WITHOUT belittling the polit ical economy challenges that
face reform in Pakistan, I
believe that the time just may
have come for long-overdue fun damental reforms, and not just
because of the urgency of effect ing these changes.
In this writer’s view, there is a dis cernible shift in the public narrative (being admirably piloted by the media) which is demanding better quality gover nance (the core issue) and leadership.
With little sympathy shown by our external partners, there is a growing real isation that we have to solve our own problems and live within our means. There is a need for a just and fair society in which different income groups con tribute to the restructuring of the socioe conomic order based on their capacity to bear this burden. There is certainly a degree of exaggeration about the deep seatedness of these sentiments among the voting population but an inspired political leadership with ‘greyish’ credentials of principles and probity could snatch the baton and carry the populace with it in, say, five to seven years from now.
Most of the prescriptions for our economic travails are now well-known and do not require repetition. This article refers to what would be the minimum agenda while arguing for a change in the sequencing and some modification of content.
To begin with, I would privatise anything and everything in the public sector starting with government-owned banks, simply to protect public money (including depositors’) and ensure the safety, soundness and stability of the financial system.
Just three public-sector enterprises like PIA, Steel Mills and Railways are together losing a crore rupees a minute. The country cannot afford the continued haemorrhaging of public finances and the banking system. There is no option other than privatising these organisations or some of their services. Even when it comes to social services like education, poor households are voting with their feet and sending their children to low-fee-charging private schools, although government schools are free. The lessons from initiatives like the Punjab Education Foundation that private schools provide better quality education at one-seventh the cost in government-managed schools, are clear enough. The state should ensure that children get free education without being in the business of actually providing the service, unless we can change the incentive structure in the public schooling system, thereby making it a ‘game changer’ in terms of societal thinking. This is all doable. However, it is not the purpose of this article to elaborate on the necessary measures to be undertaken to that end.
We need to liberalise trade further to induce greater competition in the economy, thereby also preventing hoarding and cartel formation.
The fiscal deficit at the federal level after the recent NFC Award has become structural in nature, as a) all major expenditures, defence, debt servicing (including loans that financed physical infrastructure in provincial use), subsidies (especially for energy — the discussion follows) and administering the state require in excess of Rs2tr against the projected tax revenues of Rs1,952bn for next year, of which more than Rs1,150tr will be earmarked for the provinces; b) most tax bases that remain to be fully exploited like agricultural incomes, properties and economic services now lie in the provincial domain. Islamabad can only coax provincial governments into raising revenues from these sources through moral suasion.
Can one realistically dream of a reform-minded provincial government (challenging the rhetoric of some political parties on reform) to, say, take measures like taxing large farmers and property owners and passing legislation that declares all benami ownerships and transactions illegal (enabling, for tax purposes, the creation of databases of real owners’ property)? Through such reforms they could then shame others on their failure to mobilise revenues from such potentially lucrative bases.
To attend to the mother of all issues, the fiscal deficit, requires a structure that taxes all earnings, irrespective of source, equally. It’s not just large farmers in legislatures resisting taxation of their incomes, even bureaucrats renting out their properties in Islamabad to the diplomatic community are paying a tax that is 50 per cent less than those earning the same level of income from other sources.
However, in my view, the expenditure side in the fiscal equation demands closer attention. To this end we need to first abandon the contorted view of our importance (‘the world cannot ignore us’) because of our strategic location and also dump the old, failed policies, frameworks and concepts of a security state and strategic depth, since these are now costing us more than Rs830bn per annum. Thereafter, there is a need to reassess security-related funding requirements.
Next, we need to quickly phase out untargeted subsidies, especially for the farming community in the shape of direct and indirect subsidies on fertiliser (the latter through the under-pricing of gas) and for its wheat purchased at prices higher than in the international market. In fact, I would argue that it would be cheaper for public finances if we were to eliminate both subsidies as against levying GST on fertiliser and pesticides.
As part of the same effort, all subsidies on energy should be withdrawn for those consuming above lifeline rates. The concession of free provision of electricity to Wapda employees which is costing us taxpayers Rs35-40bn per annum, also needs to be withdrawn immediately. All this needs to be followed up by addressing the critical issue of electricity theft and non-collection of billings without disconnecting non-payers, the combined cost of which is in excess of Rs4 crore a minute. Pilferage, however, can only be tackled through privatisation of the management (with agreed targets), if not ownership, of electricity distribution companies. The purported plan of the government to restructure their boards, their membership and authority is not the solution.
Next, we need a rightsizing of government, especially at the federal level following the 18th Amendment. Merely surrendering posts as incumbents retire through natural attrition will be too slow a process. The golden handshakes and skill-enhancement efforts to enable this can always be financed.
Finally, apart from greater austerity (surrendering of all VIP planes, stopping the provision of bullet-proof cars to all and sundry, etc) there is a need to reorder our expenditure commitments. It is naïve to think that governments should do everything. Even the richest country in the world has to prioritise its spending to avoid waste of scarce resources by spreading them thinly. And, of course, such reordering is driven by political considerations. But the fact that we have to choose is unavoidable. For instance, it is a no-brainer that availability of reliable power is more important than roads for transportation. Road networks are needed to transport goods but only after they have been produced, which requires power.
To conclude, the time just may have come to initiate the process of deep structural reforms. Admittedly, however, for this the course of action to commence depends on the extent to which our political and dominant economic elite is not totally blind to changing realities that confront us as a nation and is willing to make some sacrifices in its own enlightened self-interest. ¦ The writer was until recently governor, State Bank of Pakistan.
Dawn News
In this writer’s view, there is a dis cernible shift in the public narrative (being admirably piloted by the media) which is demanding better quality gover nance (the core issue) and leadership.
With little sympathy shown by our external partners, there is a growing real isation that we have to solve our own problems and live within our means. There is a need for a just and fair society in which different income groups con tribute to the restructuring of the socioe conomic order based on their capacity to bear this burden. There is certainly a degree of exaggeration about the deep seatedness of these sentiments among the voting population but an inspired political leadership with ‘greyish’ credentials of principles and probity could snatch the baton and carry the populace with it in, say, five to seven years from now.
Most of the prescriptions for our economic travails are now well-known and do not require repetition. This article refers to what would be the minimum agenda while arguing for a change in the sequencing and some modification of content.
To begin with, I would privatise anything and everything in the public sector starting with government-owned banks, simply to protect public money (including depositors’) and ensure the safety, soundness and stability of the financial system.
Just three public-sector enterprises like PIA, Steel Mills and Railways are together losing a crore rupees a minute. The country cannot afford the continued haemorrhaging of public finances and the banking system. There is no option other than privatising these organisations or some of their services. Even when it comes to social services like education, poor households are voting with their feet and sending their children to low-fee-charging private schools, although government schools are free. The lessons from initiatives like the Punjab Education Foundation that private schools provide better quality education at one-seventh the cost in government-managed schools, are clear enough. The state should ensure that children get free education without being in the business of actually providing the service, unless we can change the incentive structure in the public schooling system, thereby making it a ‘game changer’ in terms of societal thinking. This is all doable. However, it is not the purpose of this article to elaborate on the necessary measures to be undertaken to that end.
We need to liberalise trade further to induce greater competition in the economy, thereby also preventing hoarding and cartel formation.
The fiscal deficit at the federal level after the recent NFC Award has become structural in nature, as a) all major expenditures, defence, debt servicing (including loans that financed physical infrastructure in provincial use), subsidies (especially for energy — the discussion follows) and administering the state require in excess of Rs2tr against the projected tax revenues of Rs1,952bn for next year, of which more than Rs1,150tr will be earmarked for the provinces; b) most tax bases that remain to be fully exploited like agricultural incomes, properties and economic services now lie in the provincial domain. Islamabad can only coax provincial governments into raising revenues from these sources through moral suasion.
Can one realistically dream of a reform-minded provincial government (challenging the rhetoric of some political parties on reform) to, say, take measures like taxing large farmers and property owners and passing legislation that declares all benami ownerships and transactions illegal (enabling, for tax purposes, the creation of databases of real owners’ property)? Through such reforms they could then shame others on their failure to mobilise revenues from such potentially lucrative bases.
To attend to the mother of all issues, the fiscal deficit, requires a structure that taxes all earnings, irrespective of source, equally. It’s not just large farmers in legislatures resisting taxation of their incomes, even bureaucrats renting out their properties in Islamabad to the diplomatic community are paying a tax that is 50 per cent less than those earning the same level of income from other sources.
However, in my view, the expenditure side in the fiscal equation demands closer attention. To this end we need to first abandon the contorted view of our importance (‘the world cannot ignore us’) because of our strategic location and also dump the old, failed policies, frameworks and concepts of a security state and strategic depth, since these are now costing us more than Rs830bn per annum. Thereafter, there is a need to reassess security-related funding requirements.
Next, we need to quickly phase out untargeted subsidies, especially for the farming community in the shape of direct and indirect subsidies on fertiliser (the latter through the under-pricing of gas) and for its wheat purchased at prices higher than in the international market. In fact, I would argue that it would be cheaper for public finances if we were to eliminate both subsidies as against levying GST on fertiliser and pesticides.
As part of the same effort, all subsidies on energy should be withdrawn for those consuming above lifeline rates. The concession of free provision of electricity to Wapda employees which is costing us taxpayers Rs35-40bn per annum, also needs to be withdrawn immediately. All this needs to be followed up by addressing the critical issue of electricity theft and non-collection of billings without disconnecting non-payers, the combined cost of which is in excess of Rs4 crore a minute. Pilferage, however, can only be tackled through privatisation of the management (with agreed targets), if not ownership, of electricity distribution companies. The purported plan of the government to restructure their boards, their membership and authority is not the solution.
Next, we need a rightsizing of government, especially at the federal level following the 18th Amendment. Merely surrendering posts as incumbents retire through natural attrition will be too slow a process. The golden handshakes and skill-enhancement efforts to enable this can always be financed.
Finally, apart from greater austerity (surrendering of all VIP planes, stopping the provision of bullet-proof cars to all and sundry, etc) there is a need to reorder our expenditure commitments. It is naïve to think that governments should do everything. Even the richest country in the world has to prioritise its spending to avoid waste of scarce resources by spreading them thinly. And, of course, such reordering is driven by political considerations. But the fact that we have to choose is unavoidable. For instance, it is a no-brainer that availability of reliable power is more important than roads for transportation. Road networks are needed to transport goods but only after they have been produced, which requires power.
To conclude, the time just may have come to initiate the process of deep structural reforms. Admittedly, however, for this the course of action to commence depends on the extent to which our political and dominant economic elite is not totally blind to changing realities that confront us as a nation and is willing to make some sacrifices in its own enlightened self-interest. ¦ The writer was until recently governor, State Bank of Pakistan.
Dawn News
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