Need for economic revival

Given the unusually sharp slow-down in the economy, it is natural to ask whether there are ways in which some course correction is warranted so that the thick blanket of sluggishness is lifted from the body of the economy. Arguably, there are ways that would lessen the pain without compromising the reforms agenda.

Before we discuss this, let us lay out further evidence that the slowdown may already be unprecedented in the country’s history. The data on imports by commodity groups indicates that the compression sought last fiscal year has been more severe than reflected in the 10 percent decline in dollar value. The quantity effects, wherever available, show massive reduction. For instance, machinery imports were down by 29 percent, but power machinery, the main element of the group, declined by more than 50 percent. Similarly, in the energy sector, even the dollar value of the group remained unchanged. Yet there was a drop of 30 percent in the quantity of petroleum products.

Another glaring example is in the textile sector where the overall value dropped by 9 percent yet the largest import viz raw cotton dropped by 31 percent. These examples are basically reflective of the adverse terms of trade Pakistan faced last year, whereby import values dropped only marginally compared to much larger quantity effect.

The quantity effect truly captures the slowdown in the economy. The production data for large-scale manufacturing is reflective of some of the above trends. Production of automobiles has declined by 11 percent, petroleum products have declined by 7 percent (OCAC data has shown a 25 percent decline in consumption of petroleum products), iron and steel was down by 11 percent and cement by 4 percent. The lower foreign savings, resulting from low imports, have a negative impact on GDP growth via reduced investment resources. This clearly has an impact on employment and poverty.

While it is very positive news is that the number of tax-filers have jumped to an all-time high of 2.5 million, we have to be careful, in drawing conclusions. At the outset, it should be realized that this is for tax year 2017-18, which has been extended for an unprecedented number of times. The year should have closed on Sep 30, 2018 but has been periodically extended until August 9, 2019. Thus the size of returns is not for a standard period of tax year. Second, it has encompassed two amnesty schemes (the Abbasi government scheme was extended for July 2018) where new taxpayers have entered the tax-net. Finally, the tax collections of Rs3820 billion during 2018-19 were marginally less than Rs3842 in 2017-18, and income tax was down by about 9 percent. So the chances are that this enhanced number of tax returns doesn’t necessarily mean higher income tax receipts.

As we have been arguing, the more important issue in tax efforts is the resolution of some of irritants introduced in the name of documentation. There is a long history of failure in bringing traders into the tax-net. Some schemes were introduced with great fanfare and negotiations continued for months and agreed solutions were tried and tested. The last of this was during tax year 2015-16. After protracted negotiations, when a final resolution was achieved, a grand function was held in the PM Office where the leader of the national traders association vowed that a minimum of 500,000 traders would be enlisted. The actual number was a pathetic 9700.

Our point is: why has this been mixed up with an unprecedented revenue target that is 45 percent of last year’s actual? Imagine the energy and time that has been wasted when it should have been focused on revenue collection. It is heartening to note that the issue has been postponed until end-September. The revenue performance for August would be affected as many key markets were shut down and sales were not made as the purchasers, not willing to submit to the CNIC demand, had left the market. It must be realized that non-registered persons were already subjected to 3 percent additional GST for this very reason. This revenue was lost. Similar stories are doing the rounds for small and large traders/shopkeepers. The sooner this is out of the way the earlier our focus would shift to revenue collection.

Higher interest rates are biting everywhere they matter. Forget about new investment, running businesses – which were set up or expanded under a low interest rate environment – have suddenly discovered that their bottom line is being eroded. Only a year ago, the rate was 6.5 percent and has skyrocketed to 13.25 percent. In the run-up to these increases, the low interest rate regime continued for nearly three years and credit to the private sector recorded one of the best growth periods. Last year, this trend was reversed. Banks are bracing for increased defaults or demand for restructuring. Inflation has increased from around 3.5 percent to 7.3 percent last year. Did that justify the rate increase to the present level? We had seen such a situation in 2008 when due to international oil prices there was a massive inflationary pressure leading to nearly 25 percent year-on-year inflation and core inflation of 16 percent. Even at that time the real interest rates were not as high as at present.

Nothing has been more affected by the new interest rate regime than the stock market. There is a bloodbath on a daily basis. It has closed at 29769 points close to its value five years ago. What is now a clear trend is that people are leaving the market to buy fixed income securities, as is evident from rising investment by mutual funds in such securities. It is difficult to fathom why such clear signs of distortions would be allowed to persist which would bring hardship to the economy. Such investments are unproductive; most of them are attracted towards government securities which has nothing productive to offer except some small development expenditures that are insignificant compared to non-development expenditures such borrowings would finance. That government demand is invariant to changes in interest rates. It will continue to borrow the same amount at higher rates also. This, then, amounts to nothing but transfer of resources from the public to the private sector. This process is quite unhealthy and should be curtailed as early as possible.

The starting point for some positive signal has to be at least the reversal of the last MPC decision of a one percent increase which was not part of prior actions. There is no need for this to be delayed until March, which is too distant. There is no bar on holding an MPC meeting earlier. The situation is precarious as everywhere there is a despondent mood. The market needs to be cheered up. A cut in the interest rate is the most obvious choice for this purpose.

The writer is a former finance secretary. Email: waqarmkn@gmail.com