Charter of economy

The finance minister has been advocating that all the major political parties should sign a ‘charter of economy’ on the pattern of the charter of democracy concluded some years back by the PML-N and the PPP. The charter of democracy was easy to adopt because its main purpose was ouster of a dictator – a third party – and it involved a political agreement on principles and practices for political activities to be adhered to by the two parties so that a future adventure by an army general to overthrow them could be blocked.
We are not sure what the finance minister has in mind about the purpose and scope of the proposed charter of economy to be signed by the major political parties. On the one extreme, he may just be interested in getting his current economic policies endorsed by other political parties. If so, that would amount to an attempt to entrench the existing chaotic and directionless framework of policies that is taking the economy nowhere.
On the other extreme, the minister may have made a reappraisal of the current economic situation and concluded that a major overhaul of polices is in order to put the economy on a path of sustained economic development, price stability and balance of payments viability – and that it would require the support of other political parties for its implementation.
It is usual for all major political parties to mention lofty goals for economic development of the country and economic welfare of the people and enlist sound economic policies to achieve them in their election manifestoes. However, once in power they set aside their own election manifestoes. Every government has pursued economic policies that favour the ruling elite and neglect what was promised at the election time. The PML-N government is no exception.
The current economic policies of the PML-N government have no resemblance with what was promised during elections or what is contained in its Economic Vision 2025 duly approved at the highest level of the government. Such a contradiction in the promises and performance of the PML-N government casts serious doubts on its credibility. The PPP also has a similar track record of performance vs promises.
In these circumstances, it is doubtful that any sincere efforts will be made jointly by the political leadership of the country to understand the gravity of the economic situation, search for real solutions and develop a consensus on economic policies to undertake structural economic policy reforms. Lip service is what has been given in the past and lip service is what can be expected in the future.
However, if the finance minister is indeed serious in doing something good for the country and its people, he should consult with other political parties not to get his existing economic policies endorsed but to prepare a comprehensive programme of structural reforms to be steadily implemented over a longer period regardless of who is in and out of power.
In doing so, the minister should first of all stop tweaking the real state of the economy through data manipulation and go beyond temporary measures being taken with the connivance of the IMF as fire-fighting measures and to remain afloat as a government. Once this camouflage is removed, the gravity of the economic situation will surface which would justify a major restructuring of economic policies to promote long-term economic growth, price stability and balance of payments viability. Since these reforms would involve politically difficult decisions, and take a long time to be implemented, endorsement by other political parties would be necessary.
While engaging in a constructive dialogue, the political leadership may take into consideration the following points:
First, the political leadership should recognise that fiscal mismanagement is the mother of all economic evils, and that the present fiscal policy is continuing to maintain the status quo. No progress for sustained recovery of the economy is possible without a fundamental restructuring of the federal and provincial budgets, including the shape of fiscal federalism and taxation and expenditure jurisdictions.
Second, the income tax base should be widened to increase the revenue contribution of direct taxes. A constitutional amendment should be proposed to tax all incomes equally from whatever source at a given level of income. This is called the principal of horizontal equity in public finance. Similarly, the taxation system must be made progressive in its effect by adopting the principle of vertical equity. In the field of indirect taxes, a low rate VAT type consumption tax should be applied on a broad base replacing the existing chaotic and discriminatory regime of sales and excise taxes.
Third, the underground economy, which is flourishing outside the tax net under political patronage, should be dismantled. Loopholes in policies that allow escape from taxes and escape routes for capital flight by the rich must be effectively plugged.
Fourth, legislative reforms should be undertaken to document the economy and make tax administration more efficient and less corrupt. For this purpose, tax administration should be professionalised and freed from political interference.
Fifth, and on the expenditure side, the government must commit to live within its means. Expenditure on mega projects that have no relevance for the poor and have low economic value for the country must be abandoned. All implicit and explicit price subsidies that go to the rich in the name of economic development should be withdrawn. Public-sector enterprises should be either run on a commercial basis or sold to the private sector to stop their financial haemorrhage.
Sixth, and moving from the fiscal area to monetary policy, the government should free the State Bank from the control of the Ministry of Finance and let it pursue a prudent monetary policy that ensures relative stability in the internal and external value of the rupee. Taxation through money creation and inflation is most hurtful for the poor and least helpful for economic development. An autonomous central bank managed professionally will be able to control money supply and inflation and materially contribute to the strengthening of the economy.
Seventh, a professionally sound and operationally-free State Bank should take policy steps to halt commercial banks from placing their funds in government securities excessively and instead provide credit to the private sector. Steps should also be taken to reduce the interest spread further and ensure a positive real rate of return to depositors.
Eighth, the present reckless approach of mortgaging the future of the country and of the next generation to finance the budget and the balance of payments deficits through borrowing must be replaced by a decisive move towards self-reliance – and national self-respect.
Ninth, export expansion should become the cornerstone of development strategy which will require, inter alia, adoption of an exchange rate policy that is based on economic principles rather than political whims. In this connection, the inter-link between fiscal and monetary policies and nominal exchange rate should be properly understood.
Tenth, it is about time the political leadership took the people of the country into confidence and honestly explained to them the precarious state of the economy and solicited their support for taking difficult and equitable economic policy decisions that would benefit all segments of the society and all provinces of the country.
In short, what is needed is not an effort to sell the existing policies meant to maintain the status quo for the enrichment of the ruling elite but rather to evolve a new macroeconomic policy framework intended to promote all-inclusive economic growth on a sustained basis, which contributes to the economic welfare of the majority of the people.
The writer is a former governor of the State Bank of Pakistan.

Email: doctoryaqub@hotmail.com