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Seven-point strategy for economic revival

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From SHAMIM AHMED RIZVI, Islamabad
Nov 15 - 21, 1999

Addressing a select and knowledgeable audience at the 15th meeting of the Pakistan Institute of Development Economics in Islamabad, the Finance Minister, Mr. Shaukat Aziz outlined a seven-point strategy which will become the basis for the economy's rescue and revival plan. The basic approach, as he put it, is to restore business and investor confidence, stabilise the macroeconomic framework, expand the tax base, increase exports, discourage non-essential imports and stabilise the exchange rate, seek donor help to reduce the debt burden, restart the privatization process and launch efforts at poverty alleviation. His remark that we have to work in several directions simultaneously and no ordinary set of policies can arrest the downward slide shows both realism and boldness which should inspire confidence. However, translating the new economic reform agenda into swift and credible actions on the ground will be a major challenge.

The Finance Minister did well to recount the problems facing Pakistan's economy. Both the row with the independent power producers and freezing of foreign currency accounts badly shook investor confidence. Decades of living beyond our means has mired us in the classic debt trap. He spoke about how to solve the dilemma of collecting more taxes from a stagnant economy. The external sector is under serious strain. National savings are low. One fourth of the country's population lives below poverty line and human development indicators are woefully inadequate. All this indicates that the new economic team has quickly identified what needs to be done to resolve these problems. As the Finance Minister himself pointed out, a detailed economic rescue plan is under preparation and should be ready before year end.

The Finance Minister also highlighted the importance of peace and security for economic development, people's role in development process and the need to check sentiments of deprivation among the people. His assertion that a society where a large segment of population, particularly the poor, bears the greater burden of the cost of governance while a small group of rent-seekers reap its benefits is bound to generate social upheavals, is of course absolutely correct. That such a situation, he said, exists in Pakistan and its persisting is known to all of us and we must find ways to correct such imbalance. That must have aroused great expectations among the people for whom the change of the government seems to mean good governance, credibility of the official word and redressal of their long-neglected problems.

Herculean task

The country's new economic managers are, in fact, confronted with a Herculean task. Recovering the looted wealth and defaulted loans is a very tough task. Equally difficult is the task to eliminate smuggling and tax evasion. Most of those who are involved in these sorts of activities are highly clever. Then they have the assistance of smart lawyers, corrupt tax officials and bankers to protect them and their wealth. It may be more difficult to retrieve such wealth from politicians who left no trace and transferred much of that to their relatives or banks abroad.

When the country is indebted to the extent of 100 per cent of the GDP, and 90 per cent of the tax revenues goes towards debt servicing, starving all nation building activities of the requisite funds, the current fiscal mould has to be broken. To achieve that we have to restore investors confidence, increase domestic savings, carry out pragmatic tax reforms, turn-around the state enterprises towards profitability, boost agricultural productivity, revive industry and promote austerity measures. More specifically the looted wealth of the country is to be returned the long defaulted bank loans to be repaid and evaded taxes to be paid.

After three martial law regimes that had ruled the country half of its life of 52 years as well as successive political governments that had failed to enforce accountability and keep the government clean, Gen. Musharraf's administration has no option but to enforce across the board accountability quick. If revenue collection has to go up, corruption in the taxation machinery all round will have to be stamped out. The policy hitherto has been to let the corrupt officers thrive as long as they collected more revenues. In fact, the percentage of bribes collected by income tax personnel has been rising over the years and had come close to 50 per cent of the total tax dues.

There are three ways of checking such corruption. 1. Through adequate vigilance and surveillance at the stage of tax collection 2. Through uncovering the excessive assets they and their relations had acquired. 3. On the basis of living far beyond their means. But the smarter ones have kept a great deal of their money abroad with the help of foreign banks. How far our external intelligence can be helpful in tracing out such funds is difficult to predict.

If the corrupt officers and the bankers who gave the defaulted loans in return for large kickbacks get away with their loot this time as well more bureaucrats will take to the loot. Hence it is imperative that the anti-corruption drive to be launched now should be a real success, although that is by no means easy.

Restoring investors' confidence is a major objective of the government. before foreign investment can come in a sizable manner domestic investment has to come. Pakistani entrepreneurs have to be in the lead in this area. The IPP issue has to be settled expeditiously. It has lasted for 30 long months and held up further foreign investment. To restore investors confidence, law and order has to be improved radically and the run-down infra-structure strengthened quickly. And the long promised one window facility for investors, more so for foreign investors, must become a reality. India is moving in that direction fast. We cannot be too slack.

The number of taxes, federal, provincial and local, has to be reduced from the staggering 103 so that the opportunities for corruption which exist with each tax can be reduced. Gen Musharraf has spoken of pragmatic tax reforms. A decision in this area should be taken quick after a committee headed by a former high court Judge has been sitting on it for long.

The government faces an unpleasant task of finalizing the negotiations with the IMF to get the much-needed tranche of 280 million dollars. But before that, it has to come to a settlement with the IPPs. It has also to sign the letter of Intent for IMF which Mr. Ishaq Dar could not sign. It is under pressure to raise the POL prices substantially as well as levy a 15 per cent sales tax on power. All that can upset the people who are under great economic pressure.

POL prices

A major issue on which the government has to take a decision soon is how it is going to handle the issue of raising POL prices on which the IMF has been putting a great deal of pressure. If the oil prices are not raised the large surcharge from it which meets 20 per cent of the budget will vanish and the country will face a real fiscal crisis. And a substantial rise in POL price, particularly a hefty rise in furnace oil price, which will push up electricity rates, will be very unpopular in a country hit hard by inflation.

What the army can do is to come down heavily of power theft which has risen to 4o per cent of the output of WAPDA and KESC and make the people pay for the power they use. That can reduce the rise in power rates instead of those who being forced to pay far more, while the rich power thieves thrive merrily regardless of what is the new cost of power.

The new rulers have also to take firm decisions in respect of privatization and come up with a forthright policy announcement within weeks. Banks and other public sector units to be privatized cannot be in a state of suspended animation for long.

The economic success of the new administration would ultimately depend on the extent of cooperation it is able to secure from trade and industry, the farmers and the trade unions. It has also to persuade the people to accept a long, preferably five-year, period of austerity so that the country, at present having one of the lowest savings rates in the world is able to save more, invest more and employ more.

The welfare of 140 millions, mostly poor, cannot be ensured by the government alone when it has such small means. The pervasive waste and corruption in the government must be stamped out. And that can be done only with the cooperation of the people and not through decrees from the top alone. What we need is a truly national endeavour and not merely looking up to the government for everything.

No doubt the task is daunting but the country has no option but to move in this direction as this really is our last chance for survival. We can still pull through. Otherwise we will have no one to blame but our selves for the ensuing disaster.