Fixing the fundamentals of economy

Hussain Mohi-ud-Din Qadri

(This article was published in Daily The Frontier Post on Saturday, Aug. 01,
2009)
(Print Media Coverage Daily The Frontier Post on Saturday, Aug. 01, 2009)

Pakistan’s recourse to the International Monetary Fund (IMF) and the World Bank
(WB) for much needed foreign exchange to prevent default on its external obligations
shows country’s predicament. Despite promises and claims by successive
governments, both military and civilian included, about breaking the proverbial
begging bowl, Pakistan continues to remain trapped in the vicious cycle of IMF. It is a
classic case of “the more things seem to change, the more they remain the same.”
Given the surge in economic activity caused by growth in the telecom sector, stock
exchange, foreign remittances and flow of international aid and investment, an
impression of ‘economy being on the track’ was created, which led the then Prime
Minister to claim that Islamabad had said final good bye to IMF and had achieved
economic sovereignty.

Upon taking over, the PPP-led government found itself sandwiched between fast
deteriorating security situation in the country and rising oil prices, which inflated the
import bill and caused the depletion of precious foreign exchange reserves. Pakistan’s
engagement in internal war on terror had also very huge economic cost. The outbreak
of energy crisis further aggravated the economic situation and served to slow down
economic development.

While international financial crunch did have its toll on our economy in ways more
than one, however, most of our economic woes have owed their origin to the very
manner in which we have been managing our economy. Some analysts are of the view
that Pakistan got least hit by the recession in international market because its
economy is loosely linked with international financial architecture. This may be true
at its face value. However, Pakistan’s economy was affected indirectly. Consider:

The destination of most of the country’s exports is mainly Europe and the US. The
economic crunch did decrease the purchasing power of the people, thereby decreasing
the demand for our exports. Secondly, no country can make progress without foreign
investment and inflow of foreign capital. Precarious security situation coupled
negative portrayal of the country’s image in the international media and economic
crunch brought investment from the Europeans almost to a zero level with horrendous
consequences for the national economy. Thirdly, the foreign remittances by the local
expatriate community, which are a major source to strengthen foreign exchange
reserves, were also reduced.

The government had little control on these factors nor could it do much to stem the
downward slide. The economy could still have borne shock had our successive
governments paid attention to fixing the fundamentals of economy. It is unfortunate
that our governments have had ad hoc economic strategy. They have been reacting to
the economic crises rather than taking on them proactively. The previous government
led by General Pervez Musharraf had the golden opportunity to undertake policy
reforms and reorient the direction of our economy. However, it used the breathing
space in building ‘bubble economy’, which got busted at the first available test.

No reform effort can succeed without acknowledging the due importance agricultural
sector occupies in our economy. But it is equally unfortunate that this important sector
has not received the kind of attention which its potential warranted. Pakistan is
blessed to have fertile lands, hard-working farming community and conducive
weather. The focus on this sector cannot only be instrumental in achieving economic
development and self-sufficiency but can also earn much needed foreign exchange
through export of agro-based products. As indicated in the Economic Survey released
on June 11 this year, agriculture sector alone showed signs of growth by 4.7%
contrary to poor performance of other sectors.

Secondly, we need to work hard to increase our exports and decrease imports to allow
economy space to grow. Presently there is a huge gap between our exports and
imports much to the detriment of the national economy. Heavy import bill consumes
precious foreign exchange. Pakistan is a front-line state against terrorism suffering
huge sacrifices both in man and material. The government needs to put forward its
case strongly before the international community and ask for giving maximum market
access to our products.

Thirdly, the tax regime, currently in vogue in the country, is highly discriminatory.
The major share of our tax receipts is through indirect taxes, which puts heavy burden
on the poor and downtrodden sections of society. There is a need to shift from indirect
taxes to the direct taxes so that the more affluent sections of society are made to
contribute to the national kitty in accordance with their levels of income. Equally
important is the task to broaden the tax base. Untaxed sectors need to be brought
within the tax net.

The government should also cut down its non-development expenditure. This writer is
of the considered view that if our political leadership develops consensus on keeping
the non-development expenditure to the minimum, it could go a long way in bridging
the fiscal deficit. The policy of simplicity and austerity at the top level could bear
fruits motivating people to follow suit.

The welfare of the poor people should be the linchpin of our economic policy-making.
Instead of passing the burden on to the poor, the government would do well to ask
more affluent sections to bear cost of their material progress. Let them share develop
the feeling of ownership of state, a state which cares for them. It requires paradigm
shift in approach and out of box thinking.