Post-election scenarios: is fiscal stimulus still an option?

With heavy dependence on IMF it is obvious that fiscal stimulus schemes won’t get through

ISLAMABAD:

For most political parties in Pakistan, the post-election economic strategy is straightforward: plan the next stimulus in the form of an infrastructure spending spree (CPEC 2.0), increased social net spending (BISP+, retaining subsidies, etc), or tax concessions for the realty sector – all to be funded by public debt.

Since any new debt at current interest rates will be expensive, the incoming government shall be trying to bring down policy rates – not to mention there are already reports circulating that a drastic cut in interest rates is on the cards in 2024.

No matter how probable the above scenario is, it will be very unfortunate for the country if we repeat the same play once again.

With the accumulation of record debt in the past three decades, the use of such debt-driven GDP growth tactics is unsustainable. The era of using fiscal stimulus to create the illusion of growth is gone, and most federal government institutions are on the brink of default.

The body politic, however, is still used to the Soviet-styled Planning Commission, which, in contrast to the principle of devolution, enables the transfer of development funds under the pretext of SDGs. The ministry controls federal-provincial relations due to its influence in the distribution of funds, as provinces keep on looking up to the central government for additional stimulus to fund expensive infrastructure projects (such as metro buses).

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This model won’t work in the future for many reasons. The main reason is the piling up of foreign debt due to high import bills and the repayment of previous loans.

With heavy dependence on IMF and other multilateral financial institutions, it is obvious that fiscal stimulus schemes like building new motorways, etc won’t get through, and the negative feedback loop of trade imbalances will stop executives from pursuing their pet projects.

The NFC Award framework that allows only an upward increase in the share of provinces with time implies that the system inherently advocates austerity for the federal government but possibly stimulus for provinces. So, in the present legal framework, the only way any federal government could survive in the future is by cutting down its government size and, hence, borrowing.

What we need to do this time is diversify the economy and reduce reliance on textiles and agriculture. Due to the high capex associated with manufacturing and hence infrastructure development, we should instead focus on technical services and invest in human capital development.

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For example, if we consider the market for offshore financial and audit services, then our finance graduates should be well-versed with IFRS, Chinese Accounting Standards (CAS), and GAAP standards, as well as all IT/ERP and data analysis tools to help them conduct audits in hybrid mode (remote).

Regulators can introduce local variants of expensive international certification and link having a valid certification as a prerequisite for independent practice. Even if one is working as a freelancer, government regulatory bodies should ensure achievement of service quality benchmarks to pitch Pakistan as a clustre of financial services.

Besides regulating better, the government needs to intervene at targeted leverage points instead of blanket subsidies, ghost motorways, and rent-seeking corporations. One small list of such interventions could be:

Think of new paradigms

Forget about mammoth planning ministries that have been the number one enemy of the devolution of power for ages. Let local governments collect taxes and invest in infrastructure if they can afford to.

Federal and provincial governments should focus on creating a conducive environment for businesses, instead of getting into the business of awarding development contracts to special interest groups and channelling public money to campaign coffers.

Read  SBP report keeps GDP growth projection at 2-3%

Restructure government

It is high time to restructure public service as the soaring bill for wages and pensions is not pragmatic anymore. Employees should make contributions towards their pension fund, and pension annuities should be linked with cumulative contributions till retirement.

Redundant ministries should be scrapped, and all state-owned institutions should be either privatised or, if not possible, then transferred to employees themselves – with shares allocated to individual employees in lieu of commuted gratuity, pension, and general provident fund.

Set national goals

Our goal should not be achieving GDP growth in double digits as such goals encourage picking low-hanging fruit of increasing consumption. Instead, our national goals should be human development index, Gini coefficient, net trade deficit, and unemployment numbers – with a holistic approach taken to achieve most of them collectively.

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Create buffers

To bring stability to the prices of food commodities, the government should use buffers instead of any direct subsidy. This involves buying excess produce from farmers for export purposes and for building buffer stocks to prevent prices from falling abruptly.

Stability in food prices will result in a lower CPI for food baskets, which could then make a case for lower interest rates and hence some fiscal space for the federation.

Technology transfer from developed states

Instead of building fancy tech towers and special economic zones, the government should go for direct deals to transfer technology for the agriculture and irrigation sector. Introduce mega-farming, precision engineering, and contract farming to get yields that are many times that of traditional methods.

The legislature should give tax breaks and subsidies to investors who bring in new models of farming while at the same time, it should penalise unproductive use of agricultural land and inefficient farming methods by imposing new taxes such as water tax.

It should abolish protective measures for sugar mills and encourage open competition. In fact, after nuclear energy and defence, this is now the sector to bet on in 2024.

THE WRITER IS A CAMBRIDGE GRADUATE AND IS WORKING AS A STRATEGY CONSULTANT

 

 

Published in The Express Tribune, January 1^st, 2024.

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