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EXTERNAL sector problems like the currency crisis have tended to overshadow trade and industry’s demand for an economic revitalisation plan.
The implementation of the Pakistan Tehreek-i-Insaf’s (PTI) 100-day agenda promised by Imran Khan is particularly necessary to make the electoral exercise meaningful. The electorate would expect initiatives for social uplift and job creation.
Businesses would like the government to move fast to put the economy on an even keel and escape deindustrialisation. There are major hurdles in the way forward— the government is cash-starved, the economy suffers from an acute shortage of dollars, and investment in capital formation is half of that in other South Asian countries.
The PTI has promised to create 10 million jobs and build five million low-cost housing units in the next five years. It is a tall order. Will the private sector come to the government’s rescue without incentives?
It is stipulated that the International Monetary Fund (IMF), China and Saudi Arabia may contribute to the much-needed credit to shore up the country’s falling foreign exchange reserves. China has just announced a two billion dollar loan which temporarily strengthened the rupee against the dollar.
Taking a strategic long-term view, the PTI wants to boost taxes under the Scandinavian model of welfare state, which is a unique blend of free market capitalism and social benefits
However, an IMF programme may lead to further depreciation of the national currency. This time many predict negotiations between Pakistan and the IMF to be pretty difficult, and the bailout amount, which Pakistan will qualify for, might not be enough. Some forecast that the IMF may attach non-economic conditionality to its new programme.
In a recent article titled ‘The cycle of mistakes’ published in an English daily, Dr Nadeem ul Haque, a former deputy chairman of the Planning Commission, wrote that the IMF team, expected here in September, may help provide Pakistan “temporary relief as always. Sadly, they are incapable of changing the fundamental weaknesses in the economy; poor policymaking”.
The government needs cash badly with the fiscal deficit hitting 7.5 per cent in fiscal year 2017-18. The gap is proposed to be minimised or met by spiking tax revenues. The PTI manifesto says that the tax administration will be streamlined by widening the tax net through robust tax policy and Federal Board of Revenue (FBR) reforms.
To improve its performance, the FBR will be granted autonomy by reducing the influence of the finance ministry. To further enhance tax revenue, businesses will be incentivised to become part of the formal economy. The party also plans to shift towards direct taxes as the primary source of revenues as opposed to indirect taxes.
However, the private sector has a different view. Late last month, sharing its ‘Make in Pakistan’ vision with Finance Minister Dr Shamshad Akhtar, the Pakistan Business Council (PBC) reiterated that investment in capital formation in Pakistan is very low as manufacturing growth is hamstrung by the burden of taxes.
Manufacturing sector with a share of 13.5pc in GDP contributes 58pc of the tax to revenue. The PBC’s delegation called for “well-aligned government policies” that support jobs, exports and import substitution, realistic exchange rates, etc. It is difficult to raise taxes from agriculture and services sector which largely fall in the informal sector.
How the PTI will incentive these businesses to switch over to the formal sector is yet to be seen. Increasing direct taxes at a time of rising threat to economic growth and transferring resources from the private sector to the public sector may not be a prudent decision.
The federal government needs to shed its responsibility for subjects retained by the federation though devolved to the provinces under the 18th Amendment. Asad Umar, tipped as the next finance minister, says “The problem in state-owned enterprises is not due to over staffing or cost of labour but because of politicised government officers who were managing these units.”
The party proposes to rehabilitate these units with professional management and cut losses estimated at Rs1,100bn. But the Supreme Court’s decision about the salary of CEOs of state-owned companies may pose a problem for hiring qualified professionals with rich experience. Taking a strategic long-term view, the PTI manifesto offers room for boosting taxes under the Scandinavian model of welfare state.
The model is a unique blend of free market capitalism and social benefits funded by voluntary, generous taxpayers and administered by the government for the benefits of all citizens. The citizens have high trust in the government because it delivers top quality social services, including free education and free health for all.
The citizens choose to pay higher taxes in exchange for the benefits they and their family members enjoy. As in the Scandinavian model, the PTI’s concept of Islamic welfare state spills over to “an egalitarian society based on the rule of law and economic justice”.
The Sindh government is trying to traverse a new path. Under the public and private sector partnership, the PPP government in Sindh has entered into 10-year contracts with reputable private sector institutions and non-governmental bodies with a track record to run schools and hospitals under prescribed high standards.
These institutions are paid a management fee. Independent auditors look at their financial performance and independent monitors are responsible for assessing the overall performance. Insiders say it is quicker to provide a better standard of health and education under the public-private partnership model as reforming state institutions is a long haul.
Published in Dawn, The Business and Finance Weekly, August 6th, 2018
