A lot has already been written by analysts and even by this author on the 2022-23 budgetary announcement, so I will not go into the nitty gritty of the numbers again and will instead focus on whether or not this budget sets the right direction for the Pakistani economy going forward. We all know that given the policy mismanagement failures over the last few years, some pain was necessary to bring the IMF back on board in order to open doors in general for foreign exchange financing and avoid stalling on our maturing net debt commitments of almost $15 billion (or possibly even more) in the next fiscal year—a situation exacerbated by the rise in global commodities in particular and an ongoing Russian-Ukrainian war in general. So, for the sake of this article, we will assume that the Fund’s programme in Pakistan will soon be resumed and therefore try and assess the effects of this budget as if a default on foreign exchange obligations is something that has been successfully avoided. And with this reality in mind, it would be fair to say that what in essence Pakistan required was a budget that carries a vision—and naturally sets a course to achieve it—to restart growing the economy in a way that is both, primarily indigenous, equitable and sustainable.
Pakistan’s poverty and unemployment figures have worsened in the last 5 years and with almost 3 million young people entering the job market every year, a GDP growth level consistently below the 7 percent mark is simply not an option. The trouble though is that of late, every time we cross the 5 percent mark, our external account becomes unmanageable, in-turn unleashing a cycle of devaluation, inflation and a deepening debt trap. Fortunately though, in economics the measures required to counter this recurring problem are not unknown and in fact frequently used by the recent South Asian economic success stories of the world, for example of China (in particular in Xinjiang), India and of late, Bangladesh.
Essentially, the story calls for: a) Establishing and incentivising a vast but structured manufacturing base that mainly thrives on exports and discourages imports or even investment per se (domestic or foreign) unless it helps aid even more exports; b) Ensuring an increased flow of capital from the public sector to the private sector to capture the entrepreneurial, intrapreneurial and innovative juices of the private sector and thereby optimising returns on the total available national capital; c) Outsourcing key public deliverables to the private sector, albeit with a strict oversight, to take pressure off the national exchequer and to mitigate the effects of inflation through increased efficiency and productivity in those particular sectors (examples, education & healthcare); and d) Safeguarding the economy by focusing on the GNP growth through a home production lens. This, by creating an enabling operational environment that checks conflict-of-interest and rent seeking, promotes global competitiveness, helps innovation and most importantly, provides freedom to the private sector to perform fearlessly by undertaking the necessary tax and financial reforms that distances the collector from the payer, restrains extortion and corruption, rationalises tax burdens (e.g. in Sales/VAT taxes), promotes economies of scale, and ensures access to capital at regionally competitive rates.
The story of today’s Xinjiang is of a dedicated focus by China to move manufacturing from West to the East, to bring employment and prosperity to people previously excluded, to invest in manufacturing ventures that capitalise and link homegrown agriculture to the newly created industry, to create efficiencies and competitiveness using modern technology and via creating synergies through improved logistics and last but not least, by seeing to it that any investment coming in (even from the mainland or foreign investment through Honk Kong based conglomerates) forms the purpose of long-term inflows rather than soon to be created outflows, leading to a capital flight or profit outflows and other forms of repatriation.
As for the case of India, since the early 1990s to date, we have seen a systematic and consistent national strategy to keep the home industry protected from unchecked international competition through a clever web of non-tariff barriers, an outright negative list in the name of poverty alleviation or pure political stands, a defiance to Kyoto or Paris protocols to ensure that the engine of manufacturing keeps on being fuelled with the cheapest available options (the latest being the defiance to buy Russian oil at cheaper rates), the availability of low-cost capital using a maze of state owned banks carrying largely toxic capital, backing Indian conglomerates to go global and undertake keep international acquisitions, and by creating an inter-state competition culture to extract a higher tax to GDP ratio despite providing the investors with businesses capital at competitive or cheaper rates, offering lower direct and value added taxes, product harmonisation, easy access to local infrastructure and by removing unnecessary red tape from the implementation process.
And in the case of Bangladesh, the country’s success is the result of many factors, however, two features of its political economy stand out. Its success is distinctive in two ways that have yet to be fully appreciated from a broader development perspective. The first one though is obvious and we all regularly talk about it is the export miracle—Of course, not to be ignored, but a peculiar dynamic of Bangladesh’s export miracle reveals how it has been different from other exporting stories, especially of countries with a comparatively high population base. Since its success in manufacturing contributed in-turn to greater education and agency for Bangladeshi women—and this in-turn over time became the single most important factor in turning around the country’s economy. The second distinct feature relates to a conscious endeavour by its leaders on adopting the defining characteristic of the modern state by voluntarily ceding control in many ways to the non-governmental sector or the private sector to improve the state’s functioning. BRAC and a number of other now-famous NGOs have played a major role in providing healthcare, schools, and financial services, and in leading public-health campaigns to deliver oral rehydration therapy and immunisation. The emphasis has been on delivery to the people rather than mere revenue collection for the government coffers and stately pomp.
So, has the budget tried to capture any of these visionary aspects that can ultimately take Pakistan towards the path of a progressive state? The answer is sadly, No. The measures regrettably announced tend to go the other way. No lessons have been learnt—the draconian powers of the revenue collector have been further enhanced without first undertaking the now necessary FBR reforms or incorporating an element of accountability and reciprocity; future growth projections still remain predominantly hinged on an import culture, arbitrary powers to customs and other law enforcement agencies again point to knee-jerk reactions rather than addressing underlying issues through prudent policymaking. The announced financial outlays will simply continue to move more and more capital from the private sector to the public sector and in the process stoke inflation and unemployment, the interest rates are likely to climb with the real effective borrowing rates for the private investors already touching a level of almost 18 percent, and with zero-ratings available and an unsustainable level of sales tax slabs amidst high inflation, the undocumented sector (already in excess of 50 percent by conservative estimates) will continue to grow at the expense of the documented economy.
India today grows at around 7 percent, an exchange rate double that of ours, an interest rate at 4 percent and an estimated undocumented sector of 15 percent, Bangladesh at around 7 percent with an exchange rate almost double that of ours, an interest rate of 6.50 percent and an estimated undocumented sector of 10 percent; even Afghanistan carries a surplus budget with its currency almost double that of ours!
Pakistan’s poverty and unemployment figures have worsened in the last 5 years and with almost 3 million young people entering the job market every year, a GDP growth level consistently below the 7 percent mark is simply not an option. The trouble though is that of late, every time we cross the 5 percent mark, our external account becomes unmanageable, in-turn unleashing a cycle of devaluation, inflation and a deepening debt trap. Fortunately though, in economics the measures required to counter this recurring problem are not unknown and in fact frequently used by the recent South Asian economic success stories of the world, for example of China (in particular in Xinjiang), India and of late, Bangladesh.
Essentially, the story calls for: a) Establishing and incentivising a vast but structured manufacturing base that mainly thrives on exports and discourages imports or even investment per se (domestic or foreign) unless it helps aid even more exports; b) Ensuring an increased flow of capital from the public sector to the private sector to capture the entrepreneurial, intrapreneurial and innovative juices of the private sector and thereby optimising returns on the total available national capital; c) Outsourcing key public deliverables to the private sector, albeit with a strict oversight, to take pressure off the national exchequer and to mitigate the effects of inflation through increased efficiency and productivity in those particular sectors (examples, education & healthcare); and d) Safeguarding the economy by focusing on the GNP growth through a home production lens. This, by creating an enabling operational environment that checks conflict-of-interest and rent seeking, promotes global competitiveness, helps innovation and most importantly, provides freedom to the private sector to perform fearlessly by undertaking the necessary tax and financial reforms that distances the collector from the payer, restrains extortion and corruption, rationalises tax burdens (e.g. in Sales/VAT taxes), promotes economies of scale, and ensures access to capital at regionally competitive rates.
The story of today’s Xinjiang is of a dedicated focus by China to move manufacturing from West to the East, to bring employment and prosperity to people previously excluded, to invest in manufacturing ventures that capitalise and link homegrown agriculture to the newly created industry, to create efficiencies and competitiveness using modern technology and via creating synergies through improved logistics and last but not least, by seeing to it that any investment coming in (even from the mainland or foreign investment through Honk Kong based conglomerates) forms the purpose of long-term inflows rather than soon to be created outflows, leading to a capital flight or profit outflows and other forms of repatriation.
As for the case of India, since the early 1990s to date, we have seen a systematic and consistent national strategy to keep the home industry protected from unchecked international competition through a clever web of non-tariff barriers, an outright negative list in the name of poverty alleviation or pure political stands, a defiance to Kyoto or Paris protocols to ensure that the engine of manufacturing keeps on being fuelled with the cheapest available options (the latest being the defiance to buy Russian oil at cheaper rates), the availability of low-cost capital using a maze of state owned banks carrying largely toxic capital, backing Indian conglomerates to go global and undertake keep international acquisitions, and by creating an inter-state competition culture to extract a higher tax to GDP ratio despite providing the investors with businesses capital at competitive or cheaper rates, offering lower direct and value added taxes, product harmonisation, easy access to local infrastructure and by removing unnecessary red tape from the implementation process.
And in the case of Bangladesh, the country’s success is the result of many factors, however, two features of its political economy stand out. Its success is distinctive in two ways that have yet to be fully appreciated from a broader development perspective. The first one though is obvious and we all regularly talk about it is the export miracle—Of course, not to be ignored, but a peculiar dynamic of Bangladesh’s export miracle reveals how it has been different from other exporting stories, especially of countries with a comparatively high population base. Since its success in manufacturing contributed in-turn to greater education and agency for Bangladeshi women—and this in-turn over time became the single most important factor in turning around the country’s economy. The second distinct feature relates to a conscious endeavour by its leaders on adopting the defining characteristic of the modern state by voluntarily ceding control in many ways to the non-governmental sector or the private sector to improve the state’s functioning. BRAC and a number of other now-famous NGOs have played a major role in providing healthcare, schools, and financial services, and in leading public-health campaigns to deliver oral rehydration therapy and immunisation. The emphasis has been on delivery to the people rather than mere revenue collection for the government coffers and stately pomp.
So, has the budget tried to capture any of these visionary aspects that can ultimately take Pakistan towards the path of a progressive state? The answer is sadly, No. The measures regrettably announced tend to go the other way. No lessons have been learnt—the draconian powers of the revenue collector have been further enhanced without first undertaking the now necessary FBR reforms or incorporating an element of accountability and reciprocity; future growth projections still remain predominantly hinged on an import culture, arbitrary powers to customs and other law enforcement agencies again point to knee-jerk reactions rather than addressing underlying issues through prudent policymaking. The announced financial outlays will simply continue to move more and more capital from the private sector to the public sector and in the process stoke inflation and unemployment, the interest rates are likely to climb with the real effective borrowing rates for the private investors already touching a level of almost 18 percent, and with zero-ratings available and an unsustainable level of sales tax slabs amidst high inflation, the undocumented sector (already in excess of 50 percent by conservative estimates) will continue to grow at the expense of the documented economy.
India today grows at around 7 percent, an exchange rate double that of ours, an interest rate at 4 percent and an estimated undocumented sector of 15 percent, Bangladesh at around 7 percent with an exchange rate almost double that of ours, an interest rate of 6.50 percent and an estimated undocumented sector of 10 percent; even Afghanistan carries a surplus budget with its currency almost double that of ours!
