Bilal Abdul Ghani |
After taking control of the government, PTI is trying its best to control the economic conditions of the country. Starting from the amnesty drive to the IMF Program, the incumbency has taken every bitter step to revive the economy that is lying on the ventilator taking raspy breaths. How much of these steps are true and in right direction? Only the future can tell. Here is a comprehensive analysis to evaluate the past and its impacts on the economic state of the nation and on the people who suffer the most, the lower class of Pakistan’s society.
The government is taking every step, which it considers true and helpful, for the survival of the lower classes. The Austerity drive, which was aimed to save public money and reduce economic expenditures, did not create much impact on the economic reserves of the country. The drive was basically against the established principles of our economy. The same experiment was once carried forward by the UK in 2010; however, their fate was not so much different from ours.
Starting from the amnesty drive to the IMF Program, the incumbency has taken every bitter step to revive the economy that is lying on the ventilator taking raspy breaths.
According to the capitalist economy, the best ways to handle it is to provide jobs to the people, doesn’t matter if they’re full time or part time jobs, it will increase the purchasing power of the citizens, leading to an increase in the production rate of companies and ultimately it will improve the economic conditions of the country. Contrary to it, we have withdrawn jobs from market in the name of Austerity drive, or in the name of encroachment, that has caused adverse impacts on our economy.
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IMF’s Bailout Package and it’s Conditions
The government has once again knocked the IMF door to get bailout packages of around six billion dollars. Is this our last IMF loan? This is the million dollar question. Before going in detail, it is important to understand how IMF gives loans. What is the bailout package? And what would be its conditions? IMF is a US-based international lender that provides soft loans and bailout rafts to economically weak countries. It provides technical assistance and advice to these countries on how to overcome their economic difficulties.
It has 189 member countries with a lending capacity of one trillion dollars. It caters info on how to achieve economic stability, prevent financial crisis and improve living standards, working with governments to ensure responsible spending. After making agreements with the IMF a country can take loans from Asian development banks, the World Bank and other international lenders.
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Is there any country that has succeeded through the IMF? Yes there is, India
India took around seven IMF packages during the 1980s and the 1990s. It took its last package in 1993 when P. V Narashima Rao and Manmohan Singh were able to make economic reforms and set the GDP growth at 6.62 percent. The main reason is their political continuity, however, in Pakistan, we’re caught in a political quagmire.
The drive was basically against the established principles of our economy. The same experiment was once carried forward by the UK in 2010; however, their fate was not so much different from ours.
Pakistan has taken 21 loans from the IMF since 1958, 12 of which can be called bailout packages. EFF or ECF are designed for long term structural reforms, whereas SBA is designed for short term crisis management. In the past 60 years we have borrowed 27 billion dollars from the IMF under current value of SDR (Special Drawing Rights), yet still unable to streamline our economic woes.
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The Obstacles Left for the New Government and How to Overcome Them
At the beginning of the government’s tenure, Pakistan has been stalked by many economic challenges: rupee shortfall, FATF grey list, US condition of the CPEC loan repayment, depletion of foreign reserves, stagnant exports, high oil and other import bills. Though our economic prognosis never remains flowery throughout history, yet comprehensive and tough economic reforms are needed of the hour to wean off the vicious cycles of the IMF.
The main impediments in the ways of our economic systems are: (1) our imports are much greater than our exports. On most imports, the government provides subsidies and for these subsidies it has to borrow dollars from the IMF, World Bank and other international lenders. (2) Our industrial arrangement is designed to make it less export oriented so that foreign revenue is always a big challenge for every government. (3) Our exports are not high tech exports, they are agriculture or textile related, which often comes under tariff and non-tariff barriers.
(4) Number of companies registered with SECP (Security Exchange Commission Pakistan) is higher than that registered with the FBR (Federal Board of Revenue). This means that there are a large number of companies which are not paying their taxes. (5) Number of industrial utility connections is much greater than actual taxpayer units. (6) Power theft and old transmission systems of electricity are another big impediments which is bleeding out our economy, mounting the circular debt and buckling our power sector. Due to this circular debt, the government has to borrow money to assuage the power sector. (7) The government has to interfere in order to control the exchange rate and determination of the value of rupee. It leads to enforced control over the economy, which is against the principles of a free capitalistic state.
(8) Austerity and encroachment drives have also contributed to the economic woes of the country. Both seem good however they deprive many people from their jobs, which halts the circulation of wealth. (9) Pakistan is the least focused on the export of skilled and non-skilled labor, which is the main source of foreign remittances. (10) Our taxation system is much more complex and lengthy; it is very tedious to file tax returns in our economic system and is one of the strongest reasons for our low tax base. (11) Federal and provincial tax collection systems are different and complex, which makes doing business problematic, lengthy and costly. It is one of the main impediments standing in way of foreign investments; due to this an investor has to visit more than 20 agencies to establish business in Pakistan.
(12) Our tax to GDP ratio is very low and stunting our economy. (13) We have signed free trade agreements with China, from whom we import more than export.
All these factors have damaged our economic systems so much so that despite taking 21 loans from the IMF we are still unable to stand on our feet.
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How to Counter Our Loan Problem
All the above-mentioned challenges are solvable yet all previous governments have failed to implement key economic reforms suggested by the IMF and the economic advisory councils. Pakistan’s tax to GDP ratio can be raised up to 18 percent by bringing the agriculture and retail sector completely under tax-net and plugging revenue leakages.
(1) Pakistan should focus on high tech exports along with textile and agriculture; this would enable us to generate more and faster growth of foreign reserves. It is very much important to strengthen the industrial sector that is part of the global value chain. We should encourage the production of capital and intermediary goods to bolster the economy of the country. Right now the manufacturing sector is contributing only 11 percent to the GDP of our country, which is far below our potential.
(2)The next most important step is to get rid of white elephants, the Pakistan steel mills, Pakistan international airlines and other state-owned enterprises. These organizations are bleeding Pakistan’s economy at the rate of 2 percent per GDP. Structural reforms are required to ameliorate their economic situations, otherwise privatizing them is the only viable solution.
(3)Tax systems to be revised for all luxury items; this includes higher duties on large and luxury cars, higher property taxes on luxury houses and higher taxation on air travel etc.
(4)Pakistan should focus on special economic zones as it could attract foreign investment from Chinese firms after the US-China trade war.
(5)It has become vital to leave the concept of subsidized imports, as these are mounting our fiscal and trade deficits.
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Pakistan needs a direct, foreign and domestic environment to unleash the potential of its economy. This should be at the top of the list of reforms agenda by the PTI government, along with structural, economic and governance reforms, which we need for the charter of the economy. For all parties, either in opposition or in government, without a collective effort, it will be very difficult to prepare the public to pass through tough reforms because if we fail this time, it would be a big disaster for progress and growth of the country. Political capital is needed to pass through this impasse.
The writer is a graduate of the University of Engineering and Technology Lahore. The views expressed in this article are author’s own and do not necessarily reflect the editorial policy of Global Village Space.