Home Digital Magazine August Issue 2018 How will the new Govt. deal with the fiscal deficit? – Adil...

How will the new Govt. deal with the fiscal deficit? – Adil Nakhoda

Adil Nakhoda sheds light on the economic challenges the new Government will face including the Fiscal Deficit, trade deficit, our trade policy and what possibilities do we have to counter these issues.

Fiscal Deficit?
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Adil Nakhoda |

The main challenge that I think they will face when they come in will be that they have to go to the IMF. I think that will be a pretty straightforward decision due to a number of reasons. First we have a high fiscal deficit, second we have a historically high trade deficit and third, our rupee is devaluing rapidly.

On the fiscal deficit – the latest numbers show it overshot to $1.48 trillion and it will definitely go up further, as generally, it is higher in an election year. It will be a challenge to the incoming government.

The government needs to focus on attracting foreign investments, which will require them developing policies to pursue this. CPEC has also encouraged more investment from other places.

During the elections, PTI like other political parties promised the electorate many things including increased housing, more jobs, etc. How will they do that – the immediate challenge of the fiscal deficit is that you have to increase your tax revenue and then spend. I think the challenge is to increase the tax revenue.

Read more: Pakistan economy set to record fastest growth in 13 years

They will have to figure out a way to get everyone into the tax net, and only once they are in it, should it be decided who gets to pay less and who more, based on their income. So, regardless of what the income is, they have to file their taxes. Rather than constantly increasing indirect taxes, such as the tax on fuel, GST, etc. Given our low levels of education, they have to develop simple but automated systems so that income can be filed.

On the external sector; we have a trade deficit of approximately $36 billion, and a current account deficit of $18 billion. Within PTI’s 5 years, they will have to bring in long-term solutions with respect to the trade deficit. A recent Planning Commission report predicts that by 2023, imports will have gone up to $80 billion. It also predicts that exports will double or go up to $50 billion in the next 5 years. Which means that you will have to have an export growth of 15%, but still a trade deficit of $30bn.

The main challenge that I think they will face when they come in will be that they have to go to the IMF. I think that will be a pretty straightforward decision due to a number of reasons.

The problem of depreciation will remain because we don’t have foreign reserves and unfortunately the gap between the imports and exports will not shrink. Personally, I think we can go up to around $35-40 billion in exports, which in itself is still not very easy to achieve. The demand and supply factors for exports need to be considered when trying to increase them.

Read more: Pakistan Economy’s Progress Card

The last government went for short-term measures, such as subsidies. This will only lead to more problems in the long run. We need to diversify our export base and create the right product basket. So, at the present moment, we are mainly exporting rice, cotton or cotton yarn. These are raw materials, we need to go for higher value-added products, especially in our textile industry.

Then, we need to evaluate our trade policy. We talk of letting go of Free-Trade Agreements (FTAs), but we have to realize we need those FTAs in order to get cheaper, intermediate inputs. Furthermore, our textile policies are restricting trade with the largest exporter of handmade fibers, i.e. India. I see that as another challenge for the incoming government; how they will increase exports and change trade restricting policies.

The government needs to focus on attracting foreign investments, which will require them developing policies to pursue this. CPEC has also encouraged more investment from other places. For example, we are now seeing automobile manufacturers and other different producers come to Pakistan, as they see the potential in the country, especially because of improved security and better environmental laws.

Dr. Aadil Nakhoda is an Assistant Professor at IBA. He has also taught Development Economics at Penn State University. Aadil Nakhoda has done his PhD in International Economics from University of California, MA in International Economics from University of California and BS in Economics from Pennsylvania State University. The views expressed in this article are author’s own and do not necessarily reflect the editorial policy of Global Village Space.


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