THE cost-cutting measures announced by Prime Minister Shehbaz Sharif give a good signal in the present times of financial crunch, and may also help the coalition government redeem a bit of public respect and inch closer to finalising a deal with the IMF.

But will these measures tackle the structural issues that force the country to knock on IMF doors every few years for its rescue services? It hardly seems likely. Actually, it is impossible.

These ‘band-aid’ measures, for instance, will not tackle fiscal problems or fix the collapsing energy sector. At best, these measures will cover the weaknesses of expenditure management for a few months; at worst, they will push economic and financial reforms further down the government’s priority list.

This is not the first time a government has tried to cover up its inability — and lack of political will — to run away from undertaking deep restructuring of the economy. Every government turns to similar cosmetic actions to temper public anger by showing that they care for the poor.

Remember when Imran Khan auctioned off the cars and buffaloes of the PM House as part of an austerity initiative? It made for great TV, but did it change our economy or save us from returning to the IMF?

There is no doubt that the government must cut the excess fat that is bloating its expenditures and forcing it to run high fiscal deficits of above seven per cent of the size of the economy, year after year. Indeed, the latest expenditure cuts are wider and deeper than the ones previously introduced. But it would still be foolish to expect them to take care of our frequent boom-and-bust cycles.

Announcing the measures at a presser on Wednesday, the premier said his army of ministers, advisers and special assistants had been asked to voluntarily forgo their salaries, allowances, luxury cars, stay in five-star hotels and business class travel as part of an austerity drive.

The government expects these, along with a host of other measures to help it save Rs200 billion (around $766 million), or 15 per cent of its current expenditure, in a year.

What can be done?

Samir Ahmed, a financial market professional and a member of the Islamabad-based Economic Advisory Group (EAG), says that with the country battling for its survival amid the most serious economic and financial crisis, the austerity initiative is nothing more than a public relations exercise.

“There is nothing substantial or special about it. In the past such drives ended up being largely just playing to the gallery and ultimately ineffective. The new one is no different. It’s just eyewash to hoodwink citizens,” he says. “I don’t think people will take this fluff nonsense seriously.”

He agrees that the leadership should set examples but feels that it is time to show progress on real issues pulling down the economy.

Fahad Rauf, head of research at Ismail Iqbal Securities, argues that the cost-cutting measures are symbolic and cannot be a substitute for real reforms. “The belt-tightening initiatives will not fix our tax problem or our energy sector. Actually, such gimmicks take the focus away from the real problems. Remember we had a much-advertised anti-corruption campaign under the previous government? That didn’t solve our economic issues or stopped us going back to the IMF, did it?”

He added, “We turn to such gimmickry because we cannot or do not want to tax the untaxed and under-taxed sectors and persons to broaden the tax net.” Broadly speaking, he contends, the government must fix its fiscal account by broadening the tax net, cutting unnecessary expenditure on administration and privatising state enterprises that are haemorrhaging billions of rupees each year.

“Another elephant in the room is the power sector that needs to be revamped and made efficient to stop the bleeding of resources. On the external side, the government should be undertaking policy reforms to encourage and incentivise exports and attract non-debt creating FDI [foreign direct investment] inflows.”

Wide range of reforms

This means the government must undertake a wide range of reforms without wasting more time on short- to long-term economic stability.

The reforms should begin with the government stopping interfering with the foreign exchange market to fix the dollar rate, which has in the recent months led to industrial closures and job losses besides worsening the dollar crunch in the market, or influencing the central bank’s monetary policy actions for price stability.

In the long run, the government must undertake extensive tax reforms to link taxation with its growth objectives and reduce income disparities, privatise the state-owned enterprises to plug the haemorrhage of taxpayers’ money, fix the power sector and so on.

On the external side, the government should end anti-export policy bias through extensive tariff reforms to incentivise growth in productivity for exports rather than for domestic market alone, remove protections to various industries that are proving a disincentive for export, and ensure policy consistency to attract non-debt creating foreign investment to substitute borrowings.

As Shahzad Saleem, one of the country’s top textile exporters, said in a tweet: “With Pakistan’s population, everyone in the world will try to invest and get a share of the growth if we can get our house in order. Let’s stop this austerity and taxing the rich slogans and let’s move the economy and sell what needs to be sold.”

Published in Dawn, February 24th, 2023