Moreover, reform is viewed more as a change of rules and procedures that individuals who either established, or had grown up in, the control-oriented and rent-extracting environment can be asked to implement. This is our approach to reforms — energy sector reforms, education and health reforms, financial sector and capital market reforms — isolated and stand-alone.

Unfortunately, the economy is more like a machine than a house. All things within it are interconnected. To be able to fix a leak in one place we have to understand the economy as a whole. To an extent donors are also to blame. Since they are strapped for resources they have a natural inclination to exaggerate the outcome of their proposed policy interventions.

Such expectations have resulted in inadequate and poorly sustained support for reforms, leading to aborted programmes although these are essentially on the right track. The transmission mechanism through which policies lead to expected outcomes is not that straightforward. There are several steps in the process that are subject to uncertainty and delay. So, often it may be necessary to adopt supplementary policies. Without them the final outcomes may fall short of expectations.

This can be illustrated by looking at the mega issue of electricity or power. The common narrative is that by fixing it (as if it can be done in isolation) we can get the wheels of the economy moving. On the face of it, a one-time effort, even if it involves the ‘printing of Rs400 billion’, would improve the availability of power. However, without some decisions of a fundamental nature that would go beyond the realm of the electricity sector this money will only get us mileage for another two or three quarters, after which the problem of circular debt would rear its ugly head again.

It would not be a sustainable strategy without a whole range of far-reaching policy adjustments, demanding that tough political choices be made and provoking strong reactions from powerful vocal lobbies — easier said than done. Before I explain the broader links it is important to note that contrary to the popular myth being peddled by many a political leader that this issue can be resolved in a matter of months, we will continue to experience loadshedding for the next two decades, although the number of hours can be reduced by effecting a variety of policy changes.

To begin with, we have the issues of:
a) under-priced energy — the cost of provision (ensuring no theft is simply impossible given the strength of the labour unions colluding with the officer cadre) being higher than the tariff being charged to consumers;

b) the distorted tariff structure which is higher for ‘bulk consumers’/industry than for domestic consumers;

c) consumers of electricity paying their bills regularly in Punjab being punished through higher rates, to pay for free electricity being provided to residents of Fata, Wapda employees, rich farmers in Balochistan, etc. and the higher level of theft in Sindh, KP and Balochistan.

How will these be addressed as they will require a different institutional structure eg DISCOs, or electricity distribution companies, being transferred to the provinces with electricity being provided at provincial boundaries at a uniform price for tariff determination by them? Or should they be privatised? This in turn will require legislative changes regarding the National Electric Power Regulatory Authority’s future role and empowering provinces to set their own tariffs for each DISCO.

As all this will have to be routed through the Council of Common Interests will Sindh, KP and Balochistan accept an arrangement immediately requiring a sharp revision in rates that would be applicable for higher levels of leakages?

Bringing down the price of electricity will require massive investments in hydel power and development of coal (even if we factor in the decline in world energy prices over the next decade thanks to technological advancement and shale gas discovery). Each project would require more than seven years to complete — a period that is beyond the tenure of any government and during which there will be continued loadshedding and the use of scarce funds for schemes with limited visibility and no immediate political returns.

For reasons ranging from country image, an inadequate supporting infrastructure, the tortuous experience of independent power producers in getting paid on time for supplying power etc it will be difficult to attract significant volumes of private investment. And the government will hardly be in a position to provide the required level of funding without an enormous increase in tax revenues, a restructuring of its development programme through the abandonment of some projects (which may involve penalties for rescinding contracts) and delaying others (with the increase in project costs), cutting subsidies on fertiliser, wheat, etc.

Moreover, a decision will be required on the allocation of a scarce resource — gas — an important input for keeping energy prices affordable. Should this heavily ‘subsidised’ gas be used for power generation rather than as fuel for CNG and industry, or for fertiliser production? This would require a decision on its import and the level of subsidy that the government will be in a position to afford, apart from the cost of suspending provision of gas to five fertiliser companies in which huge investments have been made.

It would also need a change in the bizarre policy governing the determination of tariffs of gas companies SNGPL and SSGC. Presently, they are entitled to a 17.5pc return on assets, which creates incentives to expand systems to add on more consumers for an already scarce resource.

And so on. So, to summarise the arguments above, not only will resolution of the issues of the power sector take time they will also require broader policy reform, well beyond sectoral boundaries, the basic premise of this article.

The writer is a former governor of the State Bank of Pakistan.

Still-high inflation — even if it has declined, partly because of controversial methods of its estimation and partly owing to the deferment in administered price increases of electricity, gas and petrol — continued postponement of fundamental structural reforms and an uncertain international environment have also contributed to the macro-
economic management challenge.

These outcomes have been discussed in the media by a host of analysts and donors. This article attempts to review the composition of the low 3pc average annual growth in the last four years.

It is revealing that the two principal production sectors of the economy, agriculture and manufacturing, have performed rather poorly, with much of the growth driven by the services sector.

Despite the attractive incentives offered by government in the form of higher support prices (for wheat) and subsidies to inputs (fertiliser) and increased global commodity prices the average annual growth in agriculture was just over 2pc.

Resultantly, its contribution to growth was less than 12pc; and even within this, 83pc of the sector’s contribution came from the sub-sector of livestock, whose growth rate of 4pc per annum in real terms is not based on actual but assumed projections which simply overstate its contribution. The contribution of crops was rather limited.

In the same period the contribution of the manufacturing sector was 20pc, with almost the entire increase coming from the small-scale manufacturing sector. Again, as in the case of the livestock sector, the contribution of small and medium enterprises is not actual but assumed at an annual average of 7.5pc in real terms. This is difficult to defend given:

a) the extent of loadshedding, which affects this sector more because it does not have the financial wherewithal to purchase and maintain its own power supply and remain competitive;

b) this sector does not function in isolation — it buys and sells goods to the formal sector and ought to be affected by the ‘fate’ of the formal sector; and;

c) the extension of the road network which has improved access of the formal sector to local markets which were previously sheltered for local enterprises. The contribution of the large-scale manufacturing sector was more or less flat during this period.

On the other hand, the services sector contributed almost 60pc of this growth — although its contribution is likely to be even higher because a major portion of the sector is undocumented — with almost half of it from expenditure on public administration and defence/security. This includes the increase in the share of ‘community services’ as a result of the deteriorating law and order conditions.

In fact, given the manner in which national accounts are produced, economic growth can be enhanced by simply increasing the budget deficit through overstaffing and salary revisions at a rate higher than inflation, which happened in our case, with more than a doubling of salaries of civil and military personnel over the period.

Moreover, much of this GDP growth has been enabled by consumption, with a rapid fall in the level of investment from 22pc to 12.5pc, with the share in investment of the key job-creating sectors of large-scale manufacturing and transport and communication declining sharply from 45pc to a mere 14pc.

The fact that the government tried to keep fiscal deficit in check, albeit with limited success, through cuts in development spending on infrastructure (especially energy) and much-needed social sector spending is likely to have contributed to the dampening effect on growth.

Owing to energy shortages, there is a fair degree of under-utilised capacity that can stimulate a higher growth rate from the existing stock of machines. However, for pushing up the growth to higher rates, investment in equipment, infrastructure and skills will be required. But easing these key constraints to growth and productivity will take time and such investments also have long gestation periods.

Furthermore, enhancing the growth rate will require resources for investments which in turn require a higher rate of domestic savings to generate these investible resources, because of the continued uncertainty — for a variety of reasons — of non-debt-creating external funds in adequate amounts. In other words, the savings required to maintain high rates of investment will have to come from domestic agents, the government, the corporate sector and households.

Pakistan’s experience suggests that the government will continue to be a ‘dis-saver’ in the foreseeable future, its revenues not enough to meet its annual operational expenditures. Given the nature of our tax base and our taxation systems it would be too much to expect a major breakthrough on the revenue front, while there will be continued heavy demands for defence, loss-making public-sector corporations like PIA, Railways, Steel Mills, etc. and debt-servicing obligations.

It is also difficult to see how household savings can rise astronomically to make up for this shortfall, especially since such savings are in themselves a function of growth and only sustained growth can push up the propensity to save appreciably.

To summarise, domestic savings must increase to finance the investment required for propping up the growth rate since inflows from abroad are not likely to be forthcoming easily, and in any case there are implications of using externally borrowed money.

In view of the constraints described above to raising savings dramatically in the foreseeable future, the average annual rate of growth for the next three to four years, even with a business-friendly government in power, will at best be between 4.5pc and 5pc.

This will be largely through improved capacity utilisation and that too provided some of the electricity/power sector issues are resolved, and notwithstanding the contribution to savings and investments by the informal/black sector not picked up by official statistics.

The writer is a former governor of the State Bank of Pakistan.

Not the least of these is the productive absorption of a massively sized restive, dispirited and poorly educated young labour force with limited skills. Its restiveness stems partly from the unrealistic aspirations stoked by political parties seeking power.

Tackling these challenges for pushing the economy onto a higher growth path on a sustainable basis will be tough owing to the structural factors that have been a drag on Pakistan’s growth prospects. These can only be addressed in the long term, a time period out of sync with the time cycle of political governments or the legitimate concerns of those affected.

Despite the formidability of these constraints there are huge expectations of the ‘new coalition’ government likely to assume office (if recent opinion polls are to be believed) sometime in May. This writer, like all other Pakistanis, wonders if the next government will have the wherewithal and political determination to induce such reforms, even if by stealth.

So, what can one pragmatically expect over the next four to five years from it, considering the social background of the leadership — since many of them are either non-taxpayers or pay a piddling amount in comparison with their earnings that support their fancy lifestyles. And these powerful interest groups have historically been fairly successful in resisting reforms, which would entail a dilution of their elite/class privileges and patronage powers.

Given the performance record of the leadership likely to lead this coalition (unless the Pakistan Tehreek-i-Insaf’s ‘tsunami’ actually hits our shores, depending on how the seemingly popular demand for ‘change’, especially of first-time young voters, translates into votes for Imran Khan) we should not expect a sea change in economic decision-making.

In this writer’s view the quality of governance and degree of administrative competence should certainly improve. These positive features combined with a pro-business stance should buoy up investor sentiment, facilitating the creation of job opportunities.

All this should raise the level of economic activity, thereby setting into motion a virtuous cycle for a self-sustaining growth process. However, for economic growth to acquire the rates needed to productively employ the burgeoning labour force on a sustainable basis fundamental structural reforms involving a decisive and permanent shift in direction have become unavoidable.

This raises the question of whether such a government would be able to initiate some of the necessary reforms, say in the first 100 days of its tenure — generally characterised as the ‘honeymoon period’.

In my opinion nothing close to the minimum reforms needed will ever get launched, at least until 2014 (when the Americans are targeting to exit Afghanistan).

The quality of economic and financial management and expenditure prioritisation of potential contenders for power (as displayed in the provinces that they either ruled or where they were important coalition partners in government) should disabuse us of any such notion.

No serious effort to reform property tax and general sales tax on services (provincial subjects) and to collect tax on agricultural incomes (these incomes are taxable under a relevant provincial law — except that all those sitting in our legislature refuse to pay their dues) bears testimony to this claim.

The technocratic solutions are well-known. The trouble, however, is that there is no constituency for serious reform, considering the long slog out of this valley of despair and the pain that will accompany the correction these wrenching imbalances, albeit on the basis of the ability of different social classes to bear this burden of adjustment.

Who will initiate these basic reforms and how will they be launched? It is chronically difficult to tell home truths to people whose votes are being courted, since sacrifices will have to be more broad-based than hitherto realised.

No political party would be prepared (they have not even hinted at these in their manifestos) to:

a) phase out subsidies on wheat and fertiliser;

b) raise electricity and gas tariffs to levels required to eliminate the circular debt and create conditions to eliminate its recurrence;

c) privatise public-sector corporations like Pakistan Steel Mills, PIA and electricity distribution companies;

d) downsize a bloated state structure at the federal level (especially with the hiving off of several formations to lower levels of government under the 18th Amendment);

e) change the general orientation of government as an employment agency which has resulted in Islamabad having three times the number of ministries to cover the same subjects the US does, despite the fact that the latter has 140 million more people and an economy 75 times ours.

Given our national style of governance (of perpetually looking towards the international community for handouts to pay our bills) we should, therefore, not be surprised if the new government simply tries to buy time — a strategy that runs contrary to the experience of all democracies that the best time to implement difficult decisions is in the early days of a government.

So, perish the thought that there will be any meaningful reforms in the foreseeable future, unless our external benefactors decide to walk away, forcing us to fend for ourselves. Maybe we will then learn to swim. That we could eventually drown is the default option that we seem to be unwittingly (or is it wittingly?) pursuing.

It appears, therefore, that we will continue to bump along at the bottom until we finally hit road blocks that we will not be able to surmount, because we will not have the economic, political and social strength to remove or overcome them.

The writer is a former governor of the State Bank of Pakistan.

This article argues that if there is to be a new Fund programme there are three key aspects, other than its content/prescriptions, that are of relevance: its timing, its ownership and the nature of the crisis that it will be attempting to avert.

Take timing and ownership. Even those with a cursory exposure to our style of governance (of buying time, complacently thinking that the world cannot ignore us!) and manner of financial management would know that the extent and quality of our preparation for any crisis (which most commentators regard as inevitable in the foreseeable future) continues to be casual.

However, it would be difficult to predict exactly when the tipping point will arrive. The caretaker government would have a limited mandate to only hold elections and, at best, check the hemorrhaging of scarce resources and financial extravagance and low priority spending — especially to safeguard the external accounts. With restricted responsibility and no moral authority, it would hardly be in a position to negotiate a programme with the Fund.

Our history of repeated failures of IMF programmes — over a dozen by now —should force both parties to undertake a dispassionate review of the more recent disappointments. An honest appraisal of the scope of previous programmes, the prescriptions and the time frame for their implementation, should compel both parties to think afresh because yet another Fund programme is destined to fail without ownership by the government assuming power after the elections, resulting in the IMF blaming us for having signed on but not meeting our commitments. Rather conveniently for the Fund, it would be our fault, yet again.

In other words, for holding the new government accountable, the timing is not right.

Next, what crises would such a programme supposedly address? Our well-known problem is our stressed external account and the worry about our inability to meet our external obligations on time, even if our past record is by and large exemplary on this front.

Our foreign exchange reserves without additional flows from our benefactors (or sudden substantial inflows of remittances through the official system) are barely able to finance two months’ imports and are projected to fall to more perilous levels (below $6 billion) by the end of June. Hence the concern that we could go belly-up by end of calendar 2013, without adequate funds to repay our foreign lenders.

The other nature of the crisis could take the form of market sentiment taking a turn for the worse, betting against the rupee and forcing its ‘freefall’. Since the rupee is overvalued by seven to 10 per cent and needs adjustment anyway such an event, a default outcome, may just be a blessing in disguise — supporting exports and discouraging imports.

But what would constitute a freefall with all its political and economic implications, its value crossing Rs110 (although, for essentially a short period, exporters by holding back their receipts and overseas Pakistanis their remittances, would increase pressure on the rupee)?

Luckily, our banking system is not integrated with the global financial system and given the country’s image large transfers to Western financial institutions from Pakistan would not be accepted. Furthermore, if it were possible for speculators to borrow large sums of money or liquidate other assets (like property) hurriedly to accumulate dollars and ferret them abroad then the situation would be much more worrisome.

In reality, there are severe limits to the credit that would be available for financing such transactions and on the amounts that could be transferred abroad. Hence, speculators would have to cash rupee deposits or quickly dispose of other assets to convert into dollars.

The speedy sale of assets would lead to a lowering of their price (a disposal at a relative loss) because the market would sense this as a distress sale, inducing a correction in the strategy of the speculators. In other words, an automatic stabiliser, a self-correcting mechanism, would come into play.

Our Achilles’ heel could be the foreign portfolio investment in our stock market (with a market capitalisation of Rs340bn, approximately $3.5bn) and the revenue reserves available with the multinationals in the country for repatriation as dividends. These two factors could reinforce the downward spiral of the rupee as portfolio investors seek a hasty exit and panic-stricken foreign companies transfer reserves to the head office’s coffers.

To summarise the arguments above: a) the timing for getting programme ownership is wrong; b) it is not possible to precisely predict when the crisis involving our default on our external obligations may occur; and c) we need a better analysis of the risks and likely outcomes.

However, the above arguments do not in any way dilute the need to be mindful of the pressures building up on the external front. As the deputy chairman of the Planning Commission is reported to have put it, rather well, this already diagnosed chronic heart patient is carrying on with its leisurely lifestyle, despite running cholesterol levels of 600, smug in the knowledge that it has not had a heart attack.

We can ignore such symptoms at our own peril, although when it will cause sudden death may be difficult to foretell accurately.

In other words, we should continue to engage with the Fund as well as undertake a serious analysis of the risks and the politically marketable limitations of measures to address our problems. It is highly disturbing that none of the political parties have even touched upon this issue in their manifestos or public pronouncements.

The writer is a former governor of the State Bank of Pakistan.

Whereas there are 3.1 million holders of NTNs (national tax number), less than 800,000 had filed income tax returns in 2011/12. What is even more startling is that of the 47,800 companies that have NTNs less than 16,500 had filed income tax returns as against 400,000 industrial electricity connections. Again, while there are 3.2 million commercial electricity connections less than 50,000 file income tax returns.

Revenues can be raised through the broadening of bases, improving the equity of the tax regime, incentivising documentation and checking evasion by embracing a zero tolerance policy. Following good results of tax mobilisation initiatives, individual and corporate income tax rates and the GST rate could be lowered under a phased programme.

To this end, income tax reforms in this country are overdue. They should include:

a) Taxation of all incomes of same levels equally, irrespective of source.
b) Legislation that will render all benami transactions illegal.

c) To give a clear signal of a no-tolerance programme all cabinet ministers should be subjected to a detailed tax scrutiny throughout the period of office.

d) Making public tax returns and wealth statements of all parliamentarians and holders of key public offices and their spouses (including secretaries, chief justices, chief of army staff, governor State Bank, auditor and attorney generals) during the period of office and one year thereafter.

e) Greater reliance on technology for tracking commercial transactions to identify potential tax evasion/evaders.

f) Periodically reconcile property tax registers of all provincial governments, names of credit card holders and members of private clubs with those allotted NTNs.

g) Learning from our experience of what works and is accepted domestically and to encourage documentation of the economy, all presumptive taxes should be replaced by withholding taxes whose rate should be increased to incentivise documentation.

h) To prevent tax arbitrage by major shareholder executives the tax differential between the highest individual tax rate and the corporate income tax rate should be narrowed sharply, if not fully eliminated.

i) For individuals there should be a minimum asset tax of say two per cent which should be allowed as tax credit. Such a measure is being proposed for reasons of equity and for ensuring that large farmers end up paying some tax, considering the poor success that provincial governments have had in collecting tax on their incomes.

j) Any CNIC holder receiving remittances of more than $50,000 a year should be required to pay a tax, say at five per cent, on receipts in excess of $50,000.

k) Bills in excess of Rs10,000 per month of domestic and all bills of commercial consumers of electricity should be subject to a withholding tax of 10 and 15 per cent respectively.

l) Provincial governments should tax agricultural incomes, using lease rates in the area or the revised produce index units as proxies of taxable income from agriculture.

m) To augment revenues from the underexploited provincial property tax, “rental values” for determining the property tax liability of residential accommodation should be assessed at one per cent of property “market values” (as against the return of four to six per cent actually earned as rental income on properties), with a small tax credit for self/owner-occupied residential properties). For commercial properties the “rental values” should be assessed at three per cent. The DCO rate used for stamp duty purposes should be used as a proxy for estimating this value.

In the case of GST the following reforms are proposed:
a) To incentivise transactions in the formal sector, the rate for sales to entities registered for GST should be 12.5 per cent while for the unregistered it should be retained at the base rate of 16 per cent the latter being the rate that is charged to the final consumer.

b) For extending sales tax to retail trade a single-stage sales tax should be levied by a provincial government based on location, shop area and nature of business. Such a proposal will check official discretion and will be simple to implement, while ensuring a level playing field by bringing everyone into the net.

For customs duties:
a) To both enhance revenues and simplify the tariff structure there is a need to consider levying a minimum rate of duty on all imports other than those protected by sovereign agreements (currently Rs1 trillion worth of imports are duty free).

b) We have a highly distorted tariff regime that levies different rates of import duties on the same material based on the consuming industry, thereby creating opportunities for “extracting rent”. There is a need to simplify the tariff structure further by considering a system of “one-chapter one-rate”.

To address the issues related to the Afghan Transit Trade:
a) To check the abuse of the ATT facility we should consider incentivising use of Pakistan Railways for transportation and applying technology-tracker and GSP systems.

b) We should consider using quantitative restrictions for items prone to smuggling.

On administrative measures, the focus should be on improving the quality of FBR’s data warehouse and IT systems; ensuring that the taxes collected by the “withholding agents” or from the end consumer as GST are eventually deposited in the governments’ coffers; and on audit/tax notices being generated electronically stating in detail the reasons why the system raised the notice. To check collusion two tax officials should be required to sign the notice and interview the assessee.

This should represent the minimum tax reform agenda for any new government to assume office after the forthcoming elections since the continued postponement of fundamental revenue, expenditure, policy and institutional reforms is no longer sustainable.

The writer is a former governor of the State Bank of Pakistan.

Predicting when a crisis will hit us is difficult. Will the process be slow and painful as reflected in the symptoms mentioned above and a low growth rate or will we reach the tipping point suddenly?

This article looks at the key structural issues underlying this precarious situation because Pakistan faces a population bulge for almost the next 35 years for which it needs to quickly ramp up its growth rate; 230 million are projected to be in the labour force by the end of that period.

This huge number of young men and women will have to be provided productive jobs to avoid social unrest and reduce the recruitment queues for Taliban-like forces. The economy must grow at eight per cent per annum to accommodate these annual entrants to the labour force, as against the average rate of five per cent that we have achieved since the 1970s and the lacklustre average of under three per cent over the last five years.

Can this shift to a higher growth path be achieved on a sustainable basis? While, for reasons of efficiency, the bulk of this growth must come from the private sector, achieving such growth rates will:

a) Require a much higher rate of investment than our average historic rate of less than 19 per cent of GDP and the present rate of just 12 per cent. To generate a growth rate of around eight per cent per annum over a 30-year period will require an investment ratio of 30 per cent plus — the East Asian Tigers averaged 30 to 35 per cent while India is now averaging just under 40 per cent and China 46 per cent;

b) Necessarily require a sharp increase in domestic savings (less than 15 per cent of GDP for most of our history compared with India’s 35 per cent) to finance the investments needed to attain and then maintain such rates of growth. This large historical gap of four to five per cent of GDP between our investments and savings was financed by external flows, essentially in the form of foreign loans, leaving little room for making mistakes in the selection of projects or allowing large amounts as ‘leakages’;

c) Need continued improvement in the productivity of the resources — capital and labour — employed. Higher growth rates will not only require more capital but, more importantly, higher productivity from all factors of production necessitating a combination of greater technological progress and more efficient use of these inputs. Between 1970 and 2005 increases in productivity contributed only 20 per cent of the growth in our GDP, while between 1998 and 2008 its contribution fell to a mere 11 per cent, well below that of India, Sri Lanka and Bangladesh.

The impediments to productivity increases include availability of reliable energy at reasonable rates, an educated, skilled and healthy labour force and entrepreneurial and managerial skills. In our case entrepreneurial skills have not developed, partly because of the history of our state providing different industries protection against competition through policy crutches.

The deficiency in managerial skills is a product of our weak educational systems, poor work ethics and incentive structures that do not create a demand for professional skills. An entrenched culture of SROs to protect different sub-sectors of industry renders irrelevant the need for quality skills to improve industrial competitiveness.

Going forward we will have to look at domestic sources to meet our growing investment requirement, since international capital flows are destined to become more volatile, while the ‘poor country’ image will only make it more difficult to access such funds at affordable rates. This will require more savings both ‘public’ and private. How will these be raised?

Private savings can be stimulated through incentives and the right mix of economic policy and financial, regulatory, goods and labour market reforms, institutional reforms (the last in the form of better and more accountable civil service structures), availability of skilled labour, technological readiness, etc. — the “software of growth” that the Planning Commission argues for.

These are expected to boost investment rates by reducing the cost of doing business. Most of these reforms will not require sizeable volumes of expenditures to implement but will make businesses profitable, thereby providing an incentive to save and invest — a virtuous circle.

Reforms to facilitate private investment and savings will need to be supported by complementary government investments in physical and social infrastructure. However, the financing of infrastructure, education, health, etc. will require significantly large resources. Unfortunately, our resource-generation record has been too abysmal to fund such spending.

We have one of the lowest tax-to-GDP ratios and even among developing countries we rank at the bottom in terms of the proportion of population registered as taxp ayers — less than five per cent of household population.

Moreover, these limited resources are deployed on the basis of skewed priorities (for example on roads whereas the major constraint to growth is availability of energy at affordable prices). And the issue here is not just the creation of more assets — schools, hospitals, etc. but ensuring that there are adequate budgetary allocations for doctors, nurses, teachers and medicines, etc to keep these facilities functional, and provide decent services.

The enhancement in these public savings can only come through a credible time path for bringing the fiscal deficit under control — more tax revenues and less unproductive expenditures as a percentage of GDP. The increased fiscal space will enable the financing of social sector expenditures and physical infrastructure, an outcome that will require more than just higher rates of economic growth.

Future economic growth will also face a slowing down of demand in our traditional export markets of Europe and the US, who are struggling with their own problems. To overcome this demand insufficiency for our products, we will have to look towards the East, especially our neighbours, with young consumers and growing markets, as opposed to aging populations and contracting Western markets.

It is not quite clear how well prepared any of the political parties is to address these challenges.

The writer is a former governor of the State Bank of Pakistan.

The Institute of Public Policy, Beaconhouse National University, has undertaken a major study (of which this writer was one of the authors) on the potential of, and gains from, further trade liberalisation with India. This article attempts to summarise the findings.

Both countries have made major concessions recently. Pakistan has eliminated its ‘positive list’ and opted for a shorter ‘negative list’ of 1,209 tariff lines, resulting in a sharp increase in tariff lines importable from India. This list will be replaced by a briefer ‘sensitive list’ following the granting of full MFN status to India. The latter has reduced the list of items that Pakistan cannot export to India by 30 per cent and declared its intention to reduce the sensitive list to 100 items and lower the duty rate to five per cent by April 2013.

However, our analysis shows that although India has ostensibly opened up its trade regime for products from Pakistan through a reduction in the number of items on its sensitive list, the concession is less liberal than it appears. When the items on the sensitive list are quantified on the basis of the eight-digit level of HS Code, the number of tariff lines in India’s list at 1,753 is significantly more than the number of tariff lines, 1577, in Pakistan’s sensitive list for India.

Furthermore, Pakistan has given preferential treatment to far more tariff lines for imports from India; India’s sensitive list only grants preferential treatment to 65 per cent of Pakistan’s exports, and is heavily loaded with agricultural and textile products in which Pakistan has a comparative advantage. Pakistani exporters also have to negotiate more than a dozen legislations, a plethora of standard setting and certifying agencies implementing multiple laws and regulations that make trade in agriculture more restrictive. Indian has high import duties, ranging from 30 per cent for most produce to 70 per cent on rice and 100 per cent on wheat.

This protection comes despite massive subsidies on agricultural inputs borne by the Indian and state governments of close to $50 billion per annum, amounting to 15.3 per cent of production and 5.2 per cent of GNP, compared with Pakistan’s agriculture-related subsidies of less than one per cent of GDP and tariffs ranging from five to 10 per cent with zero duty in the case of cotton.

On many of the value-added items of textiles in India’s sensitive list the duty is the higher of the rate of 10 per cent or a specific duty. For several products the ad valorem equivalent of the specific duties exceeds 100 per cent. The maximum duty, excluding automobiles, in Pakistan is 30 per cent,

The composition of India’s sensitive list is particularly important for Pakistan because India has reduced more sharply its sensitive list for Bangladesh and signed an FTA with Sri Lanka. For example, India’s sensitive list comprises only 25 items in the case of Bangladesh. This has helped Bangladesh increase its garment exports to India by 46 per cent in 2011/12, inducing fears that the exceptional access to India’s markets, while denying Pakistan a ‘level playing field’, could incentivise flow of investment capital outside Pakistan to Bangladesh and Sri Lanka to take advantage of the more liberalised trade environment for these two countries.

This is particularly important because India, with its more diversified industrial structure and export base, is likely to gradually move out of textiles, opening up opportunities for countries like Pakistan and Bangladesh in the large Indian market.

The study projects that India’s exports to Pakistan in the next three years will grow from $1.4bn to $6.3bn with a significant proportion of this increase representing the shift to formal trade of items that were being ‘informally traded’. Pakistan’s exports to India in the medium-term are projected to increase $300 million to $1.3bn

Trade liberalisation with the granting of MFN status to India, the implementation of tariff reductions under Safta and the induction of structural reforms in Pakistan is projected to push up the country’s GDP in the medium-term by a ‘moderately favourable’ 1.5 per cent to a healthy four per cent.

In the case of the more cautious assumptions for the ‘modestly favourable’ outcome: Pakistan’s private investment will rise from 1.25 per cent of GDP to 4.2; there will be a net increase in employment of approximately 170,000; prices will decline by around one percentage point; the current account will become a surplus of more than $1bn; fiscal deficit will increase by Rs130bn, even though tax revenues are expected to grow by Rs70bn; the average gain for consumers is estimated at Rs2,300 per household.

Therefore, Pakistan should grant India MFN status to exploit opportunities created by trade preferences under Safta as well as seek relaxation of India’s non-tariff barriers and tariffs; the latter mainly through a revision by India of its sensitive list, involving the removal of agricultural and textiles items in which we have a comparative advantage. However, India will only give these concessions as a reciprocal gesture for being accorded MFN status.

Moreover, by changing the composition of the sensitive list, employing appropriate safeguard measures provided for under WTO rules and Safta provisions and by lowering duties on raw material and intermediate goods used by industries likely to be threatened by imports from India, Pakistan can prevent any ‘serious injury’ to different manufacturing sub-sectors.

The instruments available to us to prevent ‘material injury’ to some of our industries include: amending the sensitive list by excluding the large number of tariff lines relating to textiles and clothing and substituting them with tariff lines from threatened industries; improved efficiency and competitiveness of threatened industries by reducing duties on their raw material and intermediate goods; providing some protection to agriculture by raising tariffs moderately and eliminating zero duties.

Checks on predatory behaviour by Indian entrepreneurs should entail strengthening the legal framework pertaining to safeguard measures. Some industries outside the sensitive list may end up getting ‘negative protection’. Pakistan should establish a tariff anomalies commission to avert material injury to such industries The timing of this trade liberalisation coincides with a tricky period for Pakistan’s balance of payments. If in the short run there is a significant increase in imports from India without a perceptible increase in Pakistan’s exports we can consider invoking Safta provisions that allow a country to provisionally suspend the concessions.

Today there is a huge window of opportunity to speed up the project of integration. The timing is also better because traditional markets for South Asia in the West are slowing down.

To change the existing narrative the dissemination of gains from trade and the costs of non-cooperation must be carried out imaginatively, since most benefits will come in the future and initially Pakistan’s trade deficit with India will widen, making it more difficult to persuade influential detractors that obstacles are more imagined than real. So as not to jeopardise this shift India will have to be more generous in its approach to Pakistan, creating opportunities for it, especially in agriculture and textiles.

The writer is a former governor of the State Bank of Pakistan.

The reasons for the depressed rate of private investment (now the lowest in our chequered history) are missing complementary public-sector investments (especially in energy-related infrastructure). This is because of skewed priorities, and the lack of a supporting policy, institutional setting and a decent milieu for governance.

Public investments in physical and social infrastructure augment the supply side for the private sector. In our case, however, the government has slashed the size of its development programme to accommodate burgeoning expenditures on subsidies and to finance growing losses of public-sector enterprises like the Water and Power Development Authority/Pakistan Electric Power Company, the Steel Mills, PIA and Pakistan Railways.

The effects of the cuts in development expenditure accumulated in recent years are beginning to take their toll; they are reflected in the continuously expensive and unreliable supply of energy and other utilities.

Moreover, the recent lowering of interest rates (whatever the rationale) will not be enough to raise industrial-sector investment. Given a struggling economy the banks have been reluctant to extend credit to the private sector. The banking system has simply become a sophisticated post office for transferring household savings to government even at increasingly lower interest rates.

Furthermore, the institutional reforms required to improve the environment for private investment remain unaddressed. The government has not been able to maintain law and order that will ensure safety and security of life and property and ensure contract enforcement.

Nor have successive governments been able to keep the policy environment consistent or predictable. On several occasions policies have been changed after some players have made investments, i.e. after the initial investment has been locked in. Such behaviour has worked to the disadvantage of the first investor/mover. Thus, after some hiccups and losses there are hardly any investors prepared to become first-movers. Consequently, there is little investment in highly regulated sectors or in those requiring heavy resource commitment and with longer gestation periods.

It also defies logic that official circles should expect the private sector to take a long-term view when formulating its investment plans even when the government, for its own seemingly understandable reasons, takes a short-term view.

The private sector must take the lead from the government and adjust the time horizon of the payback period of its investments to bring them in consonance with the signals emanating from the government. After all, the investor acts under a great deal of uncertainty. Any investment in an asset other than financial is irreversible, as it cannot be undone. When an investment decision cannot be reversed, the opportunity cost of investment is the cost of “waiting”.

In Pakistan, investor risk, and thereby the cost, has been rising sharply in recent years. The reasons behind this are not just the poor law and order situation, political uncertainty and the unpredictability of government policy.

The reasons are more than the manner of implementation of enunciated rules and regulations reflected in the non-uniform application of discretionary powers, the general attitude of the revenue collecting and regulatory agencies, a deficient infrastructure (especially related to energy), proliferating corruption at the decision-making level and the lack of adequately skilled labour. They are also because of recent disturbing developments.

The latter refers to the increase in the number of ill-informed (but pretending to be all-knowing about issues and solutions), seemingly well-intentioned actors, including the more assertive parliamentary committees, important state institutions, civil society organisations and the hyperactive media, any of whom is now able to put a spanner in the works at any time.

Having limited, if any, expertise or training to understand complex economic policy issues does not seem to deter the latter set of players from holding forth on literally any subject.

Regrettably, as also argued by Ishrat Husain, their intrusiveness has not only increased investor risks and the insecurity of investment, thereby weakening investor confidence, it has also made civil servants risk-averse to taking decisions that are badly needed for attracting investments in areas critical to growth. Such developments are further worsening the investment environment and the costs to the economy of postponed investments in areas the government, running up huge budgetary deficits, does not have the resources to finance.

The head of a leading industrial group summed up rather well the dilemma that Pakistani entrepreneurs face. He says that he can handle the increased competition from China and India (whenever we finally grant the latter most-favoured nation status). However, it is Islamabad and the new set of actors that he is infinitely more scared of. He finds them the more formidable, and easily the most unpredictable, opponents.

Given recent developments he wonders if this period of transition, during which each player finally becomes mature enough to understand his respective role, will end anytime soon, so that new players on the scene and Islamabad, through better understanding and coordination with provincial governments, can become enablers.

In his opinion, preventing them from continuing to be disablers in the foreseeable future will become a real challenge in these difficult times for the country.

The writer is a former governor of the State Bank of Pakistan.

This scribe has been struggling to understand why they visited these shores to ‘negotiate’ a possible programme with a government in its dying days, at a time when Mr Tahirul Qadri was making his own contribution to an already chaotic political situation.

It is simply astounding that in this day and age when all relevant data is easily accessible, available online, or can be transmitted electronically in real time the Fund would send a seven-member mission for two weeks to meet the same officials three times a day.

With elections around the corner the most charitable explanation of their trip this time around and their public announcement that they could be back in February is that they are improving their personal careers and benefits without those designing the programme being liable for the risk of failure.

What is even more disconcerting, however, was that, as usual, much of the ‘negotiation’ process centred around the reduction of the ‘size’ of the budget deficit, by whatever means, with hardly any discussion on the structural issues that have been our bane and which underlie these large fiscal deficits.

The focus continued to be on the production of numbers using excel worksheets for meeting a single objective: achieving a lower, ‘acceptable’ deficit. This obsession has meant that all other policies have become hostage to the fabrication of an artificial number that would please markets and donors, forcing one to conclude that the Fund has learnt little from decades of engagement with Pakistan. This engagement should have taught it how adept we are at playing the numbers game.

The Fund seems quite happy to believe the numbers for revenues and expenditures that have, at best, modest credibility.

Just for illustration take the following cases: the subsidies for fertiliser, wheat and sugar not accounted so far as expenditure in the federal and provincial budgets exceed Rs100 billion; the losses of PIA, Steel Mills and Railways not recognised in the federal budget has crossed Rs350bn; the annual deficits for electricity provision is still not being charged as expenditure, and, building up at an astounding Rs1 million a minute, is more than Rs100bn.

The tragedy is that the Fund has done no real long-term thinking on how to fix our problems, being continuously distracted by its obsession with numbers, nor will it let us develop ours or give us time.

It has lived with this asymmetry for far too long so that all programme failures are sold as our own, while any success is marketed as that of the Fund. The question is: do programmes fail because of lack of implementation or because of poor programme design?

In my view, as in the case of the programme crafted in 2008, the collapse this time around will again be because of programme design. Why is the Fund keen to sign a programme and not the government, thus giving an option to the current set-up to sign a programme and pass failure on to the next government, the ultimate moral hazard?

In its eagerness to design a fresh programme the Fund, yet again, is not letting us come to the realisation that we have a crisis, as we could be confronted with acute pressures on the balance-of-payments position and the rupee by the second quarter of 2013.

Can the Fund, for once, let us face the consequences of our actions or inactions? Sadly, we are just as badly prepared as ever and have not been able to use this opportunity to design our own programme.

It is, therefore, time we all stop repeating past mistakes by concentrating on the magnitude of the fiscal deficit, which is essentially based on phony and fictitious numbers.

What is missing in the Fund’s ‘demands’ is the need for long overdue structural reforms which, as a minimum, should include:

— the discontinuation of commodity financing by the government (its purchases of wheat, fertiliser, sugar etc to subsidise influential interest groups)
— privatisation of state-owned enterprises

— energy sector reforms (by insisting on the deregulation of the sector)
— elimination of the SRO regime

— a fundamental review of the policy framework which is presently producing inadequate growth because it is diverting investment and entrepreneurial energies into unproductive rent-seeking activities. This is creating powerful lobbies fattened on rents earned from protected and sheltered markets.

The strategy of successive governments has been to extract rents for our geo-strategic location and, regrettably, it has paid off each time, enabling us to continually postpone much-needed fundamental reforms. So, while there was a lot of bluster and lecturing at the press conference that the mission organised before its departure I suspect that it could soon be eating its own words.

This writer has argued in these columns before that, contrary to conventional wisdom, one would not be surprised if the Fund, succumbing to US pressure, eventually drafts a relatively soft programme for Pakistan.

If we cooperate and play ball by facilitating their safe and early exit from Afghanistan the Americans should be able to persuade the European members of the IMF board (who may get, in return, softened terms for Greece, etc.) to forge less stringent conditions for the new programme, although we would not get more than $5bn against the $8bn we would be repaying the IMF.

The writer is a former governor of the State Bank of Pakistan.

Disagreements between the viewpoints of the government and the governed need to be understood in terms of the different perspectives from which each side defines an issue (eg what constitutes poverty), analyses policies and examines outcomes. And that combined results when disaggregated into smaller components more clearly reflecting people’s individual experiences may help explain the passionate manner in which differences in points of view are expressed and argued.

The poor, NGOs or groups dealing with less fortunate households believe that poverty has increased in terms of larger numbers (as opposed to percentages of the population) of the poor. This is seemingly confirmed by the growing number of beggars they encounter at traffic lights in the main cities. To them the claim of a decline in the incidence of poverty is not held out by daily experience, especially when they learn from the government that poverty now afflicts only 12.4 per cent of households.

This is compounded by their own experience of a widening gap between individual incomes and private goods and services that can be purchased from this income, e.g., clothing, education, health and housing, and goods and services like drinking water, sanitation, health etc., provided by the government.

Averages tend to be deceptive and whereas the income- and expenditure-based measurement of poverty may be failing, the distribution of this “average” may not be capturing how some members of the household, especially women and children, may be facing malnutrition as a result of the rising share of family spending on food.

Also, this poverty measure may not fully reflect the changing consumption basket, which would render people’s experience of being worse off at variance with official statistics (on inflation and the proportion of households below the poverty line), appearing to suggest a decline in the incidence of poverty and the rate of inflation.

In view of changing consumer preferences (say, resulting in a switch from cereal to other food items combined with an overall switch from food to non-food items), weaker household members being worse off and adjustments in utility tariffs absorbing a greater share of household spending, the official poverty line may well be underestimating the true cost of attaining caloric requirements. This is so especially given the accusations of commentators about deliberate government manipulation of price data for estimating inflation.

But then, there has undoubtedly been some reduction in the incidence of poverty (although the extent of the decline demands more analysis), based on a poverty line determined in terms of income or expenditure required to be able to consume a minimum number of calories a month. This is also partially evidenced by the increase in the size and proportion of a more visible middle class. This increase has come from those graduating from the ranks of less privileged households and not affluent segments falling into middle-class status. In other words, it is the proportion of the poor in the population that must have declined.

However, this may have happened while households cut expenditure on education and health to meet caloric requirements, and the quantity and quality of services provided by the government worsened (reflected only partially in the lowered spending on education and health as a ratio of GDP), without this deterioration showing up in the poverty measure. Income- and expenditure-based measurements of poverty are not designed to capture the ‘quality’ aspect of services.

There may be a lack of schoolteachers of decent quality (either they are not recruited or are generally absent) or health services may be poor (because of staff not performing its duty, lack of provision or pilferage of medicines). In the case of health, the rise in cardiovascular disease and diabetes, which are more expensive to manage, make greater demands on scarce government health services. With a stagnant, if not weakening, ratio of health spending to GDP, not surprisingly, the public perceives that there has been a weakening in the quality of health services provided by government.

There has also been a slow and steady decline in the quality and efficiency of civil servants and government institutions and, resultantly, in the coverage and quality of public services available to the citizenry. The deterioration in the quality of utility services (particularly electricity and gas) has accentuated negative experiences. As explained, none of this is picked up by income- and expenditure-based poverty indicators.

Furthermore, contrary to official claims about improvements in the functioning of domestic markets, the individual and collective experience is that ‘markets’ in Pakistan are characterised by pockets of monopolistic or oligopolistic power structures. And official economic policy is being implemented through structures which do not allow markets to function freely in the classical sense that underlies government claims. The losers are consumers with little voice.

Examples that are highlighted in support of this argument are the money lenders and arthis in rural areas, cement and sugar cartels that regularly and freely manipulate prices, the field day that motor car assemblers — Toyota, Honda, Suzuki — are having with little exposure to competition and the Water and Power Development Authority for its high tariffs partly because of corruption and inefficient operations.

Examples also include cellphone operators with consumers that are charged for a busy network and the large gap between lending rates of banks and what they pay to depositors, even after privatisation of most of the banking system.

The economic policies of governments are influenced by these agents, who have market power and operate in a structure that is not competitive and does not function freely. Hence, the theory and rhetoric underlying government policy appear to be flawed and out of line with practices and reality.

In a system in which most state actors appear to be personally prospering, and the lifestyles of public representatives and civil and military bureaucrats financed from the public purse becoming more lavish, it becomes difficult for the public at large to accept it as necessary that their belts be tightened to lower the level of the government’s budget deficit.

The writer is a former governor of the State Bank of Pakistan.