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Home›Domestic resource cost›How to break a vicious cycle [Part – II]

How to break a vicious cycle [Part – II]

By Brian Baize
June 3, 2022
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How to break a vicious cycle [Part – II]

It goes without saying that political stability is the sine qua non of any sustained effort to achieve rapid and inclusive growth. The main drivers of this growth would be small farms, SMEs and micro-enterprises, construction and low-cost housing, tourism, information technology and information technology-based services, diversification and the added value of exports.

Thus, the agenda proposed for the short, medium and long term should have a continuous chain, linking and consolidating the gains of these sectors and stimulating intersectoral synergistic impulses over time. The continuity of these policies beyond the electoral cycle is an absolute necessity. There are several paths to achieve this type of growth, but the preferred path is one that expands domestic productive capacity to meet higher aggregate demand associated with rising per capita incomes, relatively high propensity to create productive jobs and support livelihoods, reduce poverty and reduce interpersonal and regional inequalities. Difficult political decisions would be necessary from time to time. The time horizons described are not discrete as they would have spin-offs, but are continuous, intertwined in a chain that leads to the ultimate goal.

Short-term agenda 2022-24: The revival of non-inflationary, sustained and inclusive growth would take place over a much longer period. What is presented in the following paragraphs is what can possibly be done over the next two and a half year period with great concerted effort. We are fully aware that there will be elections in 2023, but the commitment of all political parties to this agenda must be guaranteed.

For this, first, increase the ratio of investment to GDP by two percentage points each year, to reach 20% by 2024. Public sector investment as well as public-private partnership must not only be intensified, but their quality and their composition must be improved. capable of attracting private sector investment. The ratio of bank credit to GDP, especially in the fixed investment component, has remained miserably low compared to our neighboring countries and needs to be doubled from the current level. Private equity, development finance institutions, IPOs and debt capital markets must play a crucial role in financing private investment.

Second, to increase the productivity of small and medium-sized farmers – especially in wheat, sugar, cotton, oilseeds, livestock products and pulses – to improve marketing infrastructure, to confine the role of government to strategic reserves to manage the gap between supply and demand and maintain price stability. The provision of improved seeds, fertilizers, pesticides, small agricultural tools through targeted subsidies as well as efficiency in the use of water resources and credit to small farmers who constitute two thirds of the total farms can increase national crop yields. Veterinary services and artificial insemination would do the same for dairy products and livestock. It is paradoxical that a country with the largest irrigation system has to import foodstuffs and cotton for almost 10 billion dollars. The impressive results of the rice and maize crops show that state intervention in the markets is to be avoided. R&D in the public sector must be integrated and coordinated.

Third, continue to pay special attention to the construction and housing sector and to tourism, which would create jobs, stimulate activity in related industries, help micro, small and medium-sized enterprises and help low-income families income to acquire houses and expand tourist facilities in Gilgit-Baltistan, Khyber Pakhtunkhwa, Makran Coast and Azad Jammu and Kashmir. The domestic cement industry is growing not only in response to domestic demand, but also because of the economies of scale it is able to export. Pakistani steel mills are to be made fully operational under a lease agreement with the private sector and expanded to a capacity of three million tonnes and, alongside performance-related incentives to produce quality products, will reduce dependency with respect to imports. The engineering goods industry has remained weak and should be encouraged to meet local industrial demand or to compete in international markets.

Fourth, expand FBR and provincial tax bases to achieve a 15% tax-to-GDP ratio (provincial taxes contribute 3% vs. 1% currently) through automation, data integration and analytics, harmonization, new surveys and valuation of properties, tracking and tracing system and minimization of interaction between taxpayer and tax collector; gradually reducing the indirect tax ratio from 60 percent of the total to 50 percent; expedite income tax and sales tax refunds on FASTER lines without any human intervention at any stage of the process.

The urban property tax has enormous potential that can be exploited if the powers of assessment and collection of this tax are devolved to municipal corporations. Cities like Karachi, Lahore, Islamabad and Faisalabad can generate five to six times more than current levels if they carry out cadastral surveys, reassess properties every year and impose heavy penalties for not using plots. Taxes on the agricultural income of large landowners and the revision of irrigation fees can prove to be a remunerative source of revenue for the provinces and also ensure efficient use of scarce water resources. The use of indirect taxes on goods and services is highly regressive and should be replaced by direct taxes on income (from whatever source), property, capital gains, assets and inheritance.

Fifth, reorganize public enterprises (EPs) through restructuring, capital market sales, sales to strategic investors, mergers, liquidations, management contracts, public-private partnerships to improve the overall economic efficiency and maximize returns on investment. All heads of these companies should be recruited through an open competitive process and candidates selected on the basis of merit, well compensated but held accountable for results. The lead ministry can set performance agreements but not interfere in day-to-day operations.

A comprehensive plan and strategy is already in place that classifies commercial SOEs into two parts: those that should remain public for strategic or public policy considerations and those that should be privatized or liquidated. In the first category, some of the companies need to be restructured and made financially viable. Implementation of this plan would save nearly Rs.1 trillion in grants, domestic and foreign loans, guarantees, equity, capital allocations, funded and unfunded grants. The budgetary situation would improve if this plan were implemented quickly.

Sixth, implement the electricity sector’s circular debt management plan, transition to a competitive market for buyers and sellers, reduce DISCO inefficiencies, utilize excess electricity generation by increasing electricity demand. increased absorption through incentive pricing. DISCOs should be immediately transferred to private sector management through an open competitive process. Government interference in price setting should end. The private sector should be encouraged to bring in LNG and distribute it to consumers without any government guarantee or purchase or payment agreement. Sui Southern and Sui Northern should own the transmission network, but supply and distribution should be opened up to private sector companies to introduce competition and efficiency and benefit industries.

Foreign oil and gas exploration and development companies are gradually leaving Pakistan. What to do to bring them back? Our oil refining policy has been in a state of heated suspension and a decision should be made quickly to upgrade them and increase their capacity. Fuel mix towards renewables is part of the energy plan, but implementation should be prioritized. The expansion of Thar Coal’s mining and rail links to consuming power stations as well as the possibility of its conversion to gas would reduce our fuel costs and energy import bill.

To be continued

The writer is the author of ‘Governing the ungovernable’.

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