News Desk |
GVS spoke with Express Tribune economics reporter Shahbaz Rana to get his thoughts on the government’s mini-budget and if it will achieve what the government needs in terms of economic growth, jobs, FBR tax collections and set Pakistan up on the right path for the next five years.
GVS: What does the government need to do to generate economic growth and has the January mini-finance bill gone any way towards that?
Pakistan’s fundamental problem is to have sustainable growth. We have seen in the past that there are periods when we have had growth at 5 to 6 or even 7 percent and then all of a sudden we start facing problems of growth decelerating. The same happened in the past five years; the initial growth was financed by taking out foreign debts, and since that was not sustainable we had the slowdown.
What the current government needs to do is think of how to put the economy on the right path. They have the right intentions. But the next question is, are they looking at the right areas where they are going to give some kind of incentives. This seems questionable right now.
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In Pakistan, agriculture is about one-fifth of the total national output and the services sector, which should have been about 30-40 percent in a country like Pakistan, is almost 60 percent of the total size of the economy. This creates a mismatch and because of this, we have high unemployment in the economy. The focus in this finance bill should have been on areas which create more jobs, but that focus is missing.
When we look at the finance bill, we see there are incentives for the stock market. This is good since it can create positive sentiments among the investors and any positive movement in the stock market creates an overall positive environment in the country. But are we addressing the real economic issues that Pakistan is facing? My answer is no.
One of the fundamental issues in Pakistan is the high cost of doing business. They could have focused on reducing taxes which could have kind of promoted industrial growth. And they should have done much more directly for the agricultural sector. Reducing the tax rates for the banks to lend to agriculture and housing sectors is not the best way to get results.
They would have been better off by setting the interest rate for the agricultural sector in the single digits. The kind of interest rates that the exporters are paying in the various refinancing schemes run by the State Bank of Pakistan, those kinds of incentives should have also been given to the agri-sector.
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They need to focus on agriculture. When you focus on agriculture you get quick results. Because the crop comes in a matter of just six months or so. So, you focus today and you get a result next year. In addition, about 30 to 40 percent of the country’s labor force is employed in the agricultural sector.
In the industrial sector, what the PTI govt did in the past five months is that they have reduced the cost for the export-oriented sector which is the right step but similar kind of incentive should have been given to the industrial sector too. The industries which are not exporting they are still paying higher tariffs on electricity and gas. This means the cost of production has not been lowered and this will make them more uncompetitive. The problem with Pakistan right now is that we are not competing within our borders.
We are competing with countries like China. We have a free trade agreement with China. Probably it is one of the worst things that have been done in Pakistan in the past decades. The cheap imports from China under the FTA are kind of pushing out the local industry, which has, in turn, created high unemployment. People are moving more towards the services sector. They are importing goods from China and selling them in the local market.
GVS: What are Pakistan’s immediate problems?
Pakistan’s immediate problems are in the external sector and the budgetary pressures. We do not see any measures in the finance bill to address that.
The currency has been devalued but the problem with Pakistan’s exports is that they are very rigid types of exports – we are making the same kinds of products that we have done so for decades without much innovation. The exporters are taking easy money from the government and putting it into their own accounts. I estimate the cost of earning one dollar of exports for Pakistan at around $1.17 cents. That is too high cost. We are actually paying exporters for bringing in this one dollar.
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In this finance bill, the government has introduced a clause under which they would give a kind of promissory notes to the exporters instead of the tax refunds. Actually, they are not paying them money but they are giving them some kind of instrument that will mature in future. So that will not resolve their immediate problems. The money you have taken from the exporters by blocking their refunds, now you want to pay them back by borrowing from commercial banks. Again this is a wrong strategy. It is against the basic accounting principles. You cannot inflate your revenues by borrowing.
The government should have given a clear roadmap of how it wants to address the issues of external sector and budgetary pressures. We have seen during the first half of this fiscal year there was a shortfall of PKR 172 billion in FBR’s tax revenue collection. We do not see any measure to plug that gap. Instead of increasing the tax base or tax revenue through additional measures, the government has actually given PKR 7 billion incentives to various sectors, mainly the stock market. So that means pressure on the budget will remain during the remainder period of this fiscal year. We have not taken new measures to counteract this.
That means we will borrow more in this fiscal year and probably the borrowing will be more than what the PMLN government borrowed in its last fiscal year. So here is the key point. Apparently, it seems that the budget was a directionless exercise. If they wanted to take these corrective measures what they call the incentive package for the economy to revive, they could have done this in the upcoming budget, which is just three months away. There was no purpose of giving another mini-budget or the finance bill at this point in time.
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GVS: When you heard about the mini-budget first being announced what did you expect was going to happen?
My fair idea was that the finance minister would announce a five-year roadmap to put the economy on a sustainable path. That is altogether missing from the new finance bill. So there is no direction. We do not know what will happen to Pakistan after two years or after three years or even after three months. So here we stand. This is a major flaw in the budget speech.