Can financial emergency prevent economic meltdown?

Economic meltdown is a worst-case scenario for any country in which sharp rise in prices, inflation, huge gap in the balance of payments and enormous debt can threaten its very existence.

On February 6, the briefing given by the Federal Finance Secretary at the first meeting of the ninth National Finance Commission (NFC) held in Islamabad was not only revealing but also reflected a serious economic crisis.

Some of the facts revealed by him before the chief ministers of all the four provinces in the NFC meeting are enough to proclaim financial emergency.

The fact that around two-thirds of the federal budget is spent to pay for debt servicing and defence is shocking. Out of the projected federal revenue of Rs5.5 trillion during the current financial year, Rs1.8 trillion will be spent on debt servicing and Rs1.1 trillion on defence.

The amount of the two items may surge before the end of financial year. Out of the remaining amount after spending on debt servicing and defence, the Centre will give 1.65 trillion rupees to provinces in the year 2018-19 as their share under the NFC award.

The Sindh chief minister, while giving a policy statement on the province’s economic predicament in the Sindh Assembly, lamented that in first seven months of this financial year the Centre has paid Rs97 billion less which will adversely impact developmental programmes.

Expenditures like paying salaries, pensions, running administration and developmental programmes are mostly met from internal borrowing and from seeking external loans. Rise in the interest rate and 30% depreciation in the value of the rupee versus the dollar will put an additional burden of around 1 trillion rupees on the national economy.

The foreign debt has now crossed $100 billion and if one takes into account $5 billion worth of loans received from Saudi Arabia and the UAE in the last three months and the CPEC-related loans, the external debt will cross $110 billion before June 30 this year.

The government has revised economic growth rate from 5.8% to 5.2% during the current financial year which is lowest in the last three years. In addition, Standard & Poor’s global rating issued on February 4 reduced Pakistan’s sovereign credit rating to B- from B and stated that “the prospects for a rapid recovery in fiscal and external settings are now diminished”.

Pakistan’s official foreign currency reserves are not even enough to meet two months of imports and by June 30 this year, the country will have to pay loans of five billion dollars.

With such alarming facts, should the government allow serious imbalance in the balance of payments; uncontrolled expenditures, misuse of national resources and tax evasion or should it take a decisive step by announcing financial emergency?

Although, Pakistan’s finance minister in September last year ruled out the proclamation of financial emergency, the situation on the ground today requires an immediate action under Article 235 of the Constitution which has a provision to impose financial emergency by the President of Pakistan.

According to that article, “A financial emergency can be declared if the President is satisfied that a situation has arisen whereby the economic life, financial stability or credit of Pakistan, or any part thereof, is threatened.”

Yet invocation of Article 235 must enforce strict financial discipline and management by drastically cutting non-essential and non-developmental expenditures, cutting imports, taking steps to enhance exports and augmenting remittances.

Furthermore, financial emergency must expand the tax base by putting all such people into the tax net who are doing private business, consultancy or any other work which is a source of income for them. The number of tax filers, which is shamefully 1.5 million out of a population of 210 million, needs to be enhanced on a war footing.

There are two perceptions on the question of imposing financial emergency. First, such a step will only yield positive results if there is will and determination on the part of policy-makers to implement steps taken under the financial emergency and withstand pressures from ‘mafias’ who have ruined the country’s economy.

That the people of Pakistan must be on board to accept the fallout of financial emergency and support steps to extract ill-gotten wealth from ‘sacred cows’. Without seriousness and pursuing professional approach to implement measures outlined under financial emergency, it will be a non-starter.

Second, in a country like Pakistan where tax evaders — those involved in money laundering, corruption and nepotism — are able to get away, the imposition of financial emergency is a remote possibility.

Around 30% of Pakistan’s economy is undocumented because there is no proper mechanism outlined by the State Bank of Pakistan and the Federal Board of Revenue (FBR) to extract taxes from those who are out of the tax net. Will consultants, schools, coaching centres and those doing all sorts of businesses earning billions of rupees be put under tax net?

In India, financial emergency under Article 360 of the Indian constitution has been imposed three times and the tax laws are so stringent that it is rather impossible for anyone to conceal any sort of earning or to escape from taxation. Learning from other models, the internal revenue system of Pakistan must be restructured so that tax evaders are caught and punished.

Unfortunately, the PTI government has totally disappointed people in the last six months of its rule because it has failed to prevent the depreciation of rupee, and excessive internal and external borrowings.

When the federal information minister openly says that the government cannot give any relief to the middle class and at the same time fails to control the gas crisis and the rise in the prices of electricity and other daily items, it means things are not under the control of the government.

No concrete step has been taken to deal with white elephants like PIA, the Steel Mills and the Railways which together accumulate a debt of one trillion rupees. Likewise, the circular debt of around Rs800 billion along with payments of billions of rupees to Independent Power Producers (IPP) not producing electricity adds to the financial predicament of the country.

Blaming previous governments for the prevailing economic crisis in the country is highly imprudent and aims to escape from one’s responsibility. Before coming to power, the PTI leadership was aware of what was going on as they themselves used to say that they had a viable programme to fix things in a short span of time.

Imposing financial emergency to effectively deal with the current grave economic crisis is an option provided there is the required machinery to implement its pros and cons across the board. If the focus of the PTI government is to fix the economy, it must not open many fronts, particularly against its political opponents.

The Prime Minister and his team must be mindful of the fact that in the last six months, they have not been able to put a dent to the VVIP culture let alone doing away with it completely; and there has been no significant achievement as regards conserving resources; expanding the tax base; enhancing remittances; preventing the depreciation of the rupee and focusing on human development.

Many federal ministers are still travelling in business class and staying in luxurious hotels during their visits to foreign countries. With such a mindset, how can one expect the country to escape from economic meltdown? The elite must come out of their comfort zones and see for themselves the plight of the lower and lower middle class before it is too late.

The Prime Minister, while giving sermons on austerity, should note down the words of the former US president, Barack Obama, which he uttered a decade ago while referring to enormous debt of his country. He said: “A nation should learn to live within its means.”

Published in The Express Tribune, February 15^th, 2019.

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