Roadmap for economic revival

The country has been suffering from low growth and high inflation for the last three years, with the outlook for the next year not materially different. – File Photo

The 2011-12 federal budget is going to be presented in extremely challenging circumstances. The country has been suffering from low growth and high inflation for the last three years, with the outlook for the next year not materially different. Exogenous shocks such as the global financial crises, the rise of commodity prices and floods in Pakistan have contributed to our current predicament. However, the long-term unaddressed structural imbalances of Pakistan have made matters significantly worse.
This can be seen from the fact that Asia (except Japan) grew by more then 9 per cent in 2010 and is expected to grow by 8 per cent in 2011. Compared to this the growth rate of Pakistan’s economy will be just above 3 per cent for these two years. Similarly, average inflation for these two years in Asia will be approximately five per cent while the comparable number for Pakistan will be higher then 13 per cent. In other words, growth less than half of the rest of Asia and inflation more than double the rest of Asia.
There is urgent need for bringing the fiscal deficit under control to reduce inflationary pressures and stop the private sector crowding out taking place. However, mere stabilisation around a low level equilibrium is not sufficient. We need to accelerate the economy and take it towards a sustainable non-inflationary growth rate of between seven to eight per cent which produces enough jobs to absorb the millions of new entrants in the job market that we expect based on our demographic profile.
A critical element of that turnaround has to be revival of investment in the economy. In the last three years, through a combination of factors, investment, particularly by the private sector, has seen a sharp decline. As a proportion of the economy, investment in the current year was lower than at any time during the last 40 years. This is a near calamity and means that we will have serious problems accelerating growth in the coming years and will continue to lag significantly behind the job creation rate that we desperately need.
In order to start addressing the long-term structural issues, the budget would have to reflect proposed actions along the following lines.
Tax all incomes irrespective of source: Not only are we losing tens of billions of rupees by granting exemptions and favours to particular sources of income, but we have also created an inequitable and unjust tax code where people making barely enough money to make ends meet pay direct taxes on their income and those living in luxury have their incomes exempted from tax.
Plug the leakages: With flagrant violation of even the tax laws which do exist and high-profile people in positions of power and prominence paying hardly any tax, the system is in need of serious revamp. Without seeing concrete visible gains in this regard, the culture of paying tax will not develop and the resistance of the existing taxpayers will get stronger and stronger. Talk is no longer enough. The budget must contain tangible measures. There are many recommendations on how to make this happen available to the decision-makers.
Documentation of the economy: There can be no sustainable solution to our fiscal woes without dealing with the lack of documentation of the economy. The most widely used vehicle for that in economies around the world is a value-added tax.
Energy crises related budgetary measures: These would include, among other measures, development expenditure to revamp the antiquated and inefficient generation, transmission and distribution systems; rationalisation of price disparity among different fuels and between different user segments; budgetary allocations to clear the circular debt; and measures for recovery of Pepco receivables which are largely due from federal or provincial governmental agencies.
Restructure and privatise public sector enterprises (PSEs): The massive losses being incurred in these entities need to be urgently addressed through a combination of restructuring and privatisation. The budget should set a clear target for how much revenue is to be collected through these measures and targets for reducing the losses.
Reduce the size of government: The National Commission on Government Reforms has identified approximately 200 out of the 400-odd government departments, corporations and entities that can be merged or disbanded without seriously affecting the ability of the government to function.
Eliminate untargeted subsidies: Subsidies which benefit the rich more than the poor, for whom they are intended, need to be rationalised and eliminated in as short a time as possible.
Significantly increase social expenditure for the most vulnerable: This should take the shape of significantly enhanced education and health expenditure (mostly at the provincial level) and increased expenditure for social safety nets. The combined expenditure on these three stands at just over 3 per cent of GDP at the moment. This should be tripled in the next three years. The government has to ensure that the poor are the actual beneficiaries of these programmes and must ensure the use of targeted programmes to spend these enhanced budgetary expenditures. The poor of the country are hurting immensely and the state needs to step up its support for the most vulnerable.
The time for a business-as-usual approach is gone. The economic strains and stresses have created a situation where along with the security-related threats, the social fabric is stretched to a breaking point. We as a country need to come together, with civil society, business and political leadership of the country agreeing on a home-grown economic reform agenda designed to restore our sovereignty and ensure progress.
If we do that today, not only can we meet the challenges we face but also create an exciting economy with high growth rates that deliver an equitable improvement in the lives of each citizen of the country and meet their aspirations. Let there be no doubt that we are capable of doing that.
— The writer is president and CEO, Engro Corporation, and chairman, Pakistan Business Council