- Address the balance of payment problem first
By Dr Safdar A Butt
There is no denying the fact that Pakistan is going through an economic crisis. The government has, in its wisdom, decided to go to IMF for a loan that they think will solve all of their economic problems, at least for the time being. The IMF’s style of solving these problems, as borne out by large number of “packages” granted by them to developing countries over the recent past, is far from satisfactory. These packages have suffered from an inherent defect: wrong diagnosis and wrong treatment. I greatly fear that the same is going to happen to the package negotiated by Pakistan now.
The terms and conditions that are being imposed by IMF for the grant of a forex loan are indicative of what IMF thinks is the root of Pakistan’s economic woes. All these terms are simply aimed at bridging the gap between government revenue and expenditure, that is reducing the budget or fiscal deficit. Their prescription is to increase taxes, raise interest rates and withdraw all subsidiaries to different sectors. None of these steps will cure the real cause of our country’s present woeful state of economy.
The real cause of our problems is foreign debt. For the last several decades, we have been borrowing from foreign countries and institutions to meet the balance of payment deficit. Each year, our balance of payments deficit keeps getting larger and so does our foreign borrowing. What we need is to narrow down the gap between our imports and exports which in turn will reduce our dependence on foreign borrowings. None of the recommendations made so far by IMF propose any real steps to arrest the need for foreign borrowings. If you will pardon my cynicism, the conditions being imposed on Pakistan for the grant of the latest package will actually damage our exports, increase the need for imports and as a consequence we will end up having to borrow even more from the international sources in the future.
The conditions being imposed on Pakistan for the grant of the latest package will actually damage our exports, increase the need for imports and as a consequence we will end up having to borrow even more from the international sources in the future
What we need to do is to increase exports and reduce imports. It is as simple as that. Bangladesh has done that wonderfully and its textile exports alone are above $45 billion per annum – and they don’t even grow their own cotton. Their government offers all sorts of concessions to exporters and industrialists. On the other hand, Pakistan is being told by IMF to withdraw all concessions from, industries and to load them up with additional taxes. We are also being asked to increase the cost of electricity and gas – vital inputs for most industries – to increase government revenue. This will make our local industries quite uncompetitive in the international markets. Why don’t we look at the Chinese model? For almost five decades the Chinese government was very wisely providing free or highly subsidised energy to exporting industries. But then China had not been tied down by IMF.
Rather than reducing fiscal deficit we must reduce the current account deficit first by increasing our exports and significantly reducing our imports. This will help plug the trade balance gap.
The government has the necessary number of economic experts to prepare a comprehensive list of measures to reduce imports. I will confine myself to only a few major ones.
- Ban the import of ALL those consumable items for which Pakistani substitutes are available. If banning them is not possible, we should load such imports with really heavy import duties. Why do we need to import clothes, shoes, biscuits, confectionary, fruit juices, furniture, sanitary ware and hordes of other consumer items? All of these are also being produced by Pakistani companies. Yes, there is an issue of quality in certain cases, but we will have to sacrifice our preference for quality, at least for a short period, in order to bring our country out of economic doldrums.
- Pakistan spends far too much forex on cars. To start with, import of all pre-assembled cars including used cars should be immediately banned. In addition, the tax rates on locally assembled cars should be significantly increased. Taxes on petroleum products should be rationalised: taxes on fuels used in private cars like petrol and high octane should be increased and taxes on fuels used for public transport should be reduced. These recommendations will bring down our import bills and also boost governmental revenue.
- In general terms, the government’s anti-industry attitude needs to be addressed. Industry’s share in GDP is around 18%, yet it provides 64% of total taxes to the government. We should not kill the goose that lays the golden egg. Instead of harassing them through bureaucratic red tape, we need to nurture our fledgling industries by providing them protection against unfair imports. International agreements be damned; we need to protect our industries. USA does it, whole of Europe does it, China does it, why shouldn’t we do it?
- Through careful studies, areas of import substitution should be identified and promoted. For example, if we encourage plantation of olive and palm trees, we can effectively cut the import bill of edible oils by as much as 75% over the next four to five years. Instead of senseless, random and unplanned 5 billion useless trees, we should aim at planting trees that will help our economy both in ecological and economic terms. Incentives need to be offered to commercial farmers to foray in these unchartered waters.
In order to increase exports, it is proposed that:
- We must take steps to make our factories competitive in the international market by helping them reduce costs. Industries that export products should be offered cheaper energy and lower taxes on their other inputs. Subsidies is an ugly word, but we can offer incentives in the form of “export bonus”. For example, for every dollar received from exports, the exporter should be allowed a concession of say Rs 10 in its income tax. This will spur exporters.
- New avenues of export must be found. Our export promotion board has done virtually nothing over the recent past. There are so many areas of our economy that can enhance our exports if due attention is paid to them. One glaring example is fisheries. We are still using nineteenth century techniques and therefore failing to fully exploit the potential of exports. Incentives should be offered to encourage investment in this area, leading to use of modern equipment to enhance our production and forex revenues.
This brief article cannot possibly provide a comprehensive guide to solving all the economic problems – it is merely intended to draw the attention of our planners to the possible dangers of administering wrong treatment due to wrong diagnosis. We must address our current account deficit first, and come to fiscal deficit later. If the order of current priorities (as prescribed by IMF) is not reversed, we will land deeper into the economic quagmire.
The writer is professor emeritus of finance and corporate governance at Capital University of Science and Technology, Islamabad. He has served on the boards of four financial institutions in the past and is currently an independent director at Hi Tech Lubricants Ltd. He has written 38 books and over a hundred research papers and articles.
