Cost of welfare policy

28/02/2022by PRIME Institute PRIME Institute No Comments

Cost of welfare policy

Ali Salman

Welfare is not free as someone always pays cost of this system

***Elderly women from Younisabad meet every two months since 2019 to discuss implementation of the Sindh Senior Citizens Welfare Act, 2014 that still remains pending. PHOTO: Sameer Mandhro***

ISLAMABAD: Welfare is an elusive term. Politicians talk about welfare all the time and seek votes on the basis of providing welfare to the masses.

There is a popular concept of a welfare state, which supposedly can take care of the masses, say through the provision of unemployment allowance or subsidies or food.

However, it is obvious that despite being packaged as free, or subsidised, welfare is not free. Someone always pays the cost of this welfare.

It’s a question of resource allocation and market structures who gets benefits and who pays costs. Academically speaking, welfare economics deals with this and considers policies which can maximise benefits for all or most members of a society.

Distribution of welfare usually takes the form of allocation of resources towards a specific component of population.

Take one example – the subsidy or concession for housing loans. Ownership of houses has become difficult for the present generation, which increasingly comprises nuclear families.

In a recent PIDE publication, the popular notion of shortage of 10 million houses is contested, citing 70% home ownership at the national level as per PSLM 2019-20.

However, the government has announced a programme of constructing or facilitating the construction of five million houses. Following this target, the government announced various fiscal and monetary incentives in an effort to correct “market failures”.

It announced a major amnesty scheme to attract investment in real estate. It also set mandatory lending targets for commercial banks.

To date, with Rs38 billion disbursed, the Mera Pakistan Mera Ghar financing scheme has benefited not more than 10,000 households.

On the other hand, prices of land, which takes as much as 80% of the cost of a house in a city, have risen by 60% for everyone in cities like Lahore and Islamabad in just two years.

This has resulted from an unusual flow of capital in real estate – according to a recent news report, as much as $19 billion has been buried in empty urban plots in 2021 alone.

This is the direct consequence of a policy defined by tax exemptions and fiscal subsidies.

Lesson 1: The welfare policy in the name of poor people has benefited a few thousands while causing losses to millions of people.

A majority of households would have benefited in the absence of these incentives and especially through reforms in building regulations.

Another example of welfare policy is the universal health insurance – the Sehat Sahulat Card, which has provided Rs1 million medical insurance to all eligible citizens in Punjab and Khyber-Pakhtunkhwa.

This has been generally lauded by all. However, with a careful look – and as some time passes by – the problems in the universal medical insurance will become clear.

The government will find it impossible to fund the programme on its own very soon while the public health system will deteriorate.

A differently designed health protection programme would have led to the flow of greater investment in the public healthcare system.

A small admission fee is affordable by all and should be charged without exception. The government should have left insurance to be managed by the private sector.

This is how resource allocation and adjustment with market structures can work to maximise welfare for most of the population at the least cost.

Lesson 2: A universal and publicly funded health insurance is a bad idea and the government can achieve more by investing in the public healthcare system.

Another popular example of a welfare policy is price control. The prime minister and federal cabinet keep monitoring prices of fruits and vegetables – with noble intentions.

The government has established price control committees and hired more price inspectors than before.

Prices are only going up. If the government were to focus on a two-pillar strategy – invest in agricultural productivity and allow border trade, it would have provided both short-term and long-term solutions.

On the other hand, price controls have made sure no one invests in agriculture, thus undermining the major goal of keeping prices low.

Price controls provide clear signals to investors and traders – do not enter into the business.

Lesson 3: Price controls distort welfare.

Welfare policies must be put to a simple theoretical question of efficiency and incentives. To bring in welfare economics once again, one can look at the economic surplus – the sum of consumer surplus and producer surplus.

I will also add a fiscal equation here given our constraints and would caution against any policies becoming a fiscal burden.

As three examples above indicate, in each case, welfare policies have distorted incentives and have contributed to the reduction of welfare in fact. This is why, it is very difficult to design a welfare programme which can ensure increase in the overall welfare without greater loss.

A wiser option for a government may be actually do no welfare at all, especially if it poised to do more harm than good.

The writer is the executive director of PRIME, an independent economic policy think tank based in Islamabad

Published in The Express Tribune, February 28^th, 2022.

Prime Webinar: Pakistan Prosperity Index January 2022

16/02/2022by PRIME Institute PRIME Institute No Comments

Prime Webinar: Pakistan Prosperity Index January 2022

Policy Research Institute of Market Economy (PRIME) was established in January 2013 as an independent economic policy think tank in Islamabad. PRIME publishes monthly Pakistan Prosperity Index Report, which examines the trends in six macroeconomic indicators: inflation/ purchasing power, exchange rate, output of large scale manufacturing sector, trade openness, borrowing of private sector, and foreign direct investment in the country, to assess the macro economic performance of the country using high frequency data. The roundtable focuses on the overall macroeconomic situation of the country with special emphasis on current economic developments, major challenges faced by the country and possible solutions to mitigate the crises.

The report is presented by PRIME Research Economist Mr. Tuaha Adil.

The roundtable is moderated by PRIME Research Economist Ms. Sarah Javed.

Watch Full webinar below:

Should IMF define Pakistan’s economic policies?

14/02/2022by PRIME Institute PRIME Institute No Comments

Should IMF define Pakistan’s economic policies?

Ali Salman

Agreement with lender driving country’s economic direction, targeted reforms

The latest IMF Country Report on Pakistan is out, and $1 billion are in.

The report’s language is largely critical and cautionary. Whether one agrees with the IMF programme or not, one thing is clear – Pakistan’s economic direction, policy discussions and targeted reforms are all driven by the agreement with the IMF.

Anyone wishing to understand what our economic managers are deliberating or planning just needs to read the 34 pages of IMF report.

Everything, including taxation policies, housing finance policies, social protection programmes, and development spending has to follow the guidelines as defined in this document. Any policies or allocation not consistent with the IMF guidelines will be reversed.

Consider. There has been a heated media debate on the State Bank autonomy bill, which has already been passed by parliament. IMF’s prescription prevailed.

The government announced a major housing finance programme one year ago with unprecedented allocation of Rs30 billion as subsidy, which now risks reversal or reduction as the IMF staff disagrees with it.

To improve fiscal space, the country needed to surpass tax collection targets. A mini-budget was passed and the FBR is likely to exceed its collection target now.

By setting policy targets, the IMF has defined policy debate also – or at least the debate that the government will be keen to listen.

There are five dimensions. In IMF’s own words, these are (i) reinforcing fiscal discipline by mobilising revenues and controlling current spending (ii) ensuring disinflation through a tighter monetary policy stance; (iii) maintaining market-determined exchange rate and building external buffers; (iv) restoring financial viability of energy sector; and (v) advancing structural reforms, including by addressing deficiencies in AML/CFT regime, SOE governance, and business climate, as well as stepping up to the challenges posed by climate change.

Let me simplify. To remain in the IMF programme, the government must increase tax rates and cut state spending, increase interest rate further, keep exchange rate free floated, increase energy tariffs, and close down state-run companies.

All of these measures will result in fast deterioration of political capital and increase in public dissonance that the government is visibly experiencing.

Hypothetically speaking, one can get out of this “bondage”, by not agreeing to accept $6 billion in the first place, from which $3 billion is yet to be received.

With the remittance and export receipts expected to gross over $60 billion this year, and balance of payments cushion available through FDI, Roshan Digital Accounts and bilateral loans from countries like China and Saudi Arabia, Pakistan will not experience any major difficulty if it does not receive $1 billion of the IMF fund in one year.

The problem does not lie in finances. The problem lies in how to understand our economy and a missing credible resolve to put our house in order.

If we cannot understand, for example, what are our housing needs, we remain gullible to a political fiction – called construction of 5 million homes.

This target has no relationship with the demand from an increasingly mobile and dynamic population.

By allocating resources to concessionary financing for real estate, the government has done developers, especially the elite developers, a major favour. Real estate prices have skyrocketed and land has become unaffordable.

Fiscal and monetary measures were grossly misplaced. The IMF staff is right in asking to reduce and reverse this bonanza. It is, at the end of the day, a lender only and not an agency for housing policy.

Take another example. Pakistan needs more fiscal resources and also needs to stop leakage of hundreds of billions of rupees channelled through SOEs.

To close down inefficient state-owned enterprises is hard. To come up with an equitable tax mechanism is harder. The easier option to increase government resources is to increase the tax rates.

All that it takes is changing input figures in an excel sheet in a computer in the Q-block. This is the genesis of the mini-budget.

As a lender, the IMF does not, and should not, care about where the money comes from. It will care about performance criteria and structural benchmarks. Where the actual performance is missing, the commitment to future reforms is good enough reason to qualify for waivers.

Should we blame the IMF? Far from it. If I were Pakistan’s finance minister, I will actually follow the broad IMF guidelines – without asking for its funds and hence will define my own strategy, pace and priorities.

I will bring in a broad-based, low-rate regime instead of just hiking rates. I will figure out how to use the policy to unlock the dead land in cities. I will preserve the SBP policy autonomy and will reduce its operational autonomy.

These reforms need systematic thinking and research, otherwise they will be short-lived and will never get local ownership. While we continue to outsource policy and research to lenders, we will keep passing on the blame to them.

IMF is not right or wrong. It is the government approach to policy which can be right or wrong. It has the agency to design a reform programme which can work for Pakistan. It has stopped exercising this agency.

The writer is founder and executive director of PRIME, an independent economic policy think tank based in Islamabad.

Published in The Express Tribune, February 14^th, 2022.

Pakistan Prosperity Index – January 2022

04/02/2022by PRIME Institute PRIME Institute No Comments

Pakistan Prosperity Index – January 2022

Prosperity Index declines due to soaring commodity and petroleum prices

Over December 2020- November 2021, economic prosperity deteriorated by 1.7 points, according to PRIME’s latest report Pakistan Prosperity Index. The decline in overall country’s economic performance can be attributed to continuously soaring inflation, currency devaluation and fall in foreign investment.

Purchasing power continues to decline as the Y-o-Y inflation was reported at 11.5%, while the M-o-M inflation clocked at 3%. The prevalent high levels of inflation are due to soaring supply-demand gap emanating from monetary expansion carried out through commercial banks’ investment in government securities, higher inflow of remittances, falling productivity, and rising international commodity and petroleum prices.

Local currency, the rupee, has remained volatile thus contributing to the uncertainty. In past 12 months, depreciation of rupee has been 8%. Average monthly exchange rate stood at Rs.173 against dollar in November 2021 compared to Rs.171.7 in October 2021.

Inflow of foreign direct investment to the country has seen a plunge due to expeditious spread of COVID around the globe. FDI stood at $220 million in November 2021 compared to $300 million last month.

The trade volume witnessed an increase of Rs.688 billion Y-o-Y and Rs.350 billion M-o-M on account of an increase in domestic and international demand. In M-o-M trade growth, exports experienced an increase of Rs.79 billion while imports increased by Rs.273 billion compared to October 2021.

Large Scale Manufacturing (LSM) output posted a growth of 1.91% M-o-M and 0.3% Y-o-Y. The slowdown in manufacturing activities on yearly basis is due to significant increase in the energy and input prices along with gas load shedding while monthly increase is associated with rising demand.

The private sector borrowing from banks has been on an upward trajectory with Rs.214 billion Y-o-Y and Rs.22 billion M-o-M increase. The borrowing continues to increase despite the hike of 150 basis points in policy rate to 8.75% in November due to higher domestic demand.

The overall economic performance, as measured by PPI, is not encouraging due to mounting challenges. The burgeoning current account deficit on the back of significant increase in the international commodity and energy prices and the resultant hike in the policy rate will contribute to slow down in the economic activities in the country. Inflation remains a big concern, which could be mitigated by addressing the supply side bottlenecks such as lower productivity and interruption in the supply of energy.

Read full report here;

Pakistan Prosperity Index – January 2022Download

PPI Methodology January – 2022Download

PRIME Institute publishes monthly PPI report with a lag of two months due to availability of data, which comprises trade openness, soundness of rupee, foreign investment, lending to private sector, purchasing power and manufacturing output indices.

For inquiries, please contact afzal@primeinstitute.org or call at 03330588885.

Prime Comment on Re-basing of National Accounts

26/01/2022by PRIME Institute PRIME Institute No Comments

Prime Comment on Re-basing of National Accounts

Improved Estimates for National Account should come with Development of the statistical System

The author is of the view that if international standards are met and the re-based series of national accounts are floated every 5 years, while pointing out and rectifying deficiencies in different sectors, the re-basing is one of the fundamental targets to be achieved and will help us in measuring the impact of economic policies.

Click below to read full comment:

Prime Comment on Re-basing of National AccountsDownload

Pakistan & 5G

18/01/2022by PRIME Institute PRIME Institute No Comments

Pakistan & 5G

Policy Research Institute of Market Economy (PRIME) was established in January 2013 as an independent economic policy think tank in Islamabad. The range of topics included international trade, energy, taxes, property rights, and public finance. We propose policy solutions for the long run, develop constituencies for reforms with the private sector and taxpayers and inform general public to create demand for better policies. Our publications and other activities can be accessed through our website, www.primeinstitute.org.
Continuing our legacy of policy solutions for Economic Growth, we had recently organized a webinar on “Telecom Spectrum: A fuel for long term economic growth” which can be accessed here (https://primeinstitute.org/virtual-round-table-on-telecom/), our next roundtable is on 5G and how Pakistan should move forward in this regard.
The roundtable will be moderated by PRIME fellow Ms. Atifa Asghar, who has been associated with the telecommunications industry since 2005 and has held leadership positions in Pakistan and abroad, including her last assignment as Head of Global Customer Engagement for Nokia out of Singapore.

Click below to watch the whole webinar:

Economy – looking beyond numbers

17/01/2022by PRIME Institute PRIME Institute No Comments

Economy - looking beyond numbers

Ali Salman

PM and his team need to pay more attention to job creation, increase in real income

ISLAMABAD: In his speech to a gathering of more than 60 business leaders from all over Pakistan last week, Prime Minister Imran Khan gave an overall account of economic progress under the Pakistan Tehreek-e-Insaf (PTI) rule.

He mentioned various “historical records” – exports of $31 billion, remittance flows of $32 billion, tax collection exceeding targets, large-scale manufacturing growth of 15%, corporate profit of Rs930 billion, private sector credit of Rs1,138 billion, IT sector exports of $3.5 billion, and finally inflows of Rs1,100 billion into the rural economy.

At the outset, all of these numbers can be verified as correct. The devil, as they say, lies in detail. Let’s take exports. The sharp increase in the dollar value of exports has created an erroneous perception that the policies are finally delivering.

For example, the policymakers have interpreted the year-on-year increase of 28% in the dollar value of textile exports during the first five months of fiscal year 2021-22 as evidence that existing subsidies such as the preferential energy tariff have been successful in meeting their intended objective.

On a careful look, and contrary to the perception of policymakers, the independent Economic Advisory Group (EAG) finds that the increase in dollar value of exports has little to do with these policies.

One of the EAG members, Ahmed Pirzada, has used the publicly available data on textile exports to decompose the increase in dollar value of textile exports into price and quantity effects. The analysis shows that out of the $1.7 billion increase in textile exports during Jul-Nov 2021, more than two-thirds is simply due to an increase in international prices. In other words, had international prices remained the same as in the previous year, the dollar value of textile exports would have increased by only 7.8%. Changes in world economic conditions have also played an important role in driving the quantum of exports.

For example, the drop in world economic activity during Covid led to a 25% drop in exports relative to the trend. However, the sharp recovery in world economic activity since then has had a positive effect on Pakistan’s export performance during most of fiscal year 2020-21. Let’s take up remittances. It needs to be acknowledged that increasing the flow of remittances has been very helpful for Pakistan to manage its current account deficit.

On the other hand, it is well argued that it acts as the Dutch Disease, whereby windfall revenue gains can erode or reduce a country’s competitiveness.

The overflow of remittances can lead to an increase in the Real Effective Exchange Rate, reducing trade competitiveness. It also reduces the pressure for reforms, especially in the area of taxation and tariffs. This point needs careful empirical examination.

Now take taxes. It is true that the Federal Board of Revenue (FBR) has exceeded the tax collection target by Rs282 billion. However, the contribution of income tax to this increase is only Rs5 billion and the balance mainly comes from sales tax at the import stage and customs duty.

In terms of revenue collected at the import stage, and its share in the total tax revenue, Pakistan is probably on top of the world. It is not only regressive but also creates cash flow problem for the industry.

There is no doubt that large-scale manufacturing activity has picked significant pace, and that is something we need to appreciate. The private sector credit offtake is also showing progress. Similarly, IT sector is performing well, which is contributing to growth and job creation. Also, the growth in the agriculture sector has increased rural income considerably, though its distributional effects need to be examined.

Where the prime minister and his team need to pay more attention is job creation and increase in real income, which comes on the back of productivity. While listening to the PM’s speech, I realised that while the government spends considerable time explaining how Ehsaas – the social protection programme with a budget of Rs260 billion – is helping the low-income class, it glosses over big-ticket items. Pakistan needs to create far more jobs, and more well-paying jobs than it is doing now. Opportunities can be created by aligning incentives with efficiency and productivity. We should not be content with just an increase in the level of production – whether in the number of cars or quantity of crops. While these increases are helpful, the real income will rise by transforming our way of doing government – and business, and by increasing productivity.

It is not about leaving agriculture and jumping to the IT bandwagon. It is doing better in whatever we produce – and to begin with – from agriculture and agro-based products. That is the play of both the government and the private sector.

The writer is founder and executive director of PRIME, an independent think tank based in Islamabad

Published in The Express Tribune, January 17, 2022.

The Bill for Autonomy of State Bank of Pakistan

12/01/2022by PRIME Institute PRIME Institute No Comments

The Bill for Autonomy of State Bank of Pakistan

It will help in curtailing government expenditures and ensuring sound money, but changes needed to restore institutional check & balance

The key features of the SBP Autonomy Independent Bill 2021 are: (1) policy and institutional autonomy, which implies that the Bank will determine and implement monetary and exchange rate policies, manage currency and international reserves of Pakistan, and carry out these functions free from the influence of the Ministry of Finance yet under the overall target set by the federal government; (2) primary objective of SBP is to maintain inflation and achieve government’s set target; (3) it will be prohibited to lend money to the government for budgetary needs and or invest in government securities rolled out in primary markets; (4) SBP will submit performance report to the parliament and; (5) Bank’s employees are protected against any action in a court of law.

The policy autonomy of SBP will help in better management of exchange rate which has been historically kept overvalued. An estimate by PIDE (2020), suggests that the country has lost more than $100 billion of foreign exchange reserves since the inception of the country to fix the exchange rate and keep the currency overvalued. The autonomy of SBP will improve soundness of money, which means currency will not be prone to artificial controls, sudden shocks, and frequent erosion in purchasing power. The PTI government has effectively taken this government already in 2018.

The main reason for continuous dependence on bail-out packages is current account deficit however, this is a symptom, and not the cause itself. The cause is a historical failure of successive governments to reform and lack of clear thinking. We have evolved our taxation system around exemptions instead of a low-rate and uniform system. We have created anti-export biases in our trade policy. These problems have led to fiscal and current account deficits which continue to force governments to seek bail-out. An external limit on borrowing will hopefully increase the pressure on the governments to reform.

Currently, the country is experiencing continuously soaring commodity prices and a drop in the purchasing power of the masses, more felt by the lower income tier. The autonomy will equip SBP to manage inflation in correspondence to the government’s set target in the medium and long term through the use of monetary policy tools, most commonly the interest rate. The real interest rate in the country has been negative for quite some time to restrict the cost of borrowing and promote growth, which delayed the required interest rate hike and elongated the inflationary pressures.

It needs to be highlighted that the monetary policy tools will not completely resolve the issue of inflation as it only addresses the demand side factors. Whereas, the supply side issues require fiscal tools as country has a significant proportion of undocumented economy, which has no access to formal financial credit.

The inability of successive governments to control or reduce wasteful expenditures and its failure for wide ranging taxation reforms have led to continuous borrowing from SBP though it has been stopped in last couple of years. The Autonomy Bill envisages the prohibition on the government to seek SBP lending or investment in government securities in primary markets. This will force the government to cut unnecessary expenditures to achieve fiscal discipline. The government can continue to borrow money from commercial banks by selling securities, but it will further crowd out the private sector.

In our view, this bill is largely a step in the right direction as it will help in right sizing the government and achieving monetary stability but some amendments to the current bill are necessary to restore institutional check and balance. This can be ensured by giving a right to vote to the Secretary Finance who will be a member of the Board of Directors. Further, blanket indemnification of SBP employees against a court of law should be reconsidered in the interest of establishing rule of law. There should be a term limit for the governor and the current option of renewal for another five years should be withdrawn. The fact that the appointment of the governor will be made by the President in consultation with the federal government is a re-assuring feature of the bill and similar powers can be provided to the Parliament for removal of the governor in case of failure to achieve targets.

Pakistan Prosperity Index – December 2021

24/12/2021by PRIME Institute PRIME Institute No Comments

Pakistan Prosperity Index – December 2021

Economic prosperity improves amid rising energy constraints

Over November 2020-October 2021, economic prosperity has improved by 1.5%, according to PRIME’s latest report Pakistan Prosperity Index. The improvement in overall country’s economic performance can be attributed to higher business activity on the back of rising domestic and international demand of goods and services, decline in supply chain distortions and return to normalcy.

The trade volume witnessed an increase of Rs.538 billion Y-o-Y and Rs.3.8 billion M-o-M on account of an increase in domestic and international demand. In M-o-M trade growth, exports witnessed an increase Rs.19 billion, while imports witnessed a decline of Rs.15 billion in October 2021.

Purchasing power continues to decline as the Y-o-Y inflation was reported at 9.2%, while the M-o-M inflation clocked at 1.9%. The prevalent high levels of inflation are due to soaring supply-demand gap emanating from monetary expansion carried out through commercial banks’ investment in government securities, higher inflow of remittances, falling productivity and surging petroleum prices.

Large Scale Manufacturing (LSM) output posted a growth of 1.9% M-o-M, while a decline of 1.2% Y-o-Y. The slowdown in manufacturing activities on yearly basis is due to significant increase in the energy and input prices while monthly increase is associated with rising demand. The automobile industry maintains leading position with the growth of 1.2% while textile and food industries having weightage of 21% and 12% showed growth of 0.1% and 0.4%.

The private sector borrowing from banks has been on an upward trajectory with Rs.197 billion Y-o-Y and Rs.19 billion M-o-M increase. The borrowing continues to increase despite slight hike of 25 basis points in policy rate and indication of further hike in coming months. However, the borrowing is likely to slow down after recent hikes in the policy rate.

The economic performance is encouraging but caution is needed due to prevalent challenges. The burgeoning current account deficit on the back of significant increase in the international commodity and energy prices and the resultant hike in the policy rate will contribute to slow down in the economic activities in the country. This is cardinal factor in the yearly decline in manufacturing sector output.

The surging global energy prices translates into domestic inflation thus declining the purchasing power/real incomes of the citizens and hinders the economic activity. Instead of relying on administrative measures to control prices, addressing the supply side bottlenecks such as lower productivity and interruption in the supply of energy are imperative to lower inflation, especially food inflation, which is the main cause of rising overall inflation in the economy.

The overall economic outlook, as measured by PPI, shows improvement and supports the government’s growth targets. The supply side shocks call for more liberal trade measures and elimination of state intervention in the market. Moreover, prudent economic planning is needed to curtail fiscal deficit.

PRIME Institute publishes monthly PPI report with a lag of two months due to availability of data, which comprises trade volume, lending to private sector, purchasing power and manufacturing output indices.

Click Below to read full Report & Methodology:

Pakistan Prosperity Index – December 2021

PPI Methodology-December 2021

For inquiries, please contact afzal@primeinstitute.org or call at 03330588885.

EAG reviews SSRC Reforms Agenda

24/12/2021by PRIME Institute PRIME Institute No Comments

EAG reviews SSRC Reforms Agenda

Economic Advisory Group (EAG) in its Vision document has strongly argued in favour of revisiting the support price regimes and the relevant laws that hinder competition, including in the agriculture and commodities sector.

A general principle we espouse is that economic activity should be contestable, i.e. individuals and firms should face the pressure of unrestricted competition. Deviations from this principle should be thoroughly scrutinized and vigorously debated.

Historically, there have been significant deviations from the principle of contestability. For example, the Punjab Sugar Factories Control Act 1950 states,“… cane grown in a reserved area shall not be purchased by a purchasing agent or by any person other than the occupier of the factory …” This adversely affects the bargaining position of the farmer in relation to factory owners.

Likewise, the licensing regime governing the setting up of sugar factories not only prevents existing factories from relocating to where production can be organised more efficiently, but also prevents new entrants, thus limiting competition. Excessive government intervention in restricting exports and imports of the commodity has also frequently given rise to surpluses and shortages in the domestic market, thus keeping government functionaries busy with managing one crisis after another.

In light of this, the Sugar Sector Reforms Committee (SSRC) setup by the federal government has proposed a set of reforms that go a long way in addressing the above challenges. Some of the key proposals include abolition of restricted areas, tax free imports of sugar, a gradual move away from the minimum support price regime, bringing transparency to forward contracts by allowing for such under the Pakistan Mercantile Exchange, and implementing adequate pricing of water to incentivise the adoption of water-saving farming practices.

EAG supports these measures and encourages policymakers both at the federal and provincial level to take necessary steps towards their implementation. EAG believes that these measures will improve farmers’ bargaining positions in relation to other stakeholders by allowing them to sell their produce to whoever offers the higher price. These reforms will further allow for new factories to be established, while facilitating existing ones to relocate to where it is more productive to operate. In addition to improving productivity at the level of sugar factories, the increase in competition between factories will also benefit both the farmer and the consumer.

Allowing for forward contracts while ensuring effective supervision will help reduce seasonal volatility in sugar prices. Likewise, removing restrictions on imports will expose the industry to international competition and incentivize the adoption of more productive technology. Alternately, the new regime will allow inefficient players in the sugar industry to exit the market, thus reallocating economic resources to more productive activities. This latter point is the bedrock of EAG’s vision document.

While supporting the reforms agenda in principal, EAG also recommends that the SSRC reconsiders some of the other proposals put forward in the report:

The report suggests that exports may only be allowed “in times of high production” and “through allocation of quota on FCFS without any government subsidy.” This proposal will lead to similar problems as in the past. A combination of low international prices and surplus stock at home will necessitate government subsidising exports to bring inventories at a level where factories have an incentive to undertake production. Instead, a better policy will be to allow free export of sugar while maintaining strategic reserves as a credible threat against speculative activity in the domestic market.
The current proposal restricts forward contracts to a maximum of 15 days. EAG proposes that this limit should be increased to at least cover one full season, if not more. Research shows that forward contracts play an important role in reducing the volatility of the spot price. These further allow businesses to hedge against risks and, as a result, incentivise firms to increase their investments. To avoid speculation, government should invest in the capacity of concerned regulators, such as the Competition Commission of Pakistan, to monitor collusive practices and guard against these.
The proposal also recommends enforcement of relevant laws “to ensure that no hoarding is possible.” EAG recommends that the committee should clearly define “hoarding” in the context of the sugar industry. There should be a clear distinction between hoarding, on the one hand, and the need to store the commodity by industry players for business purposes. For example, farmers need to store the crop while they negotiate on price with multiple market players. Likewise, retailers need to maintain sufficient stock levels to effectively manage their supply chains and expand their retail networks. Finally, traders accumulate stocks so these could be sold during off-season when prices are generally high. This distinction has historically been lost on the district authorities charged with implementing anti-hoarding laws, and, as a result, economic efficiency is compromised. For example, in the process of implementing anti-hoarding laws, farmers have been denied the few weeks after the harvest that it can take to select the best possible transaction.
While the report notes, “import of sugar is already open for the private sector,” policymakers have time and again imposed restrictions in the past, often requiring approvals from the highest levels of the government. This loophole must be closed to bring more certainty to the rules that govern the sugar market.
Finally, while EAG fully endorses the move away from the minimum support price, EAG also recommends that policymakers at the provincial level should work towards carefully designing a mechanism for introducing crop insurance for small farmers in order to protect them from adverse shocks. This is essential both for protecting small farmers from falling into poverty in the face of adverse shocks, and also for increasing the acceptability of a market-based pricing regime. The insurance product can be linked to the Kissan Card that the current government has recently introduced, and rolled out gradually to minimize the likelihood of costly mistakes.

Overall, EAG largely supports the reforms agenda put forward by the SSRC. This is in line with what the EAG has been proposing on different forums. However, EAG also points to certain proposals and reservations that must be revisited in line with the recommendations above. This will ensure that the overall effectiveness of the reforms agenda is not compromised.

The Economic Advisory Group is an independent group of individuals from economics, policy and the private sector that deliberates regularly on economic developments and shares its views with the government and the public. It is supported by PRIME, an independent think tank.

For media inquiries, contact at info@eag.org.pk or visit www.eag.org.pk.

From economic growth to transformation

20/12/2021by PRIME Institute PRIME Institute No Comments

From economic growth to transformation

Ali Salman

It calls for grand re-look at allocation of resources including public spending, taxes and tariffs

ISLAMABAD: Economists in Pakistan generally agree that the country has followed a boom-bust cycle of economic growth throughout its history.

While the long-term average growth rate is a respectable 5%, the cyclic nature of this growth, largely propelled by external finances, has always led to macro imbalances. That, in turn, has forced successive governments to seek bailout from the IMF that has always started from stabilisation.

We have run this model for 22 times. If the current trends continue, we will do it again.There is something deeply wrong in our growth model, or indeed in how we understand growth. The underlying driver of growth has never been productivity, which is why it is always short-lived and uneven.

Moreover, its distributional impact on both businesses and poverty remains questionable.

Our productive structure remains ossified, exhibited in a very narrow export basket. Our average income has not increased much and in recent years, we have begun to fall behind regional peers. Lastly, the public finances have remained in shambles, with the increasing portion of tax revenue being allocated to service our debt.

Dr Hafiz Pasha has already predicted that soon 100% of tax revenue may have to be allocated to debt servicing. We both pray it proves to be wrong.

There is no short-term respite from this crisis. In the medium to long term, we must transform our economic model. For that to happen, we need to change our narrative from growth to transformation.

We have seen far too many episodes of borrowed growth, whether it is funded by consumption, investment or debt. Each time, we have successfully managed the cash flow crisis to live to another day. Transformation was never our need. I believe we have reached the brink now.

The recently launched document, “New Vision for Economic Transformation: Rethinking Resource Allocation and Productive Structures” by the Economic Advisory Group, offers a solution. It analyses the factors hindering the efficient allocation of resources, hence contributing to economic slowdown, and presents practical suggestions.

It builds on a number of good studies, which have been done in recent years, and presents a coherent framework for policy debate. The suggestions put forth in the document are organised under four themes: revisiting the pricing regimes that currently govern agriculture and commodities’ sectors; revamping the education system with the aim to introduce and mainstream pathways for vocational training at the level of higher and post-secondary education; reduction in tariff and non-tariff trade restrictions and greater integration with the regional trade blocs; and, finally, rethinking the industrial policy with special emphasis on moving away from picking winners to rewarding innovators, improving land use within cities, and simplification of the tax code.

Examples of success

To naysayers, let me offer two good examples. The liberalisation of our motorbike industry 20 years ago opened up the sector for new investors and manufacturers.

Our annual production went up manifold from around 50,000 in 2000 to above 600,000 in 2008 and crossed 1.3 million in 2020. This phenomenal increase was accompanied by a downward pressure on prices. The motorbike assembled in Pakistan with the leading brand name was sold for Rs70,000 in 1999, which I remember paying as I bought my own two-wheeler after graduation.

The amazing fact is that it was still available at the same price in 2018. In fact, now Pakistani consumers can afford to buy a motorbike at almost half the price of the leading brand.

Another example. In the last three years, Pakistani footwear sector has registered a stunning growth and may reach $1 billion in exports by 2027. One major policy change that enabled this growth was slashing down import duties on industrial raw material in 2018-19. Once the government was convinced of giving up a portion of its customs revenue, it enabled the private sector to grab the opportunity. It already had the necessary manpower and skillset.

In just three years, the production has registered a 50% growth. This can be done in all other sectors.

In both examples, what we witnessed was not just growth but also sectoral and structural transformation. Growth eventually followed, but it is a sustainable growth. Transformation bears fruit for businesses as it helps create opportunities. It leads to more job creation, which helps in social harmony. It facilitates the government in changing its revenue basis – from dependence on indirect taxes to shift to direct taxes, which is more equitable.

While these are great examples of success, our large-scale sectors, particularly in agriculture and industry, have remained in protected walls.

Without altering the productive structure of our economy, and without letting some of them to fail, we cannot hope to improve the livelihood of our masses. The best welfare regime is the creation of productive and well-paying jobs. To change the productive structure, we need to change how we distribute incentives. When we withdrew incentives available to one or two motorbike assemblers, through protected tariffs, we experienced transformation and growth.

When we altered our import substitution to export-led model in the footwear sector, we again saw transformation and growth. Transformation is not just about liberalisation, which is a necessary but insufficient condition. It is about a grand re-look at how we allocate and re-allocate our resources including public spending, taxes, tariffs and regulations. It is not a pipedream. We have already begun doing it.

The writer is the founder of PRIME Institute and a member of the independent Economic Advisory Group

Published in The Express Tribune, December 20^th, 2021.