Four Policy Measures To Tackle The Economic Downturn In Pakistan
Former Governor of State Bank Shahid Kardar and former minister Hafeez Pasha have developed a homegrown macroeconomic framework to deal with the economic situation that Pakistan faces in the years to come. We are publishing excerpts for our readers.
“The primary objectives behind the design and implementation of the policy agenda are to reduce substantially the ‘twin’ deficits while preserving the growth momentum to the extent possible. It is expected that the process of structural adjustment will take place primarily in the first two years, 2019-20 and 2020-21. Thereafter, the economy can get on gradually to a trajectory of higher growth, reaching a GDP growth rate of almost 6 percent by 2023-24.
The key elements of the policy agenda entail:
Containment of Imports
The Government has already introduced a number of measures to restrict the level of imports. The rupee has been depreciated by 16 percent up to now in 2018-19. Today, there is no significant overvaluation of the rupee. Luxury goods’ imports have been restricted by the imposition of large regulatory duties and 100 percent cash margin requirements. However, their coverage is only 6 percent of imports currently.
The approach adopted is to ensure that in the future there is no significant overvaluation of the rupee. A 15 percent real depreciation of the rupee is envisaged during 2019-20 and 2020-21. Simultaneously, it is proposed to widen the coverage of the cash margins of up to 30 percent.
Imports of major essential goods like POL products, fertilizers, medicines, pulses and edible oil should not be subject to cash margin requirements. In addition, it is proposed to raise the maximum import tariff from 20 percent to 25 percent to provide more protection to domestic industry.
Promotion of Exports
A large number of steps have already been taken to promote exports. These include depreciation of the rupee, lower power tariffs, duty exemption on imported inputs for exports, issuance of promissory notes against refunds due and an export incentive scheme. However, despite these wide-ranging measures there has been no visible improvement in exports. It appears that exporters have largely opted initially for increase in their rupee profit margins. As such, the benefit of the devaluation has only been passed on partially to buyers in the form of lower dollar prices.
The policy agenda for promoting exports will include the payment automatically to exporters of the export incentive at the time of receipt of the export earnings by the commercial banks. Also, the export incentive scheme will need to be widened to cover a large number of emerging exports. Export-oriented SMEs should be given preferential access to credit and energy.
Tax Revenue Mobilisation
This is the critical area if the size of the fiscal deficit is to be controlled. Apparently, the IMF Framework is proposing generation of up to Rs 700 billion through taxation proposals in the budget of 2019-20. This is excessive and while imposing an intolerable burden on the people will suffocate growth in the economy.
The ‘Homegrown’ Macroeconomic Framework proposes additional taxation of Rs 650 billion in 2019-20 and 2020-21 combined. Additional revenue of over Rs 100 billion is likely to be generated in 2019-20 by the restoration of taxes on mobile phone cards by the Supreme Court recently.
The primary focus will be on generating at least half the additional revenues from direct taxes. Reforms in the Federal income tax will include reduction in tax expenditures, scaling down of the exemption limit, extra profit taxation, transition from schedular to comprehensive income taxation, broadening the tax base of capital gains tax, provision of incentives for filing returns and so on.
In the realm of indirect taxes, the primary emphasis will be the move to a nationally integrated value added tax on goods and services, rationalisation of import tariffs and broadening the tax base of excise duties by levy of a ‘green’ tax on polluting industries. Simultaneously provincial direct taxes like the agricultural income tax and the urban immoveable property tax will need to be developed. The potential additional revenue from these two taxes is almost Rs 100 billion.
Current expenditure has been characterised by, more or less, runaway growth in 2018-19. This is due particularly to higher debt servicing caused by the major jump in interest rates. The Macroeconomic Framework, which includes the Budgetary Framework, is based on a strong effort to reduce the size of the federal government and only limited increase in current expenditure of provincial governments linked to the completion of development projects, especially in the social sectors. Further, the defence budget may be subjected to voluntary restraint. Also, subsidies and grants will need to be reduced. A policy of no increase in salary and allowances or pensions may also have to be followed in 2019-20, except for low level employees.
Development spending is projected to show low real growth in the first two years. Thereafter, it can begin to grow somewhat rapidly. As such, priority will need to be attached to avoid ‘spreading too thin’ and allocate bulk of the funds to relatively mature on-going projects especially in water resources, power transmission and distribution sectors and CPEC. In addition, escalation in energy tariffs is proposed in 2019-20 and 2020-21.This will prevent further accumulation of circular debt. Beyond 2020-21, access to cheaper sources of electricity and reduction in losses should obviate the need for further tariff escalation.
In conclusion, Pakistan will need to pursue an agenda of deep and wide-ranging reforms with the umbrella of an IMF EFF, especially over the next two years. There is ideally a need for the government to develop a broad-based political consensus on the design and implementation of the reforms.”