Call for charter of economy

Federal government restructuring will form basis for such a charter

ISLAMABAD:

Last week, Finance Minister Ishaq Dar repeated his call for a charter of economy and isolating the economic realm from politics during his conversation at Pakistan Prosperity Forum.

One can say that all economic policies are political choices as they create winners and losers, therefore the call for the charter of economy has not gained significant traction. However, on reflection, one can also see the significance of the charter of economy for creating a working consensus on a minimum agenda.

This consensus is critical for a healthy and financially sound federal government, without which no political parties can follow their respective manifestos.

Federal government in Pakistan is the linchpin of economic governance. Over the last 10 years, it has weakened significantly owing to increasing demand for defence, debt servicing and energy sector payments.

While defence, debt and energy affect the entire federation equally, provincial governments have been insulated from these fiscal pressures. Given the constitutional nature of NFC Award, under which shares of provinces cannot be reduced, this calls for creative and radical thinking for the remodelling of federal government. In this article, I am sharing a proposal for restructuring the federal government, which can become the basis of a charter of economy.

There are four important tools of reforming the federal government. The first one is the tax system, which is largely a federal subject. The second one is public sector development spending.

Third tool is the federal government mandate through the Economic Coordination Committee (ECC) to intervene and decide upon commercial transactions. Fourth tool is the federal government ownership of state-owned enterprises through its various ministries. I offer a brief explanation of these four tools.

Tax system needs to be rationalised thoroughly. Many recommendations have been made already but the reforms have only changed certain procedures like filing of tax returns and some degree of automation.

Structural change in the tax system cannot be done unless we change the number of taxes and tax rates.

As explained by Ikramul Haq and Huzaima Bokhari (2020), such a system can make the entire system simplified and can yield more revenue. The World Bank has also provided endorsement of such reforms.

Pakistan’s public sector spending (PSDP) needs a complete re-design. There is a strong case for suspending the PSDP in terms of new projects and prioritisation for completing the existing projects. Practically, all of PSDP as of now is being financed on borrowed money and therefore we need to evaluate the programme in terms of economic returns, even if returns are long-term in nature.

ECC is a war-time cabinet set up in 1965 which has attained extraordinary powers to intervene in commercial matters. Decisions which can be made at a different and lower tier of the government or decisions which should not be tabled for government permission have choked economic governance.

Due to the insurmountable number of “summaries”, which are presented and approved or rejected, it has become impossible for cabinet members to allocate time to review these summaries. A radical revision of Rules of Business 1973, which form the basis of ECC mandate, is needed urgently.

We do not need ECC to deliberate on, for instance, a request from a private firm to invest abroad by using its taxed profits. State-owned enterprises (SOEs) and state management of energy sector, in particular, has become the single most important threat to the viability of federal government finances.

If urgent steps are not taken, this will become impossible to manage the demand of a growing energy sector and the circular debt. Future investments in the energy sector are also at risk.

We need a federal government which is able to deliver its constitutional responsibilities towards the state and citizens. It needs to shed a lot of fat, which it has assumed over time. Institutional autonomy, local governance and markets need to be re-aligned with a new structure of the federal government.

In some cases, while privatisation of SOEs may not be desirable, institutional autonomy with one-time fiscal restructuring can offer an exit. In some cases, markets can be trusted to deliver through improvement in contract enforcement measures. A charter of economy, which promises a new structure of the federal government and a new framework of its economic management, can be developed on theses lines. This can be modelled into a document and political parties can endorse it.

Furthermore, these ideas can be further developed into a legal code, which can be made eventually binding by parliament with a high hurdle like two-thirds majority for making any changes in the future. Incidentally, current political make-up of parliament provides a unique and narrow window for such a structural change.

Ideally, all political parties should endorse the charter of economy. PDM coalition should commit to radical reforms and restructure the federal government.

While the absence of PTI in parliament is not ideal for a vibrant democracy, PDM does not have to wait for its return. This can be a positive legacy of a coalition government, which has a fairly wide representation of national, regional and ethnic political parties.

The writer is the founder and executive director of PRIME Institute, an independent economic policy think tank based in Islamabad

 

Published in The Express Tribune, December 19^th, 2022.

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