Economic stability 'borrowed': Iqbal
Planning Minister Ahsan Iqbal has termed economic stabilisation "stunted and borrowed" and urged Prime Minister Shehbaz Sharif to alter growth trajectory before election cycle begins to present something to voters more than just saying we "inherited an economic crisis".
In his detailed memo, Iqbal recommended an eight-point new Growth Compatible Fiscal Stabilisation Framework for higher growth and development instead of merely saying in polls that we "inherited an economic crisis" and achieved stability. He wrote to the PM last month that Pakistan was increasingly achieving fiscal stabilisation by compressing development expenditure and borrowing more, rather than sufficiently expanding the revenue base and increasing exports.
"To me, it is stunted and borrowed stabilisation. It may improve fiscal numbers today, but if continued, it will weaken the productive capacity required to sustain those numbers tomorrow," he said.
His memo has surfaced at a time when a new World Bank report stated that one out of every two poor people in the region spanning Middle East, North Africa, Afghanistan and Pakistan was living in Pakistan. Iqbal supported fiscal discipline but said that the issue was "the composition and quality of fiscal adjustment". A country cannot permanently balance its books by cutting the expenditure that creates its future productive capacity and borrowing more to plug its external-sector requirements, he added.
In 2018, the federal development expenditure was equal to 2.6% of GDP, which has been slashed to 0.8% this fiscal year. The Express Tribune waited for two days for response of the finance ministry to the criticism of stabilisation policies. But the ministry did not respond.
Ahsan Iqbal reiterated that the present approach to the IMF programme management has increasingly become numbers-driven, with overriding emphasis on quantitative fiscal targets. Fiscal targets are necessary, but merits and composition of the numbers matter as much as the headline deficit, he added.
Iqbal wrote to the PM "we must consequently ask a simple but critical question now: Where will Pakistan's economy stand in 2029 when this government goes back to the people". He went on to say that in 2029, it would be insufficient to point only to the inherited macroeconomic crisis or the stabilisation achieved thereafter.
"The electorate will judge the government on the economy it experiences in 2029: growth, employment, income, investment, exports, inflation, energy costs and economic opportunity," he wrote. According to official figures, economic growth was a mere 3.7% in the last fiscal year, unemployment was at a 21-year high of 7.1% of the labour force and exports contracted nearly 6% last fiscal year. Investment was stagnant at 14.4% last year and foreign direct investment fell 34% to only $1.6 billion.
Commenting on the overall success of economic policy, the planning minister said that the relevant test of economic policy is, therefore, no longer merely whether Pakistan can complete the IMF programme successfully. "It is what kind of economy emerges after the IMF programme and what economic record this government will present to the people in 2029."
He said that almost half of the government's five-year term has already passed and it effectively has about two and a half years remaining, and the final year will inevitably be dominated by the general election. "The window available for taking decisions that materially alter Pakistan's growth trajectory is, therefore, much shorter than the constitutional remainder of the term suggests".
He recommended that the finance and planning ministries should jointly identify what growth rate Pakistan is currently heading towards by 2029, what growth rate is required, and what policy changes must be made now to close that gap. Iqbal suggested that the government should establish a clear economic destination for 2029 and work backwards from it. "Otherwise, there is a risk that we successfully manage successive IMF reviews and annual budgets but arrive at the election with macroeconomic stability accompanied by insufficient growth, investment and employment."
The planning minister added that the government's engagement with the IMF must similarly evolve "from a narrow conversation about next year's numbers into a broader economic framework addressing how Pakistan will grow, invest, export and generate the revenues necessary to maintain stability over the next decade". He suggested that the PM establish a forum where the Ministry of Finance should be specifically directed to present its baseline projections for the economy through fiscal year 2028-29, including the expected growth trajectory and the likely state of the economy when the government completes its term.
"The Ministry of Finance should, therefore, be asked to present to the prime minister and cabinet a credible post-IMF medium-term economic scenario through FY2028-29, rather than limiting our horizon to the next programme review or annual budget."
The planning minister further wrote that between 2022 and 2026, successive rounds of fiscal adjustment have placed disproportionate pressure on the federal development programme. "Whenever the fiscal space contracts, the PSDP becomes the easiest expenditure to postpone, reduce or surrender." At these levels, he said, the federal development programme is approaching a point where it can no longer adequately perform its basic economic function with a through forward of Rs11 trillion. Cutting productive investment beyond a critical threshold is economic de-capitalisation, he added.
Iqbal said Pakistan continues to have a tax-to-GDP ratio substantially below that of many comparable economies. With a low tax base, there is a danger that inadequate taxation of under-taxed segments and leakages in tax collection are effectively being compensated for through cuts in development spending. "The economy sacrifices infrastructure, education, technology, water security and productivity because the state has been unable to mobilise sufficient revenues from the economy." It is administratively easier to cut PSDP than to undertake difficult reforms involving tax broadening, enforcement, documentation, exemptions and politically influential sectors," said the minister.
He feared that the greatest danger is that Pakistan may successfully stabilise at a structurally low rate of economic growth. The sequence is straight forward which is low revenue, fiscal pressure, PSDP cuts, lower public investment and infrastructure and human-capital deficits, weaker private investment, lower productivity, slower growth and weaker future revenues. "If development expenditure remains at rock-bottom levels, our potential growth rate will be damaged."