Recently, the government has been touting reduction in current account deficit as one of its achievements but in my opinion, the fiscal and monetary policy tools used to manage the external account are operational and temporary in nature. Only structural changes and reforms could bring long term and sustainable solutions. These changes are hard to implement as they require phenomenal political-will and an extremely committed and competent executive team for execution and delivery. But unfortunately there are no shortcuts to these structural reforms anymore and as the time is passing by the need for them is escalating given that other operational tools are almost exhausted.
The critical aspect is that to manage external account, the reforms must be broad-based and cover all the main constituencies, including internal account and taxation. In fact, the circle expands to foreign policy and managing law and order situation in the country, as in this day and age, it is impossible to separate economy from politics. This will not be out of place to say that politics has the most influence on economic factors. Globalization has also resulted in the lack of separation of local economy from international political and economic developments.
The recent economic environment in Pakistan is primarily a result of uncertainties prevailing on the political and the foreign policy fronts. The lack of broader reforms in decades and fragile state of affairs of Public Sector Entities (PSEs) and institutions make the economy exposed to political and economic shocks. Whilst the economic growth has been on the up over the last four years; however, these strengths were not institutionalized, at least not been embedded enough to sustain the moderate political vibration and; thus, inherent weaknesses started to surface.
The single biggest vulnerability in the economy, which the government had to face on the external account front was the growing current account deficit, which is a result of unprecedented increase in imports and almost stagnant exports. In order to manage the imports, the best instrument available is the fiscal policy (duties, cash margins, bans etc.) at this stage, while simultaneously working on the import substitution, a medium to long term solution. On the other hand, the sustainable growth in exportable flows could only be achieved through a medium to long term solution with structural changes (value-addition, non-conventional exports, etc.) and exploring new areas, like manpower exports. Following are some of the measures that could be taken to manage the external account:
Internal Account: The local currency risk primarily emanates from funding losses of PSEs and energy sector. These risks could only be addressed with an aggressive reform agenda across all PSEs and some, particularly energy sector, require fundamental structural adjustments, optimal generation mix and transmission up gradation/enhancement. The decision-makers in the past merely focused on generation, where a very robust regulatory framework exists; transmission on the other hand was not given enough heed; resultantly, transmission became the dominant reason for load-shedding during the last five years. The policy-framework in transmission sector is still struggling and this area must be given attention on top most priority. Similar is the case in the petroleum sector, pipeline infrastructure is the primary reason for chocking. The point is that the logistics (all sorts, be it in energy sector, railways, air-cargo, storage, terminal, etc.) need policy direction and fixing. These’re all medium to long term issues and cannot be addressed in the short-run. A part of the solution in this respect is hidden in privatization of the state own entities but only when post restructuring and enforcement of strong legislative/regulatory changes/structures are in place and tested. However, in the interim, as an immediate measure, the restructuring of the regulators and the large PSE is inevitable.
Taxation: The recent initiatives by the government are in the right direction. The fundamental reason for taxation issues emanates from the fact that the whole taxation regime has become too complicated and there is an element of increased intimidation by the taxmen for the genuine tax payers. Harassment is the single biggest hurdle that keeps people from paying taxes. The other factor being the lack of trust on the government to judiciously use the tax collected from masses; in other words, the element of corruption and leakage in the system. This is, therefore, imperative that the interaction between the taxmen and the taxpayer is reduced to the minimal. This is possible through: i) use of technology; ii) flat tax regime, particularly in customs; and iii) substantial reduction in direct taxes. The total net contribution of direct taxes in the revenue collection of FBR is merely 12% whilst on the other hand the direct taxes require heavy paraphernalia and resources. The truth is that we, as a nation, for right reasons or wrong, do not pay taxes voluntarily; therefore, it makes sense to collect the taxes through indirect sources which are not only cost efficient but also effective in terms of collections. With the above measures, not only the number of tax payers will enhance, but the amount collected will also be boosted. As mentioned above, making the taxation system simpler and eliminating the interaction with the taxman alone will help in enhancing the taxation collection. This objective could be achieved through some policy changes discussed above and with the use of technology. Whilst FBR has come a long way on the technology front; however, this area still require reforms and professionals engagement. There will be a considerable resistance to this change, therefore, strong political and institutional will and commitment is a prerequisite as the reforms are absolutely inevitable in Federal Board of Revenue (FBR).