Pakistan’s upcoming budget must signal that Pakistan is open for business
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In contrast to the World Bank, IMF and SBP’s modest GDP growth projections for the current fiscal year, which ranged from 1.3% to 3%, the National Accounts Committee provisionally estimates growth at 3.94%. This could rise further as actual figures for the last two months of the fiscal year are incorporated. The services sector grew by 4.4%, the industrial sector by 3.5% and agriculture by 2.7%.
Within services, the highest growth came from wholesale and retail trade, whereas within the industrial sector, it was large-scale manufacturing that grew by 9% and continues to accelerate. Although the low base effect can be partially attributed to the unexpectedly good growth figures, it also reflects the inherent resilience of the economy and the government's deft handling of the COVID-19 crisis.
The positive turnaround in the economy has largely been led by the private sector without the stimulus of government spending. The growth figures strengthen the government’s reform agenda, and it should capitalize on it in the upcoming budget by reducing blanket subsidies, renewing rapid divestment of state-owned enterprises (SOEs), and prioritizing overall productivity improvements and the country’s integration into global value chains.
While targeted subsidies or direct cash transfers are needed as social protection measures, general or blanket subsidies induce inefficiencies in the economy and send wrong economic signals. The estimated PKR 400 billion spent on such blanket subsidies needs to be urgently rationalized. Similarly, the government should also not sink further resources in sustaining SOEs, and instead accelerate the Triage Plan in order to reduce their operational losses. The government’s overarching policy must be to incentivize investment by the private sector in businesses that boost exports and create employment.
The government can take credit for having taken some tough decisions to stabilize the economy for which it has had to sacrifice political capital during the first half of its term. It has also avoided succumbing to intense pressures to stimulate growth through debt financing. It is now beginning to see the benefits of these measures through renewed autonomous growth that is largely private sector led.
Javed Hassan
Recently the government has appeared reluctant to pass through utility tariff hikes or petroleum price increases. Such practices have in the past caused circular debt in the power sector to balloon to levels that exacerbate the eventual burden on private consumers and industry. Even if unpopular, the budget should make clear that the government does not intend to use fiscal policy to absorb commodity prices and tariff hikes in the future.
Failing to take difficult but necessary measures at the right time have necessitated previous governments to resort to mini budgets that not only undermine the sanctity of the budgetary process, but send the wrong signals to important stakeholders, and add instability and arbitrariness to economic governance. In continuation with the practice of the previous two years, the government should not accede to the temptation of supplementary grants.
A key requirement for any economy to undergo significant transformation over time is that resources must be allowed to move from less productive to more dynamic activities. The incentive structure must progressively evolve such that returns from investing in more productive activities are higher than from less competitive ones. This will only happen when private sector growth is earned and adds value through an efficient allocation of resources.
Therefore, the budget must eschew past historical practices of granting tax concessions, tariff protections or direct subsidies to various industrial lobbies. Such measures create distortive incentives in the economy that have allowed inefficient industries to survive. Such sector protection and subsidies need to be replaced with adequate and specific support necessary for overcoming clearly identified market failures.
Government interventions should be designed to catalyze the private sector’s own self-discovery process. It is imperative that less productive businesses which are unable to compete are allowed to fail so that economic resources move towards innovative and more productive businesses. Putting in place an incentive structure that enables this process will allow Pakistan to accumulate greater productive capabilities and, as a result, help deliver sustained prosperity to its citizens in decades to come. The government in effect must play the role of nudging efficiency gains through reforms within various sectors.
The government can take credit for having taken some tough decisions to stabilize the economy for which it has had to sacrifice political capital during the first half of its term. It has also avoided succumbing to intense pressures to stimulate growth through debt financing. It is now beginning to see the benefits of these measures through renewed autonomous growth that is largely private sector led.
It can further help facilitate this process through the rationalization of the complex tax structure and reducing tax rates as well as removing the plethora of archaic regulations that not only increase the compliance cost of doing business, but also discourage small and medium sized enterprises (SMEs) from accessing formal banking channels and entering new markets.
Through policies that not only encourage continuous evolution of incentives for the reallocation of resources, but also alleviate tax and regulatory hurdles faced by businesses, the budget should signal that Pakistan is now open for large and small businesses and welcomes local and international investors.
*Javed Hassan has worked in senior executive positions both in the profit and non-profit sector in Pakistan and internationally. He’s an investment banker by training.
Twitter: @javedhassan
