Structural Reforms

Huzaima Bukhari, Dr. Ikramul Haq & Abdul Rauf Shakoori

 Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism but peace, easy taxes, and a tolerable administration of justice: all the rest being brought about by the natural course of things—Adam Smith

It is a well-settled principle that in international arena, strategic alliances are based on economic strength and interests of the nation states. The states that fail to realise this incontrovertible fact and lack financial independence end up risking their national security. Pakistan is a classic example of this failure in recent times. Even after 75 years of independence, we are still heavily relying economically on global lenders, donors and “friendly states”. Successive governments have failed to maintain a balance between revenues and expenditures. Resultantly, the country is in a deep debt trap. Unfortunately, we have utterly failed to achieve a sustainable higher growth, reform our tax system to tap the real potential. The overwhelming part of tax collection is anti-growth, based on regressive measures to overburden the existing taxpayers/businesses. Over 60% of federal tax collection is consumed by debt servicing and 57.5% goes to the provinces. What is left is insufficient for defence and running the government affairs, what to speak of public sector development programmes and social sector spending e.g. health, education etc.

The fundamentally flawed policy of relying on debts has made the economy extremely vulnerable to external shocks and any force majeure event. To date, the economy is managed in an ad-hoc manner, where we look forward to economic assistance from global lenders and friendly countries every year to meet fiscal gaps. This is a highly lamentable attitude. Because of this, neither have we been able to expand our resources and inflows, nor curtail wasteful expenses and unnecessary outflows.

The challenging economic situation globally, coupled with catastrophic floods, has made the situation worse for Pakistan. Due to aggressive policies of the incumbent government and in the wake of this natural calamity, inflation is at its highest in our history. Now, the unprecedented rainfalls, floods and landslides have wiped out agricultural lands, livestock, and critical infrastructure. Rural living is highly affected; people are very much dependent on agriculture and livestock for their livelihood and this situation can trigger a new wave of poverty and a national food emergency. It is estimated that only in the province of Sindh more than 1.2 million acres of agricultural land is affected.

It is high time that government addresses its financial inefficiencies that are consuming resources on other fronts. A prime example of this inefficiency is state-owned enterprises (SOEs). According to official statistics, presently around 212 SOEs are operating in various sectors of Pakistan, out of which 85 are commercial SOEs with 83 subsidiaries and 44 non-commercial SOEs. The commercial SOEs mainly operate in sectors like Power, Oil and Gas, Infrastructure, Transport and Communication; Manufacturing, Mining and Engineering, Finance; Industrial Estate Development and Management; Wholesale, Retail, Marketing, etc.

The Asian Development Bank (ADB), in a report, has highlighted the poor financial performance and stated that for FY 2018, the SOEs’ portfolio comprised US$ 119 billion in total assets and US$ 31.5 billion in total equity but posted minus 1.37% return on assets and minus 5.16% return on equity. The few sectors in which SOEs achieved positive results related to the financial sector and promotional and advocacy sectors, however, their performance is not good, and it yielded only 0.70% and 0.68% return on assets, respectively.

The abysmal financial performance of these SOEs is a burden on the national exchequer. From an overall net profit of Rs. 204 billion in financial year 2013-14, the SOEs reported a loss of Rs. 143 billion in 2018-2019. The top three sectors turning red with negative returns on assets were industrial and engineering (-6.63%), transport (-4.17%), and services (-3.04%). Further, the financial deficit in the four largest SOEs namely, Pakistan International Airlines, Pakistan Steel Mills, Pakistan Railways, and National Highway Authority accounted for 3.0% of GDP. Without being able to restructure or offload these loss-making operations, the government continuously supports their required financial matters, which squeezes space for any other initiative. It further states that in the 5-year period, fiscal year (FY) 2013 to FY2017, total loans and subsidies paid to SOEs from the federal budget was $12.8 billion.

Wastage of huge amounts of resources on these loss-making enterprises leaves very limited fiscal space to invest in the social sector to improve the common man’s life. The government should design a comprehensive roadmap for the privatisation of these entities by ensuring transparency for better utilisation of financial resources. The government agreed with the International Monetary Fund (IMF) for initiating the process of strengthening the legal and regulatory frameworks of SOEs in collaboration with ADB. Subsequently, National Assembly adopted a new SOE law in July 2022, still awaiting approval in the Senate—expected by end of September 2022 as agreed with the IMF. The new law is aimed at ensuring not only transparency but also to state the rationale for state ownership so that operations are undertaken on a commercial basis.

Sadly, since independence we have been struggling to meet our fiscal gaps. Fiscal reforms are the main and basic steps towards achieving financial freedom and sustainability. However, we have miserably failed to execute the much-needed, long-delayed reforms agenda. Resultantly, for just 1.17 billion tranche from IMF, we have imposed taxes of over Rs. 1700 billion, agreed to a free market economy, which does nothing better but favours the rich to maximise their wealth through speculative transactions. The measures taken so far have resulted in hyperinflation and high policy rates, making the life more miserable for the citizens and increasing the cost of doing business. In order to put the country back on track, the government should focus towards improving overall governance through structural reforms. Without wasting any further time, it should execute economic as well as legislative and judicial reforms to bring about political and economic stability.

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Huzaima Bukhari & Dr. Ikramul Haq, lawyers and partners of Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS), members Advisory Board and Visiting Senior Fellows of Pakistan Institute of Development Economics (PIDE). Abdul Rauf Shakoori is a corporate lawyer based in the USA and an expert in ‘White Collar Crimes and Sanctions Compliance’. They have recently coauthored a book, Pakistan Tackling FATF: Challenges and Solutions