Financing expenditures post Covid-19
State decisions are not those of individuals, but are taken reflecting collective interest
Informed people, academics and economic experts know better: focusing economic management on the pricing of capital, goods and energy, and permutations of subsidies to firms, selected sectors and the vulnerable is unlikely to structurally alter the economic landscape in Pakistan. It is more likely to have adverse implications on distressed public finances of the country and stir media frenzy.
In today’s era of uncertainty, we are largely certain of three aspects: i) the Covid-19 shock is severe and global; ii) it elevates the need for public spending; and iii) even before this episode, Pakistan’s public finances were in distress, with dependency on external and internal borrowings and on increasing revenues to fill fiscal gaps. The need to finance Covid-19 expenditures in an atmosphere of a further fall in revenues has prompted the government to raise new debt through the Islamic Sukuk of Rs700 billion for the budget and Rs200 billion for the power sector; Rs100 billion to defer energy bills (there is no free lunch); and multilateral financing and an IMF facility of $1.4 billion.
There has never been a more pressing time to rethink ideas beyond debt-creating instruments. A possible policy response for raising finances engrained with non-debt creating instruments includes: divestment; monetising existing infrastructure assets; recovering tax and energy payments owed to the state; formalising remittances; tax recovery from profit shifting; and hedging petroleum products. These can unleash both foreign exchange earnings and domestic resources, with no bearing on national debt. Serious monies are involved requiring an equally serious response — raising finances without stretching the country’s balance sheet. This is a multi-round response game, whereas the initial response of liquidity to firms and households matters, the real test is putting in place desirable instruments for rewiring the economy.
Creating the right ecosystem for divestment is essential to build competitive markets in the country, especially the energy sector. On the other hand, we have to build on our “ownership advantage” of billions of dollars worth of roads, rails and logistics giving an unlimited potential of asset recycling. Pledging airports to raise debt creates a yearly interest payment, burdening the exchequer and future generations. Alternatively, asset recycling keeps the ownership of the state intact; allows leasing of the Islamabad Airport, an asset fully paid and owned by the state, to a world class operator; and receive an upfront payment on a net present value of projected earnings for 30 years. The Civil Aviation Authority can focus on its core job of a regulator. The silver lining is that the airport will revert to the next generation, worth many times the Rs100 billion spent on it with increased traffic, while passengers enjoy a much higher level of polite and courteous service. Similar work on hedging petroleum products at almost half the price a month ago, has a yearly potential of savings more than the IMF package stretched over three years. This has to be undertaken immediately.
The state encounters two obstacles in implementing a non-debt raising strategy. One, the ability of letting high-calibre experts make the process credible and two, hesitancy of decision makers. But it does not have to be this way. Well thought-out ideas, proficient models, researched documents, legal covers, executive endorsement, parliamentary oversight, and more importantly the nation’s buy-in can provide the platform to move forward. Pakistan’s experience of successful outcomes (nuclear deterrence, motorways, and income support programme) gives us a guiding framework. Let us classify this as an “island approach”: ring-fence each of the non-debt creating instrument described above, declare it a priority, engage a smart delivery team, and monitor. Those not up to speed can be utilised elsewhere. State decisions are not those of individuals, but are taken reflecting collective interest. Today, there is an indescribable opportunity cost of not planning an economic recovery, based on non-debt creating instruments, self-sufficiency and domestic markets.
Published in The Express Tribune, April 16th, 2020.
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