Avoiding default without misery

The challenge in dealing with the short-term crisis is to avoid debt default without making the poor pay for it. At the same time, the tactical measures undertaken should be designed to set the strategic direction of the economy towards a people-centred economic growth process. In this article, I will attempt to address this challenge.

There are two interrelated aspects to the current crisis. First, the State Bank reserves, net of liabilities and repayments over the next two months are reported to be substantially negative. Without a quick injection of US dollars by the IMF, there is a danger of an exchange rate collapse accompanied by hyper-inflation.

Second, the budget deficit must be kept at a level that prevents a huge build-up of foreign debt in the process of financing it. Historically, when faced with such a situation, the government has selected policy instruments that have added to the burden of the poor, while protecting elite interests. Given the current crisis of state, society and economy, the government needs to stem the financial rot by placing the burden on the rich rather than the poor. The following measures can be undertaken in this regard.

First, the critically low State Bank reserves create the imperative of a drastic reduction in foreign exchange expenditures on non-essential imports. For example, the import of motor vehicles alone during 2020-21 was $1.53 billion which constituted almost 4 per cent of total import expenditures. This figure represents an 80 per cent increase in import expenditures on motor vehicles, compared to the previous year.

The expenditure on the import of consumer durables, excluding motor vehicles, in the same period was another $1.1 billion, or 2.8 per cent of total import expenditures. Mobile-phone imports added another $1.54 billion to the import bill (about 4 per cent of import expenditures) and food imports (including Norwegian smoked salmon, French cheese, marmalade and Swiss chocolates) at $6.1 billion constituted 15.6 per cent of total import expenditures. Import controls over just these items alone could save the country over $10 billion.

Second, the budget deficit issue needs to be reconceptualized in light of recent research. The key thing to understand is that it is not the size of the budget deficit that should worry the government, but what causes it. If the budget deficit, even at 9 per cent of GDP, is generated by productive investment, then the ensuing economic growth and the associated increased income stream will reduce the deficit over time. It is unproductive expenditure of the government that needs to be curtailed, not productive expenditure. Thus, the preoccupation with ‘finding fiscal space’ is misconceived. As Professor Lord Robert Skidelsky observed at a recent Government College University Lahore (GCU) webinar, the government can create as much fiscal space as it wants to by borrowing from the State Bank and spending it on productive investment.

Third, a blanket withdrawal of all subsidies in an attempt to reduce the budget deficit can have serious adverse consequences for the lives of the poor. So, those subsidies which ease the economic burden of the dispossessed classes should be retained, while those subsidies that enrich the upper class should be withdrawn. For example, tax concessions given to the elite in the form of exemptions from income tax, sales tax, and customs duty, amount to Rs1.3 trillion. Why not let the rich pay their tax dues and use the revenues to provide a cushion to the poor and middle class that would in fact accelerate economic growth.

Fourth, further revenue generation can be achieved by placing three types of direct taxes on the super-rich: (i) Increasing stamp duties on large land transactions; (ii) increasing property taxes on those having more than one house; and (iii) a ‘Food for the Poor’ tax on those possessing luxury motorcars and multiple houses.

Fifth, some policy measures can be immediately undertaken for the benefit of the poor, with the revenues saved from withdrawing tax exemptions of the super-rich and placing new direct taxes on them. One, the government can declare food as a fundamental human right. In this regard, the government can undertake to provide through food stamps, vital food rations (flour, ghee, cooking oil) at a 50 per cent subsidy to the bottom 40 per cent of the households who are currently food insecure.

Two, an employment guarantee scheme for the rural poor. This would involve offering employment for 200 days of the year to them at the going market wage rate. They can be hired to work, using simple tools, on rural infrastructure projects such as strengthening the banks of canals, pucca khalas, and building water reservoirs near rivers to build up water reserves during floods. Three, the government can give a commitment for the provision of high quality education, healthcare and social protection to all citizens. Recent research shows that government expenditures on health, education and social protection are not simply welfare measures, but also contribute to increasing the productivity of citizens and therefore accelerate GDP growth.

The policy measures indicated in this essay can, while attempting to avoid an economic meltdown in the year ahead, also lay the basis of a new growth process that is powered by the people and works for their benefit. It is precisely during a major crisis that the seeds can be sown for a new economic trajectory that is for the people and by the people.

The writer is distinguished professor at Beaconhouse National University, Lahore. He can be reached at: akmal.hussain@bnu.edu.pk