The rapid spread of the coronavirus disease is forcing economic shutdowns across the world to limit its spread, pushing economies into recession over supply shocks, and inducing extreme volatility in the global financial and energy markets. Pakistan’s stock exchange has also felt the impact of global developments as foreign portfolio investors pulled out $44.5 million from equities and $790.86mn from government debt (often referred to as ‘hot money’) during this month.

The magnitude of the pandemic’s impact on Pakistan’s economy is yet not clear but there definitely is more downside to it, which will reveal itself in the coming days. It, therefore, is not surprising to see the businesses getting nervous over the potential consequences for the economy as the government shut down educational institutions, closed borders with Afghanistan and Iran, restricted international travel and cancelled large gatherings to control the spread of the disease. Many are worried that the economic slowdown could intensify further as the global shutdowns increase in response to the pandemic unless the Imran Khan government decides to ‘tweak’ its present monetary and fiscal policies.

‘America was made great by businessmen like John Rockefeller and Henry Ford; let your businessmen also build a prosperous Pakistan,’ says Mian Mansha

“There is now a stronger need for an appropriate economic policy response (to fight the potential impact of the pandemic and spur growth in the country),” Mian Mohammad Mansha, chairman of the Nishat Group, one of the country’s largest conglomerates with business interests in cement, textiles, power, banking, retail and dairy, said in an interview with this correspondent.

To him, appropriate economic response means a reduction in interest rates, drastic cuts in taxes — especially the existing sales tax rate of 17 per cent, and immediate commencement of the stalled privatisation process of big-ticket state-owned enterprises. “The current (fiscal and monetary) policies have stifled the economy; we need to spur economic growth and increase exports to ease the life of the ordinary people,” he emphasised.

Pakistan’s economic growth has sagged under the weight of macroeconomic adjustments that saw the policy rate jump to 13.25pc in July last year, rupee to lose 30pc of its value, headline inflation to increase by 14.6pc in January before dropping to 14.4pc in February, and industrial output to drop significantly as government compressed imports to slash current account deficit.

Prime Minister Imran Khan has repeatedly stated that 2020 will be the “year of growth”. But prominent economist Hafiz Pasha does not agree. He projects the economy to expand between 1-1.5pc this fiscal against the budget target of 2.4pc with the unemployment rate increasing from 5.8pc to 8pc. “I don’t see any signs of recovery (as claimed by the State Bank of Pakistan or the government). What I see is 10m more people being pushed under the poverty line because of lack of enough economic growth and exceedingly high food price inflation,” he told this correspondent.

Mian Mansha considers the International Monetary Fund’s (IMF) front-loading of the tax target a flawed recipe. “When we entered into the agreement with the Fund we did not think of how the drive to collect the huge tax revenue target will affect our economy, businesses — especially exports — and people. The purpose of taxation should be to grow and document the economy and create jobs; it shouldn’t be used for generating revenue. You cannot document the economy by imposing a 17pc sales tax. This will only suffocate the economy and growth. Bring the rate down to 5-7pc to make documentation acceptable to people, reduce the cost of doing business and incentivise investments.”

He believes the government could cover the revenue gap through privatisation of big-ticket state-owned enterprises (SOE) like power plants, distribution companies, National Bank, Bank of Punjab, State Life Insurance Corporation and so on. “Privatisation brings in its own growth and creates jobs. We need to learn from the success stories in the telecom, cement and banking sectors. Once the government got out of these businesses we saw them flourish rapidly, expanding and creating thousands of new jobs and creating ease for consumers.

“SOEs are like a bucket with a big hole. We keep pouring water in it and hope it will hold it for us; but it will never. For example, Pakistan International Airline losses have crossed $4 billion, the power sector is losing money like anything, the railway is in disarray, our ports are becoming more inefficient with the passage of time, and so on. These are not only costing the government immeasurably but also increasing the cost of doing business for the private sector. Bringing a container from Karachi to Lahore, for example, costs you much more than bringing the same container from China because we do not have a functioning rail freight system. The solution lies in the privatisation of these state-owned firms because the government cannot fix them.”

Naved Hamid, a leading economist, says we are where we are because of bad economic policy choices. “We let the wealthy elite business lobbies, which live off massive government subsidies, capture the economic policy. Now, these vested interests have grown so powerful that it has become a problem to dismantle them; the government needs to slowly chip away at protections given to them and build the momentum over time.”

He is of the considered view that the country’s economic troubles are largely an outcome of poor governance. “We need to put our house in order and implement structural changes for achieving sustainable growth momentum. The solutions to our economic woes are not rocket science, but how to apply them. The collapse in the oil prices could provide an opportunity as well as breathing space (for the government) to tackle the structural issues the economy is faced with, particularly in the energy sector and, to some extent, on the fiscal side.”

He agrees that excessive taxation is bad for the economy. “Frontloading of the tax target (under the IMF programme) leaves no option for the government but to push the Federal Board of Revenue — one of the most corrupt and inefficient government agencies — to chase taxpayers. Documentation is critical for us to get out of the Financial Action Task Force’s grey list but it shouldn’t be used for revenue collection alone. Reduction in tax rates, simplification of tax processes and spread of taxes across different segments of the economy will encourage people to comply with tax laws without fear (of getting stuck in a corrupt system).”

Mian Mansha’s advice for the government is to create an environment in which businesses can thrive. “America was made great by businessmen like John Rockefeller and Henry Ford. Let your businessmen also build a progressive and prosperous Pakistan. The state of Pakistan cannot exist if we do not fix our mess and develop a broad (political) consensus on the economy like they did in Bangladesh to ensure policy continuity, respect for past contracts and rule of law.”

Published in Dawn, The Business and Finance Weekly, March 16th, 2020