How to create wealth to repay debts? – Journal
Prime Minister Imran Khan said his government has taken several initiatives to build wealth so that it can get rid of heavy foreign loans with a strong and categorical assertion: “We want to create more and more wealth to withdraw heavy loans. foreigners some of whom are causing more loans. “
In December, the Fitch rating downgraded Pakistan’s long-term debt rating from “B” to “B-” due to what it described as a high debt repayment obligation, low foreign exchange reserves and a fragile fiscal situation. Since then, foreign exchange reserves have continuously improved thanks to a surge in remittances from homeworkers, foreign capital inflows and significant debt rescheduling.
In terms of local currency, external debt service will decline if the continued trend of strengthening the rupee against the dollar continues or if the exchange rate stabilizes at current levels. This will have a positive impact on the government’s financial situation. The resumption of reforms of the International Monetary Fund (IMF) has enabled policymakers to obtain more foreign loans from international lending agencies and raise funds on the international market.
But given the overall macroeconomic trends, stable growth seems more difficult than ever. PTI Planning, Development and Special Initiatives Minister Asad Umar said the industrial policy tools Pakistan used in the 1960s were now outdated. It may be remembered that President Ayub’s industrial revolution was also stimulated by heavy foreign debt with political implications as evidenced by the title of his book “Fiends, Not Masters”.
Policymakers are now examining new policy approaches / options for the transformation of the economy propelled by rapid domestic capital formation. The Planning Commission launched a public debate at a recent seminar in Islamabad, where leaders of the Economic Advisory Group (EAG) / Prime Institute presented a conceptual framework for economic transformation.
Based on a trade gravity model estimate, the World Bank’s latest Pakistan Development Update shows that the country’s potential exports are estimated at $ 88.1 billion, or about four times the current actual level. This large gap between actual and potential exports places Pakistan in the top quartile of the distribution of countries “ with missing exports ”
Analyst Javed Hasan reminded the seminar audience that the wealth of nations is closely related to their productive structure, as evidenced by the diversity and sophistication of the goods and services they can produce and export. Unfortunately, he noted that in terms of relative level of sophistication, Pakistan ranked 99th out of 133 countries in the Economic Complexity Index.
Based on an estimate of the trade gravity model, the latest Pakistan Development Update from the World Bank (WB) indicates that the country’s potential exports are estimated at $ 88.1 billion, or about four times the current actual level. This large gap between actual and potential exports places Pakistan in the top quartile of the distribution of countries “with missing exports”.
Addressing the seminar, Asad Umar stressed that a deeper understanding and new levers are needed to trigger growth, and for this, the most important government function is to provide political signaling, a framework for competitiveness and a supporting regulatory architecture.
It was also emphasized in the speech that economic transformation required a continuous reallocation of resources towards productive activities, that is, the production of more sophisticated products requiring higher capacities. Speakers included Planning Commission Vice Chairman Muhammad Jahanzeb Khan, Chief Economist Dr Muhammad Ahmed Zubair, Prime Institute Director General Ali Salman and Dr Ahmed Pirzada of EAG.
Arguably, the central question is not only that of economic transformation, but that of political economy, briefly mentioned in his speech by Jahanzeb Khan. Drawing on the dimensions of political economy, Khan said the federal-provincial relationship should be factored into any plan for economic transformation.
The federal government’s 2021-22 budget strategy paper projected a provincial revenue surplus of Rs 440 billion against Rs 210 billion this year to show a consolidated deficit of Rs 3.2 trillion or 6 percent of GDP.
The persistent impasse of the National Finance Commission on the sharing of resources between the federation and the provinces is a stumbling block in the future development of fiscal federalism necessary to increase tax revenues and reduce the consolidated budget deficit. The Federal Board of Revenue’s recovery, estimated at 9.8% of GDP for this fiscal year, is expected to increase to 11.2% in 2021-2022, but it is still below the target of 15% set in the part of the 7th NFC Award.
Asad Umar advised economists attending the seminar to conduct work on the policy implications of reforms and to conduct empirical research on the impact of structural reforms on the lives of citizens.
And the World Bank’s latest Pakistan development update tied the restructuring of state-owned enterprises to addressing the political economy implications. For the first time, the IMF program has set deadlines for measures and laws that must be approved by parliament.
In the past, IMF officials have interacted with parliamentarians to exchange views on IMF reforms, but have recognized that they (members of the National Assembly) cannot be dictated. While unwarranted, the IMF’s intrusion into parliamentary affairs also shows that IMF reforms require broad political ownership to be successful. Approval of legislative issues related to reforms is stuck in a dysfunctional parliament.
The country needs a political ceasefire. In a much later move, the Prime Minister advised his spokespersons to refrain from criticizing the opposition as it was “harmless” and “did not matter”. The question is whether this will lead to a change in policy. The government has invited individual parties – PML-N, PPP and JUI-F – to talks on controversial issues while refusing to recognize the now divided Pakistani democratic movement.
In the budget strategy document approved by the Cabinet, the government revised the estimate of the growth rate for the current fiscal year to 2.9% from the 2.1% budgeted and set a target of 4.2 % for 2021-2022. All short-term growth forecasts are well below the 7-8% annual growth needed to absorb the growing number of unemployed entering the workforce.
The 4% GDP growth rate projected by the IMF for the next fiscal year has also been questioned by the former finance minister, Dr Hafiz A Pasha. He argues that the said estimate “seems optimistic given the coup de grace of the much higher expected electricity tariffs and indirect taxes.” Likewise, referring to IMF estimates for the current year, he says that “exports are too high and imports are underestimated”.
The view expressed at the Islamabad seminar was that existing and future policies, including tax and tariff structures, should be changed, so that they can promote economic transformation rather than prevent it.
Significant improvement in productivity – the main source of GDP growth – is necessary for stability to last and for sustained growth in capital formation to last.
Posted in Dawn, The Business and Finance Weekly, April 19, 2021