Huzaima Bukhari & Dr. Ikramul Haq
In the absence of self-acclaimed genius Finance Minister, reportedly under treatment in London for heart ailment after being indicted for amassing wealth beyond means, who will fix the economic ailments of Pakistan? The reply to this vexed question and lies with Prime Minister Shahid Khaqan Abbasi (many allege that he is just a dummy premier who is dictated by ousted/disqualified three-times-elected-premier Nawaz Sharif). It is conveyed to the Press that Nawaz Sharif wants to retain his close relative, Muhammad Ishaq Dar, in cabinet even though his assets are attached and non-bailable arrest warrants have been issued for non-appearance by the Accountability Account.
According to a news report, Mr. Shahid Khaqan while speaking to journalists at Manchester airport on November 6, 2017 said that “the Federal Finance Minister Ishaq Dar may not return to Pakistan in the near future”. This fact was confirmed when Finance Minister was removed by President Mamnoon Hussain on November 12, 2017 from the Council of Common Interests (CCI) on the advice of the Prime Minister. Will our Premier— hardly matters whether he is de facto or de jure—take the trouble to tell the nation how can he run the country without a whole-time Finance Minister when economic challenges faced by Pakistan are multiple and grim?
Pakistan is caught in a deadly debt trap. According to State Bank of Pakistan (SBP), the debt added by the Federal Government in the first two months of the current fiscal year alone was Rs. 1.003 trillion—the figure by the end of August 2017 reached at Rs. 21.8 trillion. There was also monstrous increase in external debt during this period—liability increased from Rs. 5.9 trillion in June 2017 to Rs. 6.1 trillion. The World Bank in its latest report of November 2017, Pakistan Development Update, has said that against 4.1% of the GDP [about Rs.1.5 trillion] official target, the budget deficit in the current fiscal year would be of around 6.1% of GDP [Rs. 2.2 trillion].
According to data released by SBP, contingent liabilities have also increased manifold mainly due to the borrowing spree by public sector enterprises and more borrowings by those state-owned companies for various purposes. Country’s total debt and liabilities have increased to 78.7% of GDP that is by all standards an alarming level as our revenues are not even sufficient to meet current expenditure. The ratio of revenue to debt is now more than 700 times. Out of Rs. 25.8 trillion as on August 31, 2017, gross public debt, which is the responsibility of the government directly or indirectly, was 68.1% of the GDP. According to SBP, the government received “record-high gross disbursements amounting to $10.1 billion in last fiscal year out of which 43% came from commercial banks”. The government termed this instrument a diversification of its existing funding avenues but the World Bank is of the view that these “bullet facilities” can create repayment issues in the future.
The report of World Bank has noted that “macroeconomic imbalances have significantly worsened over the last 9 to 12 months”. It predicts that Pakistan will miss all key macro indicators targets set for this fiscal year, notably fiscal deficit, current account deficit and annual economic growth rate. The official target of 6% annual GDP growth rate will not be met. It will not be more than 5.5%. There will be a 4% current account deficit against the official target of 2.6% of the GDP.
Trade deficit widened to $12.1 billion in first four months of the current fiscal year, which is nearly half of the annual target set by the government and is the result of unstoppable growth in imports that were almost triple the value of exports. In the coming days, the widening current account deficit will certainly mount more pressure on already sliding foreign currency reserves. The World Bank has given a timely warning that “the widening macroeconomic imbalances could increase the country’s vulnerability to external and domestic shocks. With declining reserves and elevated debt ratios, Pakistan’s ability to withstand external shocks will be compromised and the risks will remain predominantly on the downside”.
The World Bank says that Pakistan’s domestic debt composition has also undergone a structural shift, with an increase in the proportion of short-term borrowing. This substitution toward short-term borrowing could pose refinancing and re-pricing risks, warned the lender. The World Bank is of the view that Pakistan’s public debt could fall to 66.4% in next two years from the current level of 68.1% provided it takes needed corrective measures including limiting the growing fiscal deficit in an election year. The country’s long-term debt, with a maturity period of more than one year to 10 years, has decreased to Rs. 7.8 trillion. There was a reduction of Rs. 505.8 billion or 6% in the long-term loans. But short term loans nullified this reduction.
According to a Press report, on November 13, 2017, “the federal cabinet allowed immediate borrowing of up to $3 billion from international debt markets by floating three sovereign bonds and has also waived a dozen taxes to make deals attractive for investors. The report says that “instead of tabling a summary in a cabinet meeting, the finance ministry got approval of the cabinet by circulating the summary among its members earlier this month. This is surprising as the federal cabinet meets every week”.
The share of bonds issued by the federal government shrank from Rs. 4.8 trillion to Rs. 4.23 trillion despite an overall increase in public debt. There was a net reduction of Rs. 541 billion or 11.3% in July-August 2017. However, the debt acquired through the sale of prize bonds increased from Rs. 747 billion to Rs. 765 billion at the end of August 2017—this is now used to avoid withholding tax on cash withdrawal.
The Finance Ministry in the face of above disturbing facts and figures still says that the country’s debt burden has not crossed dangerous levels—though the government changed the definition of ‘public debt’ through the Finance Act 2017 to hide the actual debt burden.
While commenting on the social sector, the World Bank report says:
“Overall, there has been some improvement in human development indicators since 2010, although inter-provincial, income, and gender disparities remain. In education, there has been progress in terms of school participation at all levels of schooling. However, youth enrollment in higher education and skills training remains very low. In health, indicators such as skilled birth attendance and child immunization rates have improved. However, stunting is chronically high among children under five years of age, with 44 percent in this age group being either severely or moderately stunted.
Pakistan’s working-age population is expected to continue to grow at 2.1 percent per year over the next decade. The country faces the triple challenge of creating enough jobs for this growing population, improving the quality and productivity of jobs, and enhancing access to jobs and economic opportunities for women…. Data from the formal private sector in Pakistan suggests that there are significant barriers to growth-oriented entrepreneurship—the kind that could provide more and better employment opportunities to a growing workforce. The investment climate is weak, as reflected in the country’s Doing Business (DB) rankings, and most businesses identify corruption, electricity, and tax rates as the top three constraints they face”.
One thing is undisputed that there is no will on the part of the government to come out of the existing fiscal mess by tapping the real tax potential and stopping wasteful and unproductive expenses. During 2016-17, Pakistan obtained a record high $10.1 billion in foreign loans to repay old debts and support foreign exchange reserves. According to a press report, “about 37% or $3.9 billion of the total external borrowing came from China alone—Islamabad’s new lifeline. This included $2.3 billion in commercial loans and another $1.6 billion under the bilateral economic assistance”.
One of the main reasons behind the growing reliance on foreign lenders is the government’s inability to enhance exports that have been constantly declining since the PML-N government came into power. In the last fiscal year, exports stood at only $20.44 billion, which were just 6.7% of the total size of the economy.
According to the State Bank, fiscal year 2016-17 witnessed the current account deficit of $12.1 billion or 4% of the GDP. The government resorted to reckless borrowing to bridge the deficit. Even after this, foreign exchange reserves fell by $2 billion to $16.1 billion by June 30, 2017.
Another area of concern is repressive tax policy that is detrimental for savings and capital formation for enhancing investment resources within the private sector for economic development. Besides corruption and incompetence, inconsistent tax policies of Federal Board of Revenue (FBR) have forced the business community to search for safer havens abroad, depriving the country of invaluable capital. Similarly, foreign investors are reluctant to avail the tremendous Pakistani talent that goes to waste for lack of proper funding.
Pakistan is one of those very few fortunate countries of the world that has an abundance of resources and a climate that is fit for simply any activity throughout the year. But thanks to donors’ agenda of overemphasis on retrogressive taxation and incompetence of our economic wizards (sic), Pakistan’s dependence on imported products has increased manifold, whereas value-added exports have not been given any attention, let alone promoting high-tech industries capable of technological innovations—modern economies are knowledge-based and the future is for those who can develop them as quickly as possible.
For technological transfers, rapid industrial growth and employment generation, foreign direct investment (FDI) is desirable. In Pakistan when local investment is declining, expecting FDI is like living in a fool’s paradise. Tax incentives play an important role in attracting FDI—which has nose-dived in Pakistan during the last decade. Tax policy constitutes an important, if not a determinant factor, for favourable investment behaviour. Unfortunately, our budget makers and wizards sitting in FBR have always been preoccupied with revenue targets and have never bothered to provide some long-term investment-oriented tax incentives for infrastructure development, investments and employment generation, without which sustainable growth is not possible.
Foreign investors will not come to Pakistan for the main reasons of lack of transparency and as long as rule of law remains weak even if we overcome energy shortages and improve infrastructure. Nobody is willing to invest even in special economic zones, where tax incentives are available. Even the existing industrialists due to rising cost of doing business and hostile tax policies are shifting their capital abroad. Investors, both domestic and foreign, prefer a place that characterises stability, consistency and requisite infrastructure facilities—we lack all these. Tax incentives do matter but not as first priority—any feasible growth-oriented project can be profitable after paying reasonable taxes. In Pakistan, corporate taxation is still very high [30% for a company and further taxation on dividends paid to shareholders—12.5% in case of filers and 15% in case of non-filers].
Pakistan also faces the herculean task of providing jobs to millions—on an average we need to create 2 million jobs annually for young people alone. For achieving this task we have to ensure that economy grows at the rate of at least 8% per annum over a long period of time—for this we need investment of 20% of GDP. It is thus imperative to raise tax-to-GDP ratio to 30%. This challenge is also our great opportunity for economic progress. Majority of job seekers are young people, our greatest asset—imparting education and skills to them and creating matching jobs is the real challenge. This can be met successfully by assignment of taxes for productive investment and employment generation—our real engines of growth. The prevalent pessimism is due to attitude of the rulers and financial managers, who cannot think beyond what they are “commanded” or “trained” to think. They keep on telling us about the symptoms of an ailing economy but never try to cure the real causes of illness. The practical ways to move forward are suggested by Dr. Nadeem Ul Haque in his book, Looking Back: How Pakistan Became an Asian Tiger by 2050. Unfortunately, neither the government nor the private entrepreneurs have imitated any debate on this work.
Devising an economic model for high growth with emphasis on exports requires an analytical study of all the irritants prevailing in all institutions and laws. Comprehensive structural reforms are the key to make Pakistan a success story as projected in ‘Looking Back: How Pakistan Became an Asian Tiger by 2050’. The main irritant for business growth is highhandedness, corruption and unprecedented high level of maladministration in tax apparatuses—both at federal and provincial levels. Experts must strive to analyse the existing negative statutory, regulatory and administrative frameworks and then suggest solutions to remedy the situation for promoting growth and creation of the much-needed jobs as has been done by Nadeem Ul Haque.
The writers, lawyers and partners in Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS)