WEB DESK: Finance Minister Ishaq Dar while addressing the inaugural session of China Pakistan Economic Corridor (CPEC) Summit took credit for the 46 billion dollar inflows expected under the CPEC by inexplicably declaring that “economic challenges of the country are over” and maintaining that China had chosen the right moment to invest in Pakistan.
Dar then proceeded to mention the Sharif administration’s three accomplishments. First, the massive rise in foreign exchange reserves from a very low level in 2013 to the current level, an increase in reserves acknowledged by the mission leader for the ongoing International Monetary Fund (IMF) programme as largely debt enhancing; second, improvement in the hours of load-shedding, though he did not focus on the tariffs agreed with prospective energy sector investors which would make electricity generation one of the most expensive in the region thereby making our exports more uncompetitive in the regional markets; and third, law and order situation which has certainly improved though the civilian component of the National Action Plan (NAP) remains largely unimplemented due to political expediencies.
The question is did our business environment improve during the three years of the Sharif administration as indicated by the Finance Minister? Pakistan’s Ease of Doing Business as determined by the World Bank declined from a ranking of 136 in 2015 to 138 in 2016. The CPEC is not the outcome of the economic situation prevailing in the country but is largely due to foreign policy initiatives that began well before the third tenure of the Sharif administration began.
However, what must really stick in the craw of many an Ishaq Dar critic is his claim that all economic challenges are over. A few reminders are in order. The government’s reliance on external debt has increased manifold during the past three years and as per data released by the State Bank of Pakistan (SBP) our external debt and liabilities (including the issuance of eurobonds as well as sukuk at rates well above the international rate of return) have reached 73 billion dollars.
The Finance Minister is on record as having stated that given lower interest rates in the West he opted to borrow from external sources and retire the more expensive domestic debt. Unfortunately, though he made no concessions for the annual rupee erosion and instead interfered in the market to keep the rupee value artificially high. The IMF contends that the rupee is overvalued by about 20 percent and in its eleventh review noted that “Pakistan’s de facto exchange rate regime is classified as ‘other managed arrangement.'”
Secondly and even more disturbingly, while the Special Advisor to the Prime Minister on Taxes Haroon Akhtar Khan has made stupendous efforts to raise revenue, even though there are some concerns about the heavier reliance on indirect taxes whose incidence on the poor is greater than on the rich, yet this rise has not impacted positively on the economy as total government debt remains at about 600 percent of tax revenue. And to add insult to injury development spending remains significantly less than interest payments on government debt, so maintained the IMF Working Paper 182.
And finally, serious concerns remain with respect to governance reforms with SBP data indicating that debt of public sector entities (PSEs) is rising – from Rs 2.48 billion in 2015 to Rs 2.75 billion in 2016. In this context, it is relevant to note that IMF’s press releases subsequent to the twelfth and final review under its ongoing programme gives an entire litany of ‘do-more’ that are almost the same as at the start of the programme: “it will be important to further strengthen public finances and external buffers, broaden the tax net, improve public financial management, strengthen the monetary policy framework, address losses in PSEs, complete the energy sector reforms, and accelerate competitiveness-enhancing improvements of the business climate, including the trade regime”.
Making SBP, SECP and PBS entirely autonomous – a decision that would not lend credibility to their data but also enable the Ministry of Finance to take informed decisions in a timely manner – would be a step in the right direction. We have not been able to avail the ‘window of opportunity’ provided by low price of imported oil as well as absence of natural disasters. We need to improve our tax-to-GDP ratio and also raise the domestic savings rate to bridge the prevailing investment gap to generate higher growth.
Source: Business Recorder