Amid passing through complete confusion in last eight months, the government is finally heading towards making up its mind for moving towards approaching the International Monetary Fund (IMF) for obtaining fresh bailout package anytime around in coming May/June period.
Amid passing through complete confusion in last eight months, the government is finally heading towards making up its mind for moving towards approaching the International Monetary Fund (IMF) for obtaining fresh bailout package anytime around in coming May/June period.
It seems that next three to four months will be quite crucial for Pakistan Tehreek-e-Insaf (PTI) -led regime on IMF and FATF (Financial Action Task Force) as the government will have to demonstrate its ability to deliver on key conditions such as fulfilling prior actions and curbing terror financing.
First of all, there are some positive developments as the current account deficit has narrowed down significantly but there is need to analyse developments in details. The trade deficit has not shrunk but the current account deficit improved mainly because of impressive growth in remittances. The remittances went up by $1.5 billion and after excluding from the overall inflows the balance stood at the same levels. The depreciation of rupee against dollar has resulted into giving boost to remittances from Pakistanis living abroad and there is need to see whether it becomes sustainable or proves a nine days' wonder. We will have to wait for next few months to get the real picture. However, the PTI-led regime is thumping up with the joy that the current account deficit shrank a because of their policies.
On the other side, the fiscal situation is deteriorating even beyond the imagination of the government and is heading towards a total disaster-like situation. The Federal Board of Revenue (FBR) has been in collection shortfall of Rs239 billion in the first eight months of the current fiscal year, indicating the imbalances on fiscal front were bound to rise sharply.
The FBR has so far collected Rs2,333 billion against the envisaged target of Rs 2,566.2 billion so the shortfall on all four taxes stood at Rs239 billion in first eight months of the current fiscal year. The budget deficit ballooned to 2.7 percent of GDP in first six months of the current fiscal year and keeping in view the record of last two decades the overall budget deficit is heading towards crossing last year’s figure of 6.6 percent of GDP.
However, in the last meeting of National Assembly’s Standing Committee, Finance Minister Asad Umar had given assurances to parliamentarians that the deficit would be less than the last fiscal year. The fiscal side development indicates the government will have to manage fiscal position otherwise the budget deficit might go close to 7 percent of GDP by end of the ongoing fiscal year.
Any gimmicks or not recording certain expenditure in books will not provide permanent solutions. Now the government is claiming that it is committed to eschewing the past practice of “borrowed growth” where internal and external borrowings were used to finance consumption driven growth.
Such growth is not sustainable and macro-imbalances recur. The path of sustained economic growth and productive employment requires structural reform to address three fundamental gaps: (i) revenue - public expenditure gap; (ii) export - import gap; and (iii) saving - investment gaps.
Underpinning the revenue-expenditure gap are failures of governance in a broad spectrum of government activity. On the revenue side, poor tax administration combined with persistent policy-induced holes in the tax net and unaddressed areas of fiscal federalism require urgent attention. On expenditures, governance failures manifest themselves in budget liabilities of loss-making utilities, mismanaged state-owned enterprises and bloated/redundant government departments.
At the heart of the export-import gap is a stagnant/weak productivity growth in all three main areas of economic activity: agriculture, manufacturing and services. Poor productivity growth has resulted in loss of competitiveness across the board. Agriculture performs far below potential, the share of manufacturing is stagnant, and the share of trade in GDP is declining.
Governance failures and weak productivity growth in a setting of poor financial intermediation cloud investment prospects. As a result, savings are parked in real estate and abroad and are poorly leveraged to fuel investment and economic growth. This results in the savings-investment gap.
The PTI government claims through envisaged proposed medium-term framework that they were fully committed to undertake structural reforms that addresses along with policy inadequacies the root-causes of governance failures, stagnant productivity and weak financial intermediation to put the economy on a trajectory of productive investment, sustained high growth and creation of productive jobs.
In the short-run, the poor and the vulnerable are disproportionately affected by the hardships of stabilisation and structural adjustment as gaps (i) to (iii) are addressed. Fortified, but fiscally prudent, (iv) social protection is thus essential to protect the poor in this transition period before they begin to benefit from productive job creation expected from reform. Finally, (v) civil service reform and right-sizing government administration are critical to both having the capacity for modern economic management of (i) to (iv) as well as to lower the fiscal burden of a bloated administration.
The government’s ongoing and proposed reforms in the five areas (i) to (v) are presented in the discussion that follows. The roadmap draws on the ongoing work of the Prime Minister’s Economic Advisory Council, various task forces set up by the premier, federal ministries, State Bank of Pakistan and development partners. Given that the work of the task forces is at different stages of completion, the roadmap is designed to be a “living” document that will be updated as more specific reform suggestions are rolled out following analysis and stakeholder consultations.
As a matter of fact, all these claims and the wish-list will remain just a dream if the government fails to come up with effective implementation strategy as so far the PTI had blamed the previous two regimes for all mess on every front. However, now the time has come for them to perform and make a difference if they can instead of seeking refuge in their habitual buck-passing approach.
The writer is a staff member
