THE next government is going to have a tough task of managing the macroeconomic problems of the country, both on the fiscal side as well as the external sector. Public debt has risen steadily, while the tax base has not widened as much as was needed. Exports have not picked up, while the imports have escalated. As a result, a huge trade deficit stands. The institutional and structural problems have also worsened. We have narrow tax base, greater reliance on indirect taxes and meagre spending in education and health than on debt servicing and defence. Both the hardware in the form of public infrastructure and software in the form of rule of law, effective governance and skillful and healthy human resource remain in precarious situation.
On the other hand, there are some signs of improvement in improved school enrollment and development of public infrastructure related to highways, motorways and public transport in some pockets. A good efficient public transport system is vital for the environment, labour force participation, real estate development, normalization of real estate prices, retail business success, cites’ expansion and diversification of business and official hubs. However, human capital development is even more important as it is the means as well as end of development. The ills faced by the economy actually have roots in bad governance, corruption and weak institutions. Economic policies alone can only superficially drag and drop few variables. But the structural and institutional change requires an all-encompassing effort to root out corruption, ensure complete justice and then governance will be better and policies will work. Foreign and even domestic investment cannot rise without solving structural and governance problems.
To meet the fiscal challenges, the government’s effort to expand the tax net by amnesty scheme and by creating a fiscal and commercial disincentive for non-filers is a necessary step. A little relief has come in the form of additional revenue collection from the tax amnesty scheme. Widening tax base requires strong measures to demotivate and dis-incentivize tax evasion, but it also requires building public confidence in institutions and policies through effective governance. Austerity measures to control expenses on bureaucracy, ministries and official travelling and events might not do much in saving large chunk of public money, but it will go a long way to signal commitment and build people’s confidence. If the tax base and collection can increase, there can be less reliance on domestic borrowing. Thus, banks will have the incentive to provide financing to the real sector. Another option that can be explored is to tax banks heavily on their investment income and lightly on income from financing provided to the real sector. In the current scenario, Islamic banks have a better finance to deposit ratio (66.9 percent) despite their small size as compared to overall industry (51.4 percent) as at end-March 2018.
Coming to the external sector challenges, despite rupee depreciation and introducing import controls, the trade balance seems hard to contain. The inelasticity of imports and highly elastic demand for low value-added exports is the reason why influencing imports and export price is not impacting the trade balance as much as we expect. On the other hand, the rupee depreciation is going to make external debts and imports more expensive. Heavy reliance on expensive imports is going to bring in inflation. To meet the external sector distress, the three most important non-debt sources of foreign exchange available are exports, remittances and foreign investment. Firstly, foreign investment requires energy, security, skilled human resource and infrastructure. Despite a sizable middle-class consumer base, the supply side challenges do not provide enough incentives for foreign investment. Due to these supply-side challenges, even the domestic industries have sluggish investment with many factories shutting down or relocating their production facilities. With the increased supply of energy resources and improved security situation, it is hoped that a business-friendly environment can be provided sustainably.
Secondly, remittances will face challenges with Pakistan remaining in FATF grey list, the ongoing crisis in the Middle East, difficulty in migration to European and Western countries and stringent employment conditions in Saudi Arabia and Malaysia as they face tough fiscal space for further investment in construction. To maintain and even improve remittances, the diplomatic and foreign policy needs to engage in fruitful discussion for providing easy employment and business visa, especially with countries whose products we are importing. Thirdly, the export enhancement requires speedy disbursement of tax refunds and negotiating i) free trade agreements for better market access, ii) easy provision of multiple entry business visas and iii) low cost and efficient bilateral quality certification mechanism which reduce the non-tariff barriers for Pakistani exporters. The exporters themselves need to improve product quality, packaging and branding, gain acceptable quality certifications and explore untapped markets in Central Asia and Africa.
Finally, the macroeconomic and public policies need to be ably supported by academia. The business schools also need to emphasize on entrepreneurship. Some business schools have made an effort to establish business incubation centres. Commercialisation of skills and ideas is important so that the skilful human resource we produce do not merely serve foreign lands as employees rather they should be able to contribute by providing commercial services in the local economy as well as exporting it. The Youth Business Loan scheme needs to expand and support other low cost businesses. If a single young person can be provided a soft loan for purchasing a car worth 1.5 million for ride hailing services, many other service oriented businesses can also be funded which have even better employment creation potential beyond the loan beneficiary alone. India’s IT-related exports have touched USD137 billion per year, which is almost six times the size of Pakistan’s total exports. IT services exports can be enhanced further without depending much on land, mobility, capital and infrastructure.
— The writer is Assistant Professor at SZABIST, Karachi.
Source:Â https://pakobserver.net/key-challenges-for-next-government/
