Pakistan’s economic revival – the way forward

Policymakers focus on short-term fixes by attracting hot money, curbing imports

ISLAMABAD: Despite some recent signs of economic revival, Pakistan’s performance is likely to lag seriously behind other regional countries.

Most experts are of the view that, over the next two to three years, Pakistan’s GDP growth will fall even lower than the current 2.8%, which is already the lowest in the region. Furthermore, unemployment will continue to rise and the debt burden will also keep increasing.

There seems to be no clear strategy to deal with such negative indicators. The focus of policymakers, at least at present, appears to be on short-term fixes such as attracting “hot money” and curbing imports.

Indeed, these policies may end up getting the economy in more trouble. To get out of this economic quagmire, the government needs to look at the bigger picture. It will need to make radical changes in those policies which are there to benefit only a few at the expense of millions of Pakistanis.

This article identifies areas where Pakistan’s performance is particularly poor but which can be reformed without incurring any significant expenses.

The most important reform is in curbing or restructuring subsidies to various sectors such as state-owned enterprises, agriculture and energy.

Since the government is unable to raise enough taxes to meet its urgent expenses, expensive debts mostly fund these subsidies. The combined losses of Pakistan Steel Mills and Pakistan International Airlines will soon cross Rs1 trillion if they are not privatised.

Similarly, most of the agricultural subsidies do not reach the smallholding farmers. They are instead gobbled up by the millers or the middlemen. The recent sugar and wheat crisis is a testament to how a few influential individuals misuse government subsidies.

These commodities were exported, which created shortages in the local market, which led to a significant rise in domestic prices, giving a few powerful colossal windfall profits at the expense of the masses.

In case of sugar, the government subsidised exports through a subsidy of $97 per ton. However, when it led to shortages, imports could not be made as sugar enjoyed a protective duty of 40%.

For wheat, the government maintains a rather expensive support policy programme. In 2019, the subsidy allocation was about Rs50 billion for procuring grain worth approximately Rs200 billion. This amount will be much higher for this year as the government recently raised the procurement target from six million to eight million tons.

By incentivising farmers to grow more wheat, the government is keeping them from earning more money through the cultivation of higher-value crops.

By maintaining higher-than-international market prices, the government is hurting poor consumers, for whom wheat intake accounts for over one-third of the total food energy intake. Since there is not enough storage space, most of the procured wheat is stored in open warehouses (godowns), where a substantial quantity is lost to weather and other such causes.

This crisis provides an excellent opportunity to move away from the failed policies of the past. Instead of giving subsidies to the wealthy millers and intermediaries, a better option would be to offer deserving farmers cheap high-yielding seeds, modern machines and publicly run storages to save them from post-harvest crop losses.

Just as subsidies benefit a few at the expense of society at large, so do the tariffs on imports. The government’s National Tariff Policy 2019-24 recognises this. However, it is suggesting several exceptions, which will make the reform process very patchy.

Besides high tariffs, we have non-tariff barriers. Not permitting imports of essential industrial raw material from India is like cutting off our nose to spite our face. We opened up the airspace for all types of civil traffic from India, so why can we not do the same for trade.

Linked with the tariff policy is the overall tax policy. There is a consensus that the current tax policy is complex and anti-growth. As a result, the level of informal untaxed economy is estimated at over 36% (some estimates put it as high as 50%), which is much higher than 22% for neighbouring countries.

Many countries have been moving towards a more straightforward system of flat taxation. Besides reducing complexities and inefficiencies, this system creates incentives for investment and savings and results in higher compliance, thus reducing the extent of grey economy.

Finally, there is a desperate need to make radical changes to the governance system and bring in fresh talent into the government. The present government has been considering strengthening the ministries through bringing in technical experts at the decision-making level but has not been able to make much headway.

It is much easier to have a pool of experts in the Prime Minister’s Secretariat. Recently, the government was successfully able to bring in experts like Moeed Yusuf and Tania Aidrus to strengthen decision-making.

Induction of scores of such bright youngsters into the PM Secretariat will go a long way in invigorating activities of the government and bring about the much-needed change.

The writer served as Pakistan’s ambassador to the WTO from 2002 to 2008

Published in The Express Tribune, March 2^nd, 2020.

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