May Issue 2015

By | Economy | Business | Published 3 years ago

Nearly two years back, the country’s capital and financial markets cheered Nawaz Sharif on taking over as the country’s prime minister at a time when the economy was nearing collapse.

Business houses were optimistic that being an industrialist himself, Sharif would prove to be business-friendly and adopt war-like measures to bolster the economy immediately after assuming power.

But two years on, the economy is still struggling and has failed to break the growth cycle of two to four per cent that has prevailed since 2008. This figure is abysmally low, and rather shameful, compared to other countries in the region. Even Bangladesh has recorded an average GDP growth of over 5.5 per cent in the last five years.

While the so-called economic managers continue to paint a rosy picture and boast about the (in)tangible measures taken since May 2013, the fact remains that the economy continues to be dependent on the crutches provided by the International Monetary Fund (IMF).

Besieged by terrorism and political instability, the incumbent government has yet to embark on a set of reforms in key areas which are extremely critical in order for the economy to take off.  These include the taxation system, the energy sector and public sector enterprises.

Pakistan’s tax base remains gravely insufficient and in the last two years little or no effort has been made to significantly broaden it. Due to the small tax base, the government relies heavily on indirect taxes, burdening the poorer sections of society. Finance Minister Ishaq Dar did precisely that when he increased the general sales tax rate by one per cent, raising it to 17 per cent in the last federal budget – a ridiculously high rate as compared to other developing economies.

In his first budget speech, Dar boasted that under the visionary leadership of Nawaz Sharif a new taxation policy had been devised, with focus primarily on improving the efficiency of the tax machinery, removing distortions in the taxation system, rationalising tax rates and addressing leakages. The cornerstone of that policy was that the government would tax those who were not paying any taxes.

However, the policy failed to yield the desired results. Tax collection remained below the targeted amount in the last fiscal year (FY14). In fact, the overall tax collection target was revised downwards twice during the year, to Rs 2,275 billion, by the Federal Board of Revenue. But even this amount was not realised and the government ended up collecting Rs 2,266 billion by fiscal year-end, June 2014.

Following his trip to Islamabad in March 2015, Masood Ahmed, Director of the Middle East and Central Asia Department of the IMF, stressed that the government should bolster its revenues by broadening the tax base.

“This will generate resources that will allow for further reduction of the public debt while increasing spending in priority areas such public investment, health and education,” he remarked, underlining the importance of reforms in the taxation system to lift the economy.

Pakistan lacks the necessary fuel to run its economy. The inefficient energy sector is impeding the country’s growth, as according to some estimates, the energy shortages are costing the country up to two percentage points off it annual GDP.

While the Sharif-led government has initiated several power projects in the last few months with much pomp, it has failed to implement the much needed urgent reforms to improve efficiency in the sector.

New power projects would take several years to come online and during these years the crippling energy scarcity would continue to bleed the economy. The government should have focused its attention on short-term remedies. For instance, it should have, by now, restructured power generation and distribution companies (Gencos and Discos) to improve their productivity and reduce line losses.

Experts maintain that the current policy focus of increasing the generation capacity alone will not yield the desired results, as the main problem in the power sector is distribution not generation. Most power units are running below their capacity, and even if the existing units were run at optimum level and more units were to come online, the country does not have a distribution system to supply this power.

Therefore, efforts should be made to improve the distribution system, reduce thefts and leakages, and restructure and privatise Discos.

There is another aspect of how an inefficient power sector is affecting the economy, and this is the circular debt accumulated by the sector. In the first few months of coming to power, the government claimed to have cleared over Rs 400 billion in circular debt, but this was an ad hoc measure as the debt has again swelledup to around Rs 500 billion.

The power sector circular debt is the single potent reason behind record high fiscal deficits in the past three fiscal years. This debt will continue to haunt the economy unless reforms are undertaken to resolve the issue on a permanent basis.

The majority of the country’s public sector enterprises (PSEs) are notorious for their inefficiency, corruption and huge losses. The magnitude of fiscal drain due to these unproductive PSEs runs into several hundred billions each year.

The losses of these PSEs – Pakistan Railways, PIA and Pakistan Steel Mills, to name a few – hit staggering highs during 2008-2013. The Pakistan Muslim League-N had promised to turn these PSEs around by restructuring their governing boards and appointing heads on merit to run these state-owned firms along professional lines and to make them profitable.

But sadly not much was delivered on this front either.

“There was little progress in this area in FY14, which means this [item on the] agenda would have to be fast-tracked. Since the poor implementation of structural reforms [boils] down to the reluctance [or inability] to change the self-serving behaviour of the management and staff, [any move to restructure] the loss-making PSEs is likely to be resisted. The challenge [in moving] forward is whether energy-related PSEs, PIA and Pakistan Railways, will [continue to remain] immune to the growing public frustration [vis-à-vis] their poor performance,” said the central bank in one of its recent reports.

These PSEs are a burden on the national economy and it appears that the government, too, lacks the will to either restructure or privatise them for reason, of political expediency.

The reforms agenda, which is so vital for the economy to get back on track, needs to be implemented with a holistic approach not just in the above-listed three areas, but in other sectors as well, as all sectors are inter-related.

Unfortunately, this government has been so busy fighting a battle for its survival, that this task has fallen by the wayside. Perhaps, the objective of sustainable economic revival and the associated reforms agenda should also be made part of the National Action Plan as national security cannot be strengthened without a vibrant economy.

This article was originally published in Newsline’s May 2015 issue.