But that’s not how the finance minister sees it
The 7th Review with the IMF may have eased the finance minister’s road to the budget, but unless the conservative policy outlook makes way for more growth stimulation, the Fund might not be so accommodating next year. Dar sb didn’t mention, of course, but his ‘success’ with IMF in Dubai recently lay not in impressing them with our performance, rather in getting them to agree to missed targets, again.
GDP growth is a full percentage point behind the projection, that too if the 4.1 percent is really achieved. The deficit, too, will overshoot, owing to Zarb-e-Azb, etc, which is the official line. Since it is expected to bloat all the way to five-and-a-half percent this fiscal, the Fund’s demand for next year – 4.3 percent – will test the government. And the previous projection of 3.9 percent will, of course, be forgotten.
And with growth slow and the deficit rising, it is difficult to see how the government will be able to trigger growth in the coming year.
“Growth needs investment”, said Dr Salman Shah, former finance minister. “And with the private sector sidelined and the energy problem continuing, there is little chance of generating enough investment to stimulate growth”.
The IMF’s Extend Fund Facility was more a stabilisation package than a growth program. Its restrictive policy posture was meant to stabilise the economy. But failure to adopt pro-growth policies once a degree of stability is achieved threatens to choke the economy. The drop in Brent crude and let up in inflation provided the right environment to shift policy, but the government did not take advantage of the opportunity.
“The private sector is still crowded out, there are no reforms to deal with the structural energy crisis”, added Dr Shah. “The $33b investment for 10,000MW generation will mortgage generations. We could have built all our dams with this money”.
With growth slow and the deficit rising, it is difficult to see how the government will be able to trigger growth in the coming year
Development expenditure
Missing the growth target in the outgoing fiscal, though pretty much standard practice, casts doubts about raising GDP next year, but the deficit overrun can have different connotations.
“In a way the Fund did the right thing by agreeing to the deficit”, said Dr Hafiz Pasha, former federal minister and head of the Institute of Policy Reforms (IPR).
“But this was the moment to move, and the government should have shifted to development led growth”.
According to Dr Pasha, another ‘standard practice’ of slashing the development budget is “suffocating the economy”.
“Right now the main sectors of growth are squeezed”, he added.
“When agriculture cannot grow more than four percent, manufacturing must be the bedrock of growth. But in the Jul-Mar period manufacturing grew only by 2.5 percent. These are not growth friendly numbers”.
He believes a four-point agenda is needed to turn things around. One, PSDP must be raised to Rs750 billion. Two, no new taxes for one year. They should increase the tax base not the rate. There have been too many increases in GST, withholding tax, regulatory duties, etc. Three, expand monetary policy and reduce interest rate. Also, make sure the private sector is accommodated. And four, sort out the exchange rate. “It’s out of line approximately 10 percent. We’re losing competitiveness. If Turkey can devalue by 21 percent, why can’t we?” said Dr Pasha.
Once enough confidence is created to attract investment, subsequent growth automatically pushes up tax revenue.
Champion companies
There might be more ways for the government to promote growth. It might not be easy, for example, of overcoming the habit of directing development funds to deficit needs immediately.
“It is growth that is needed immediately, not reforms”, said Uzair Ahson, assistant professor of Economics at Government College University, Lahore.
“While the law and order situation is unfriendly, the government can use other avenues like diplomacy and incentives to promote investment”.
Once enough confidence is created to attract investment, subsequent growth automatically pushes up tax revenue.
“Pursuing tax reforms and holidays might not be the best idea right now, growth must come first”, he added.
“A good idea is to create champion firms. But their support must come with sunset clauses and once they’re up and running, they provide uptick to employment and growth figures”.
For the present, though, there is little in terms of investment other than the government’s mega projects.
“At least they will create employment and incomes”, said Uzair. Whether or not they can provide enough push to GDP remains to be seen.
