations with the International Monetary Fund (IMF) are ongoing and the recent actions of the government in terms of rate hikes, additional taxes, and devaluation are tacit acceptance of the IMF terms. Yet, the government is not outright accepting the fact that they need IMF support and the structural reforms, which is creating an environment of uncertainty and doing more harm than good for the economy. On top of this the parallel economy, which had for so long sustained the real economy of the country, has started to dry up, under the witch hunt policy of the present government, where anyone can be investigated and pronounced guilty without proper due diligence.
The fact is that the economy is confronted with a serious balance of payments crisis. One of the key areas that requires extensive reforms is Taxation, where there could be considerable upside if the whole process is made objective and structured. The currently emphasis is on raising direct taxes for the already taxed and raising indirect taxes, which is a regressive regime. This is a system that breeds inequality, provides incentives for non-compliance and gives rise to a fear of appropriation that further lowers the incentive to invest. The government needs to focus on expanding the tax base and the capacity for collection without raising rates on the already taxed, and simplifying the tax filing process by leveraging information technology.
An environment of austerity and uncertainty impacts the economic growth negatively and restricts the level of investment in the economy. Devaluation might have made exports more competitive, but there is a need to increase the productivity of the Pakistani exporters through investment in the skill set of the human resources and there is a need to lay emphasis on value addition in exports. The government has to move away from the oft-trodden strategy based on import-led growth, and must provide incentives for investors to channelize their investment into import-substitution industries, though channelizing funds from the real estate sector into productive value enhancing, revenue-generating and employment creating opportunities.
A great deal of emphasis is being laid on the recovery of ‘looted’ funds. A commendable step and one that could help alleviate a lot of economic problems of Pakistan, depending on the quantum and time of recovery. This, however, should be part of the focus and not the sole focus of the government and it should not give an impression of being partial. There is a need to emphasize an enhancement in productivity and revenue generation from real investment, for which policies need to be put in place and confidence instilled in the economic system.
On the international front Pakistan has lost cases in International arbitration against Reko Diqq, Karkey and Broadsheet. The exact quantum of the fines is yet to be finalized, but will likely run into billions of dollars. Apart from the financial burden there is a loss of confidence for international investors and the reputational damage to the country. The Financial Action Task Force (FATF) Grey List is another issue with damaging repercussion for Pakistan. The multi-million dollars fine for Habib Bank and the closure of its US operations; and the decision of United Bank to close its US operations while under investigation are damaging events for the Banking sector, which is increasingly exposed to Compliance issues. There is need to develop a culture of Compliance through effective training within the State institutions to project a positive image internationally and avoid such mishaps in the future, which negatively impact the reputation of Pakistan.
In terms of Human Development Index (HDI) rankings Pakistan ranks a 150th and below the regional average score, with widespread socio-economic inequality and a rapidly rising population. With a slowing economy, fiscal shortages, and the vulnerable macroeconomic fundamentals the risk factors are high. The growth needs to be made equitable and inclusive for a large youth bulge. With slower growth and unavailability of employment opportunities the marginalized segments of the population could become a ticking time bomb with disastrous consequences for the internal security of the nation. At the same time there is the water crisis that is already evident in parts of the country. This is a complex issue based on inadequate conservation methods, contamination of the existing water supply, and illegal water-mining, which is draining the underground water reserves. In cities like Karachi there is a water mafia that is raking in billions through artificial water shortages. There is a need to focus on resolving the issues within the sector to ensure wastage and continuation is reduced as this has a direct link with the health of the population at large. An over-emphasis on the construction of Dams without addressing the real issues plaguing the water sector will not resolve the crisis.
Economic revival is the key challenge for the present government and it is no mean task, after years of neglect borne out of greed and ignorance. For the moment the government appears to be clueless about how to deal with the crisis and its many manifestations on the broader economy. They continue to plug the fiscal holes with the age-old strategy of short-term borrowings, and in the process have failed to provide the much needed long-term economic outlook that was expected from them. Expectations were high, and perhaps too high, from a team that has not managed such a dire situation in the past. It is easy to criticize, but a lot more difficult to deliver and that is becoming increasingly apparent. Pakistan faces multi-faceted challenges in 2019 and there are solutions to the problems the country is facing. Complacency is creating uncertainty, which is detrimental for an already fragile economy. It is time that government springs into action to induce reforms and infuse confidence to bring in real productive investments, rather than embarking on a witch-hunt and rely on the return of the looted funds to salvage the situation.