Agenda for an economic charter
The writer is a former civil servant.
Our economy faces structural problems of twin deficits, circular debt, loss-making public enterprises, low productivity, low-end exports and is therefore trapped in a boom and bust cycle.
Growth spurts are invariably halted by what economists call an ‘overheating’ of the economy, forcing us to resort to fiscal stabilization measures to slow growth momentum, mainly because the underlying structural problems crippling the economy. economy are still unresolved due to political economy constraints. The boom and bust cycle over the last seventy years of our economic history tells us that there is no shortcut to sustainable growth until we tackle these structural issues head-on.
The periodic strong growth has been driven by episodic public sector spending and investment, sometimes in the form of CPECs or sometimes by inflows of foreign aid. It is therefore high time that we developed a minimum political consensus on solving the structural problems of our economy in the medium and long term, because any further delay would exacerbate our economic difficulties and pose serious challenges to the stability of our regime.
These are the key areas where political parties need to come to an agreement to get the country out of the weak development path – a path characterized by low productivity, low value-added exports and low growth:
First, reduce the budget deficit by increasing revenue and reducing or freezing spending: political parties should agree to increase the tax-to-GDP ratio to 20% from the current 10% over a period of, say, the next ten years. years. There should be broad consensus on broadening the tax base, streamlining tax rates, removing exemptions, plugging leaks, updating and integrating the database of different economic transactions, strengthening enforcement, reducing the imbalance between direct and indirect taxes and restructuring and overhauling the tax mechanism / administration.
At the same time, we need to control and freeze our current spending by rationalizing the number of government employees with a clear understanding that government can no longer be the employer of last resort and making pensions an “off budget” item through creation. pension fund and change the pension design from the existing defined benefit pension system to a defined contribution plan for new employees.
Second, tackle the current account deficit by promoting higher productivity and high-end exports rather than relying on borrowing and remittances. The gap between exports and imports has always held back our path to economic recovery and growth on a sustained basis, as rising imports relative to stagnant, low-value-added exports worsen the trade deficit, weakening the currency resulting in devaluation and inflation pressures further requiring adjustments to stabilize the economy rather than continuing on the path of economic growth over a longer period of time to move from low income to middle / high income countries.
Economic history tells us that the way to achieve sustained growth is to convert your comparative advantage into competitive advantage by switching from low-end exports to high-end exports through technological upgrading and higher productivity. South Korea is an example. On the one hand, it requires investing in your human capital. On the other hand, we need to design a strategy to increase exports that should cover both goods and services, explore and develop hitherto unexplored sectors and find new markets to earn the foreign currencies we have. so much needed. We need to focus on the IT sector, mining and minerals, automobiles (a sector that has extensive backward and forward linkages with other sectors of the economy), pharmaceuticals, etc. to $ 40 billion over the next five years.
We need to prepare a very comprehensive set of incentives for new and high-tech sectors, as well as export targets (as has been done by South Korea), to become globally competitive, and then maintain that set. without interruption, regardless of any changes in political government. We also need to use electronic commerce, modernize our infrastructure and improve the efficiency of ports and shipping services in order to reduce the cost of doing business and improve our competitiveness.
The third area where we need political agreement is that of privatization. The political forces of this country must agree that the government will not venture into an area where goods and services can be provided by the private sector in the first place (with a few exceptions for strategic reasons like national security). The economic rationale for continuing to support organizations like PIA and Pakistan Railways, to name a few, at the cost of a budget deficit is no longer tenable given our precarious budget situation. There is no justification for running companies and businesses.
Having a consensus on privatization will achieve the triple objective of improving the efficiency of the economy, expanding the private sector and also reducing the budget deficit, as a huge amount is provided through annual budgets. loss-making public sector companies. in the form of financial support.
Fourth, subsidies to public sector enterprises and to food and energy products also contribute to the budget deficit. It must be agreed that the government will not try to control or subsidize the market prices of food and energy products. All products must be traded in the market at prevailing market prices. The government will only provide direct cash transfers to the poorest of the poor. Cash transfers should be linked to food and energy prices. In times of high commodity prices, the amount of cash transfers should be increased and vice versa. We have come a long way in institutionalizing a strong system to manage and run a direct money transfer program in the form of Ehsaas / BISP and we just need to eliminate a parallel system of provide general grants to the rich and the poor.
Fifth, solving structural problems will remain an elusive dream without holistic reform of our energy sector and it is imperative to have a consensus in this sector, given that successive political governments have hesitated to directly address the fundamental problems of the energy sector. energy sector because of the immense political costs. that a political regime might have to bear as a result of reform measures. There is a need to reduce the currently predominant dependence on imported fuels for power generation by switching to renewable energy sources such as solar, wind and hydropower as part of a well-defined plan. to be implemented over a period of time. Additionally, we need to replace cross-subsidy with direct subsidy using the Ehsaas database to identify deserving users.
The government must deregulate and privatize the distribution of electricity and gas and allow the private sector to compete and provide these services, as has been done successfully in other countries. Even if the tariff determined by Nepra is fully implemented, the circular debt flow will not stop due to under-collection of billing and excessive losses in transmission and distribution, which requires reform and, finally, the privatization of DISCO which has been repeatedly delayed by successive governments due to political policies. pressures. We therefore need a global political agreement to take ownership of this reform. The privatization of DISCO should be supported by a strong and effective regulatory regime with well-defined incentives and sanction structures.
Sixth, the 7th National Finance Commission Prize has resulted in an unequal distribution of resources between the federal government and the provinces, leaving the federal government at a fiscal disadvantage as the latter continues to pay down debt, budget for subsidies (intended for the population residing in the provinces), finance the expenses of the BISP / social protection (which should ideally be borne by the provinces) and incur the expenses of the civilian armed forces which essentially carry out law enforcement functions mainly in provincial jurisdictions.
As a result, provinces have little incentive to increase their own incomes – despite being required to help increase the tax-to-GDP ratio by taxing the agriculture and real estate sectors under the 7th NFC. There is therefore a need to revisit the NFC agreement either by amending the revenue sharing agreements to make them more balanced and fair, or by involving the provinces in some of the spending liabilities that are primarily theirs in the first place, in accordance with the mission. functions provided for by the constitution.
Seventh, Pakistani debt indicators continue to deteriorate due to persistent primary deficits, relatively high exposure to external debt (resulting in a sharp increase in the debt burden due to currency devaluation) and the high cost of domestic debt (due to higher inflation and cost of savings plans). External debt represents 35% of total public debt. We need to run primary surpluses for the next ten years, which means we don’t have to incur additional debt to cover our non-interest expenses. Second, we must reduce the proportion of external debt from 35% to 25% or less over the next five years. Third, political parties should make a solemn commitment to strictly adhere to the debt-to-GDP ratio ceilings prescribed by the Fiscal Responsibility and Debt Limitation Act. Fourth, lower inflation combined with lower borrowing requirements would translate into lower borrowing costs, which would allow more resources to be available for private and public sector investment, stimulating economic growth. Finally, we need to increase the share of long-term debt in our overall debt portfolio.
The process to reach consensus on the above issues should be led by the government involving consultations with all major political actors and other stakeholders and any changes after the finalization of the charter of the economy should also be made. only with the agreement of all parties concerned.