Business overview: The week in focus

The government’s intention to take further loans has put question marks over the country’s competency with finances.

The government’s intention to take further loans from the International Monetary Fund (IMF) in a bid to repay earlier loans and meet expenditures has put a question mark over the country’s ability to put its financial house in order.

The fresh loan will add to the pile of foreign debt which is already high at around $58 billion, eating away a big chunk of the country’s budget in debt servicing every year. In November 2008 when the government took $7.6 billion IMF loan, later increased to $11.3 billion, to strengthen its vulnerable balance of payments position, expectations were high that with the help of this assistance the country would boost tax revenue collection, tackle corruption, restructure loss-incurring public sector enterprises and introduce reforms in the power sector. However, two and a half years on, no significant progress has been noted.

Whether this time, though nothing concrete has emerged as negotiations with IMF are still going on, a well thought out strategy will be followed to improve the flow of government’s finances so that no need for further loans arises, poses a big question mark. So far, the Federal Board of Revenue has failed to significantly increase its revenues by targeting tax dodgers and bringing potential sectors into the tax net. There has been much talk about 700,000 rich tax evaders, having luxury houses, more than one car and heavy travel expenses, but nothing tangible has emerged to bring them into the fold.

Tighten the belt

“We have no choice but to go to the IMF and the situation may remain the same over the next several years,” said Dr Ashfaque Hasan Khan the former director of the ministry of finance’s debt office. Citing reasons, he said the country would start repaying around $7.8 billion IMF loan from next year and would also have to meet heavy domestic expenditures.

In order to improve its financial conditions, Khan said, the government would have to tighten its belt, slash expenditures and broaden the tax net. “Are we ready for this. What we need is to behave prudently,” he said.

Khan said the country needed a will to undertake restructuring and reforms and achieve desired objectives, but unfortunately that was lacking. “We as a nation are highly irresponsible financially.”

How to improve

InvestCap Head of Research Khurram Schehzad suggested that in order to create fiscal space the government should stop intervening in businesses and privatise the giant loss-making state-run enterprises that swallowed Rs250 billion annually in subsidies. “Let private sector do business and run the market,” he said.

Schehzad was of the view that proposed floating of shares of government companies, particularly profit-earning enterprises, in the domestic and international markets would provide much-needed funds to the state as foreign investors had been targeting emerging markets which were offering lucrative returns. The government has also the options of making long-term borrowing from the domestic market in the form of treasury bills, investment bonds and Ijara Sukuk (Islamic bonds) and an offer of National Savings Certificates to expatriate Pakistanis, who are currently not allowed to invest in these papers directly.

Schehzad advocated securitisation of remittances and dividends from state-run companies, meaning issuance of bonds on the basis of these funds. In addition to all these, putting money in development works not only pays dividends and revenues in the long run, but also creates employment opportunities for people.

However, in the current fiscal year ending June 30, the government is compelled to reduce development spending from the targeted Rs280 billion to Rs180 billion after last summer’s floods caused losses of around $10 billion to the economy.

the writer is incharge Business desk for the Express tribune and can be contacted at [e-mail]

Published in The Express Tribune, April 25^th, 2011.