Despite being ambitious on targets, this year’s budget reflects little innovation on part of the finance ministry. Even as chronic low growth, high inflation and intolerable unemployment persist, the budget offers little except a tried-and-failed policy that has seldom delivered in the past.
All major indicators, from growth to deficits, revenue collection to development expenditure, depict an appalling situation that cannot be sustained. Rapid decline in our investment to GDP ratio has left the economy without its most crucial limb. It has fallen from 23 per cent in 2007 to around 13 per cent this year, lowering growth and investment to their worst levels in four decades.
At a time when even IMF austerity has failed to reduce inflation and growth is weak, substantial fall in investment has emerged as the bane of the economy. Pakistan has 100 million people below 25 years of age, meaning millions have to be accommodated in the job market every year. Since employment feeds on GDP growth, growth needs investment and investment requires a conducive environment for the private sector, the biggest problem turns out to be the government itself.
Its addiction to central bank borrowing to lubricate spending constraints has crowded out the private sector to a point where high interest rates only savagely retard growth. The main purpose of the tight monetary policy has clearly failed and inflation hovers at the highest levels in many years.
Seemingly, our government does not subscribe to the present international trend of treating downturns by targeting growth instead of inflation. It is essential to get growth going before interest rates are jacked up for price controls. As our situation proves, attempting to arrest inflation before the economy snaps out of persistent stagflation only deters crucial private sector participation, especially if the printing press is constantly resorted to.
The interest rate regime needs immediate reshaping. Borrowing costs need to be lowered drastically. Complementing this incentive must be rapid privatisation of sick public sector enterprises. The program has to be undertaken on war footing. Talk of restructuring before privatising will find few takers. It is unfortunate that there are few examples of successful restructuring pending privatisation. The process should be without gimmickry.
A basic rule must be remembered that successful privatisation requires serious stake in the system. Merely routing private sector professionals to public sector concerns will amount to little beyond a simple transfer exercise. Unless these individuals are given stakes in the process, it will not bear fruit.
Till the government can conjure up the political will to enforce privatisation, its only alternative is effective and targeted public-private partnerships. In the power sector for example, till distribution companies are privatised, their billing and collection departments should be with immediate notice to minimise losses and thefts.
Wapda, too, should have no place in the budget. The government should inject able management and initiate public-private partnership where Wapda can supply sites, gas, power, etc, and the private sector can contribute equipment and personnel in a win-win marriage of convenience.
Similar partnerships should be employed to achieve development and revenue targets. We simply cannot afford to be stuck in the old tax-and-spend mould that leaves the government embarrassed when comes time to take stock of each year’s performance.
On the revenue front, relevant authorities need to follow up identification of 700,000 tax evaders by delivering swift justice and ensuring quick receipt of proceeds. Also, one-to-one interaction between taxpayers and collecting authorities should be minimised to rein in corruption. The system should be computerised with detailed and publicised audit reports.
Most importantly, the tax collection system needs to be incentivised.
Compliant payers should be rewarded and evaders relentlessly pursued. However, no measure of public assurance will work as effectively as the leaders themselves setting an unprecedented example. Until and unless those at the top take the lead in providing proof of paying taxes, much of the public will remain hesitant.
To set things going, the government needs out-of-the-box solutions. We cannot keep going the way we have. The practice of habitually raising expectations at budget time, then revising down estimates, then falling short of the revisions is what has brought the economy to its knees. If serious attempts at rehabilitation are not made, it is in danger of falling completely.
The writer is a former finance minister