HOW COULD PAKISTAN BE SELF-RELIANT IN MANAGING ITS BUDGETARY DEFICITS?
SAAD ANWAR HASHMI
Nov 5 - 11, 2012
Being self-reliant is the objective of any economy to have the capacity to manufacture and produce everything from within and export to countries which have a shortfall in the same or could produce but at a higher price. Since independence, Pakistan has not been able to bring itself par with developed economies due to mismanagement, political rift, corruption, leakage of revenue, poor law and order issues, crime, terrorism and dishonestly hampering improvement and growth. Self-reliance is fully achieved when a country does not need any financial support from external agencies e.g. IMF, Asian Development Bank etc. The self- reliance is also achieved if exports are strong and tax revenue is sufficient to maintain the economy and improve the lives of the people. In a recent study, it was estimated that China has USD 1 trillion in surplus funds for which the Government is failing to find avenues to invest since the economy is already self-reliant in most aspects and runs a budget surplus with the highest growth rate in the world.
The reason for the current state of Pakistan is low focus on education resulting in economic problems with crimes and law and order issues. Self-reliance can also be achieved if import substitute industries are set up with a custom and duty structure which bars import of products which are being produced domestically with quality at par with imports. Resources would therefore need to be channelized to promote through venture capital and Greenfield projects to promote such change. Infrastructure development is the key which create jobs and assists the government attract foreign investments and gain revenue. With high inflations, savings are squeezed. With reduction in interest rates, we find that more and more consumers would look for alternate mediums to invest since bank returns have reduced as compared to FY12 when interest rates were higher. With low savings and population of 180 million, Pakistan is consumption oriented economy which would keep the demand for consumer goods and commodities high. We find that FMCG industries are growing exponentially at a rate of more than 15 percent annually which further substantiates our economy being demand oriented. Resources are required to be mobilized in a way that allocation results in receipts of taxes rather than simple outflows. Government needs high degree of integrity and honestly to ensure that funds are utilized without incurring any leakage.
Through the devaluation of exchange rate i.e. the Rupee Dollar parity the purpose is to make our exports cheaper for international buyers. Competing with regional players as an example, Indian Rupee Dollar parity is 54.2 per US dollar whereas Pakistan is at PKR 95.2 per US Dollar. The industry despite such an exchange rate continues to complain that the exports are uncompetitive if compared with India and other regional players. If India at a less attractive exchange rate than Pakistan can have a higher export quantum specially in Textiles, the issue is not with the currency rather than other issues with respect to internal efficiencies, cost structures, cost of inputs, finance cost and the image of Pakistan in the international market which creates an impact far magnified than exchange rate when it comes to export orders. We need to understand that a foreign buyer specially talking about exports would pay a premium if the quality offered is superior than regional players. Even having an attractive exchange rate, other externalities taken into account as mentioned would never assist Pakistan increase its export base in order to be self-reliant.
The government in order to finance the deficit tends to borrow from the banking system which results in crowding out and higher rates for commercial and domestic borrowers. With the reduction in the discount rate to 10 percent, it is expected that private credit off-take will increase. However, we must also understand that in addition to borrowing from the banking system through Treasury Bills coupled with poor tax base, loans would have been obtained from IMF from time to time to support budgetary deficits. Pakistan has borrowed from the IMF, a loan denominated in US Dollars currently with an outstanding of USD 6.4 billion yet to be repaid. The government has already paid USD 1.2 billion in FY12. Earlier, Pakistan also received USD 1.18 billion under Coalition Support Fund (CSF) for the benefit of the economy.
The foreign exchange reserves currently stand at USD 14.38 billion cushioned through worker remittances expected to reach between USD 17 billion to USD 20 billion in FY13. The loan repayment has put pressure on reserves where we experience devaluation as and when the installment is due. According to the repayment schedule agreed between Pakistan and IMF, Pakistan will repay USD 7.6 billion to the IMF by FY15. Earlier in 2008, Pakistan signed an agreement for disbursement of USD 11.3 billion of which only USD 7.5 billion was disbursed leaving USD 3.7 billion not disbursed as the government could not meet the criteria laid down by the IMF for further disbursements.
When we observe the current problems in Pakistan and issue faced by majority, the capacity to meet day to day expenditure with low wages coupled with high inflation needs to be addressed. Inflation could be curtailed further if the value of Pakistani rupee versus the dollar becomes strong since devaluation alone does not increase exports as already established. Secondly, since Pakistan is an import based economy, further devaluation would result in increase in supply side inflation which cannot be controlled through Monetary Policy alone if Fiscal measures are not aligned. The government needs to have a tax free policy for to promote foreign investments and further investments in infrastructure development which would create further jobs. Computerization of invoices and transactions in government offices must be implemented nationwide to stop corruption along with transactions being audited daily through independent firms. Self-reliance would be brought in if tax base is made stronger through stringent implementation of law which would reduce reliance on external loans. Increase in exports through incentives given to exporters at subsidized interest rate coupled with inflow of worker remittances may assist Pakistan towards betterment. Thought these ideas may seem impossible under present circumstances, an ideal environment which includes honesty, integrity and high accountability would eventually make Pakistan self-reliant.