Austerity can't cure economy, only economic growth can

Unless Pakistan adopts sustainable growth agenda, it will continue to see vicious cycle

BRUSSELS:

On September 25, the IMF's board approved a new Extended Fund Facility (Pakistan's 25th programme since 1958) worth $7 billion for a 37-month period.

This austerity programme, like all previous IMF programmes, will not solve our nation's ills. Quite simply, what's missing is a simple straightforward set of supply-side economic policies oriented towards free markets and economic growth.

Taxation definitely has not been rationalised, excessive government spending has not been addressed, sound monetary policy has been sidelined, tariff policy remains the same, no attempt has been made to review government regulations, privatisation remains in limbo and lastly, debt restructuring/debt reprofiling remains a distant dream.

Unless and until Pakistan embarks on a genuine sustainable economic growth agenda, we will continue to see this vicious cycle and surely this will not be our last IMF programme.

So, what's the alternate solution? Let's start with our tax policy. There should be few taxes, where those taxes that are chosen to remain have low rates on a broad tax basis. Exemptions, deductions, exclusions, credits and write-offs should be kept to the bare minimum.

Low tax rates provide the least incentive for people and businesses to evade, avoid or otherwise not report taxable income. A broad tax base removes as many ways as possible for people to hide their income to avoid paying taxes.

Tariff policy remains revenue target oriented and disrupts the enormous gains from trade for the Pakistani economy. There are production gains from trade, consumption gains as well as economic growth gains; each of which has been short, due to officially sanctioned border bureaucracies including domestic export subsidies, import taxes and burdensome regulations. Free trade adds enormously to the country's growth.

Excessive government spending leads to underperformance and inefficiency at the federal and provincial levels. Pakistan's government spending has gone amok and needs to be brought down big time to a manageable size. Well-designed budgeting will produce ever-increasing benefits throughout the entire fabric of Pakistan's society.

We need sound monetary policy – slow money growth, low interest rates and a stable currency keeping inflation in single digit. Fiscal and monetary policies are closely aligned; fiscal discipline leading to fiscal space will reduce the pressure on government borrowing and the State Bank of Pakistan's propensity to print money.

It will also allow banks to cut their reckless lending to the federal government and increase lending to the credit-starved private sector, especially small and medium enterprises (SMEs).

Government regulations, restrictions, requirements, and directives should be thoroughly reviewed to make sure each one is justified on a strict cost-benefit basis. Rules need to be framed to rationalise and coordinate public behaviour.

Rules and regulations individually and collectively extend way beyond their specific task at hand and result in excessive collateral damage to the economy. Policies and rules adopted with the best of intentions actually cause enormous damage and should be carefully and objectively reviewed and evaluated on a continuous basis to ensure a level playing field for all businesses.

Privatisation needs to be implemented on an urgent basis. State-owned enterprises (SOEs) are a huge net drain on fiscal solvency. Haggling on price in the sale of these white elephants is an exercise in futility. Each and every SOE should be auctioned off to the highest and able bidder, local or foreign, in a transparent manner.

Lastly, and more importantly, debt restructuring/debt reprofiling of domestic and international debt should start in earnest in close collaboration with our multilateral and bilateral lenders, thus avoiding the sudden shock of a sovereign default and the risk of a run on the local banking sector.

One needs only to quickly view Pakistan government's debt situation to realise that there is no room left for excessive spending and profligate government programmes, which lead to debt addictions from external and internal sources to cover our reoccurring annual budget deficits.

This debt is crushing any nascent attempts by the country to jumpstart its own internal private sector growth. Debt servicing is devouring ever-greater amounts of tax revenues.

Just about everyone knows how we have put ourselves into this quagmire, but how to get ourselves out of this catch-22 situation is the immediate need of the hour. We need to take ownership of these challenges with home-grown solutions and not the "home-grown" kind professed by the current finance minister.

Pakistan is suffocating, our government has become the problem, not the solution. It is time that the government starts to listen and implement the right economic policies that have been extensively researched and covered by our think tanks, academia and associations.

The writer is a philanthropist and an economist based in Belgium