ISLAMABAD: It seems that the caretaker cabinet is setting its eyes on the future instead of just steering the country through next general elections.

There are two statements made by caretaker Minister of Commerce and Industries Gohar Ejaz, which make me think this way.

He has recently called for establishing new business parks “to consolidate Pakistan’s global trade connections. These parks or facilitation centres for traders would be designed to serve as hubs for foreign traders, enhancing trade relationships and driving economic growth.” He believes these business parks are good for trade connectivity.

Ejaz has also announced an export target of $80 billion and a “new” strategy of targeting specific countries and by devising a new trade policy framework.

This is wrong on a number of grounds. First of all, the caretaker cabinet should not be allowed to make any pronouncements with long-term consequences for economic policies.

Setting up new business parks or devising new trade policy frameworks are ambitious undertakings.

Similarly, following an export target of $80 billion from the current level of $40 billion is a very ambitious plan. It is unrealistic to achieve it within the period for which the cabinet has sworn in.

The appointment of an industrialist on a public position is also a serious conflict of interest. Public position holders, even if they are financially honest, become privy to critical information much ahead of time that they can easily use to gain private benefits, even if these gains are to materialise in the future.

A caretaker government for three months or six months cannot be taken seriously by investors and diplomats who are looking for a long-term and stable political outlook. In fact, one wonders if this should be taken too seriously by members of the cabinet themselves.

A best caretaker government is no caretaker government. There is hardly any country in the world which practices this arrangement. The sitting government continues till the holding of elections and transfer of power whereas the Election Commission is much more empowered.

If the caretaker government continues for an extended time period, as it is generally believed, till March 2024, then their main mandate is to ensure that Pakistan is not worse off than it is today in terms of economic stability.

That means, primarily, stabilisation of exchange rate, which demands keeping the forex market free from any kind of intervention. This, in turn, is the function of central bank, and not of the federal government, which should continue to exercise its constitutional mandate.

There is another news recently that electricity distribution companies will be handed over to provincial governments. While the caretaker government does not have a mandate to take such a decision, the transfer to provincial governments is hardly going to be a solution.

The solution lies in creating competition in the electricity distribution market and not in “provincialisation” of DISCOs. However, it will help in reducing the federal government’s budget deficit as a significant chunk of subsidies is allocated for the power sector.

Expectations have been built that the caretaker government will take some “tough” economic decisions which elected governments usually hesitate to undertake.

While political governments may be happy to pass on the buck to an interim setup, this does not solve fundamental issues that require consensus on restructuring and reforms.

One of the long-term challenges that Pakistan will have to face is its debt management. As the IMF standby arrangement continues to hold, there should be public discussion on various options for Pakistan’s next government including that of debt restructuring coupled with economic reforms.

The debate can help guide political parties in formulating their manifestos as they prepare for next general elections.

This Article was originally published in The Express Tribune on August 28th, 2023.

Pakistan has a rich history of state-run enterprises marred by inefficiencies and lackluster performance. There is a plethora of challenges that have hindered their growth and effectiveness. Bureaucratic red tape, political inteference, misaligned incentives, and inadequate accountability mechanisms have contributed to a lack of agility and innovation within these organizations. As a result, their ability to adapt to changing market dynamics and technological advancements has been severely compromised. 

Such inefficiencies not only stifle the potential for these enterprises to flourish but also strain the nation's economy, leading to wasteful allocation of resources and diminished competitiveness on the global stage. While the prevailing discourse among policy makers and opinion makers leans towards endorsing the state's involvement in running profitable enterprises, it is essential to critically examine the potential ramifications of such a proposition. 

Advocates of a balanced economy often argue for a mix of state-owned enterprises (SOEs) and private sector involvement. Some contend that past privatization efforts in the 1990s did not yield the expected benefits for the country, and they maintain that profitable SOEs should not be privatized at all. While this argument may hold merit when considering accounting profits alone, it overlooks the critical concept of economic profit and the accompanying opportunity costs that are invariably at play, whether consciously acknowledged or not. 

Privatization facilitates optimal allocation of resources, improved service quality, and enhanced efficiency, ultimately driving economic progress. A prominent example of successful privatization in Pakistan is evident in the banking sector. Private banks have surpassed state-owned banks in terms of return on assets (ROA) and return on equity (ROE), leading to heightened efficiency and profitability. 

Let us examine the case of the National Bank of Pakistan (NBP), a state-owned bank. NBP recorded an after-tax profit of 30.4 billion rupees last year and has consistently demonstrated commendable profitability over the years. On the other hand, the Muslim Commercial Bank (MCB), once state-owned but privatized in the 1990s, achieved an after-tax profit of 32.7  billion rupees and maintained an equally good track record of profitability. At first glance, both banks appear to be performing equally well, with nearly indistinguishable profit figures. However, this simplistic view fails to consider the opportunity costs arising from inefficiencies. 

When we examine the return on assets (ROA), a measure of how efficiently a bank utilizes its assets (mostly cash for banks) to generate a profit, MCB clearly outperforms NBP. MCB's average ROA is more than twice that of NBP's. Considering this significant disparity in ROA between the two banks, the opportunity cost incurred amounts to approximately 42 billion rupees in the last year alone, with an accumulated opportunity loss of 261 billion rupees over the past decade. These figures are substantial and demonstrate the necessity of considering the economic efficiency of SOEs beyond their superficial profitability. To put these numbers in perspective, the entire market capitalization of NBP currently stands at approximately 43 billion.

Indeed, we must not overlook the fact that a larger asset base can potentially limit a bank's ability to achieve equally impressive profits. However, it is crucial to recognize that the situation is even more concerning when it comes to smaller state-owned banks, which are performing even worse in comparison. The stark contrast in performance between private banks and state-owned banks becomes evident when we consider the average returns on their assets. 

While some may argue the need for government involvement in running profitable SOEs, the argument for privatization becomes irrefutable when dealing with loss-making entities like Pakistan International Airlines (PIA). The accumulated loss of PIA, which now stands at a staggering 651 billion rupees, poses an alarming financial burden for the government and taxpayers alike. Such a colossal loss cannot be ignored. To illustrate the opportunity cost at hand, the amount is equivalent to providing wheat supply for approximately 37 million impoverished individuals for an entire year. This staggering figure underscores the opportunity cost of maintaining PIA under government control and  highlights the potential to redirect these funds towards initiatives like poverty alleviation and infrastructure development. 

In conclusion, the successful path forward lies in embracing privatization to unlock the true potential of SOEs. By reducing the government's grip on businesses, the country can harness the power of market forces to drive economic growth, allocate resources efficiently, and foster prosperity for its citizens. To achieve this, policymakers must fully grasp the concept of economic profit, recognize the opportunity costs associated with inefficiencies, and prioritize the long-term benefits that privatization can bring to the country.

Prior to the creation of the SIFC, these objectives fell under the purview of various bodies, ministries, and institutions including the Board of Investment, Council of Common Interest, Prime Minister’s Office, Ministry of Industries, Ministry of Finance, State Bank of Pakistan, Ministry of Commerce, and Economic Coordination Committee of the Cabinet. The inclusion of the army chief in this apex body is the most noticeable change, with the prime minister attributing economic revival and the International Monetary Fund (IMF) Standby Agreement to the army chief.

The stated goal of the SIFC is to generate $20-25 billion through foreign direct investment (FDI) in order to avoid a dollar shortage without incurring additional debt. While the goal is commendable, it is worth revisiting the latest success story of investment in Pakistan – the China-Pakistan Economic Corridor (CPEC). We can argue on merits and demerits, but CPEC remains the single largest Belt and Road Initiative (BRI) investment package in the world.

Two models of Chinese investment in recent years serve as examples, excluding the debt portion.

The first model is seen in the CPEC power projects, where investments were made in power generation with guaranteed returns on equity, backed by sovereign guarantees and capacity payments. Revenue is generated from users who pay in Pakistani rupees, while the government arranges dollar payments to independent power producers (IPPs). However, this model carries foreign exchange and non-utilisation risks. We have experienced both locking us into continuously rising circular debt, which has now spiked to $10 billion already only in the electricity market.

The second example involves Chinese investment in Pakistani industry, aimed at increasing productivity, production, job creation, and export income. Earlier, the news reported a Chinese company’s plans to invest $150 million in an industrial park on Lahore’s border with Kasur. It is said to house state-of-the-art fabric units, dyeing facilities and garment manufacturing units to export sportswear from Pakistan to the Americas, Europe, Asia-Pacific and other regions of the world. However, such investments in the private sector are rare, with most Chinese investment focused on energy and infrastructure projects managed or backed by the government.

The demand from China to relocate textile industries to Pakistan is evident, but it requires swift action and a favourable environment for setting up operations. These firms can’t wait for years to acquire land, get utility connections and clear all the red tape.

According to a report by the Pakistan Business Council (PBC), Islamabad has not been successful in leveraging CPEC to catalyse domestic private investment or attract non-China FDI.

The Chinese investment in power projects is driven by two models. The first model aims to tap into a large and growing consumer base in the market, with the state providing financial backing. However, under this model, we will end up paying more dollars than we receive, regardless of the success of the investment project.

The second model focuses on increasing local capacity to enhance exports and gain a larger share in the international market. With this model, we not only receive dollars through exports but also have the opportunity to repay investors based on the success of the project.

It is crucial for Pakistan to refrain from further infrastructure projects unless there are public-private partnership agreements that do not burden the country with more debt or convert investments into liabilities. Joint ventures within the private sector should be explored instead.

This is primarily Pakistan’s problem and not that of the IMF, creditors, or friendly countries. The debt issue stems from misaligned fiscal policies, bureaucratic red tape, and irresponsible practices of the federal government. Without a radical transformation of the economic policy landscape on the ground, high-level committees will yield little results. Credibility in profit repatriation promises cannot be established if repatriation is halted for extended periods. These counterexamples highlight the need to invest in the foundational pillars before constructing buildings.

There have been numerous reports and op-eds recently blaming profiteering and the wealthiest individuals for the economic crisis and global inequality. The latest report, titled "Survival of the Richest" by Oxfam, attempts to advocate for combating inequality by reducing the numbers and wealth of the richest individuals and redistributing these resources. The report emphasizes that the richest 1% possess nearly twice as much wealth as the rest of the world combined in the past two years. However, this narrative is wholly misguided, oversimplified, and flawed on multiple levels. 

Focusing solely on wealth inequality is a misguided approach when addressing societal issues. While it is important to acknowledge and address disparities, obsessing over wealth redistribution as the sole solution overlooks the complexities of economic growth and individual incentives. Wealth creation is not a zero-sum game; it generates opportunities, employment, and innovation that benefit society. Instead of fixating on wealth redistribution, emphasis should be placed on creating an environment that fosters economic mobility, encourages entrepreneurship, and provides equal access to quality education and opportunities. By promoting individual growth and merit-based advancement, we can strive for a more prosperous and inclusive society, rather than stifling progress with an exclusive focus on wealth redistribution.

However, that would mean successful people would accumulate more wealth than others. Therefore, should we discourage people from pursuing success or impose penalties on their achievements? There is nothing glamorous about the concept of equality of outcome. Every individual ultimately reaches the same depth in the grave, and they are perfectly equal when they are six feet under. If there are any doubts, consider the tragic events that unfolded in Ukraine during the 1930s when the Soviets deemed it justifiable to attribute class guilt to successful farmers, eliminating them and resulting in the starvation and death of six million Ukrainians, thus establishing a certain equality.

The exponential advancement in the tech industry, which is often overlooked but undeniably evident, acts as the primary catalyst for inclusivity. Services such as Uber, Amazon, YouTube, TikTok, and many others have empowered low-skilled and uneducated workers to secure livelihoods at an unprecedented pace and scale. Moreover, technology has opened doors for millions of women who would otherwise be unable to work, providing them the opportunity to contribute from the comfort of their homes with flexible schedules. All these remarkable achievements have been made possible by the audacity of visionary individuals who dared to pursue extraordinary dreams. The unequal distribution of rewards serves as an incentive for individuals to strive, work hard, and undertake risks in their pursuit of greater prosperity and success. It is important to acknowledge that inequality does not always imply discrimination.  

While poor government spending and the political influence exerted by certain people are indeed the actual issues, these are not typically what studies, such as the one from Oxfam, specifically highlight when placing blame on the rich. We are currently in an era where many individuals are deeply concerned about concepts such as "fairness" and "social justice." The idea behind progressive taxation, which is often advocated for, is to increase tax rates on the wealthy to ensure they contribute their fair share. The focus lies more on achieving a sense of fairness and social justice. As Thomas Sowell once questioned, "What constitutes your 'fair share' of something someone else has worked for?"

As quoted earlier, according to Oxfam, the richest 1% has accumulated nearly twice as much wealth as the rest of the world in the past two years. However, this alone is not evidence of a problem. Wealth is not a zero-sum game, and the rich do not become wealthy at the expense of the poor. Rather, the creation of wealth benefits society by generating employment opportunities, increasing productivity, and driving innovation.    

Let's take the example of Amazon. During the pandemic, Amazon's market capitalization has soared by approximately 95%, equivalent to a staggering $920 billion increase. As a result, Jeff Bezos, the CEO, and founder of Amazon, witnessed his fortune rise by $89 billion, owning 9.7% of the company. However, the remaining $831 billion of wealth creation was shared among the public, including both large and small investors.     

It is crucial to note that individuals like Jeff Bezos cannot simply realize the gain in market capitalization as personal profit. In fact, they may never be able to fully actualize the wealth indicated on the charts. Furthermore, the total value generated by Amazon extends beyond market capitalization, encompassing the 1.9 million sellers and millions of buyers who benefitted from the platform during the extensive global lockdowns. Unfortunately, studies like the one conducted by Oxfam often overlook these important aspects. 

Milton Friedman, a Nobel Laureate in Economics, emphasized that there is a positive benefit to the inequality of outcome for everybody. While some individuals become millionaires and other billionaires, it is precisely because they have succeeded in satisfying their customers. That's the economic system that has transformed societies in the past century, and that's what gave people like Jeff Bezos and Bill Gates the incentive to produce the miracles that have benefited us all. If we didn't allow them to become incredibly rich, we would be more equal, but the question is whether we would be better off?

For Dar, current account management has taken precedence over anything else, sacrificing growth. He is an easy target for economists like us.

However, I do realise that as the minister of finance, his key performance indicator is to keep government accounts in good shape, at least under his watch.

He used many tools for it such as import compression, debt re-profiling, rollovers, tax rate hikes, and budget re-appropriation. He did it all to, successfully, manage accounts and to avert default.

He has cut down current account deficit by 75%, beating even IMF estimates. While we are free to interpret history, and to project varying scenarios, this is what Dar has achieved as finance minister.

Now, let’s set our eyes at the post-election and post-Dar scenario. I am hoping that by that time, our economy, and in particular the economics of the federal government, will be out of fire-fighting mode, and we will be ready to discuss economic issues in a five-year framework. We can then talk about growth, jobs, exports, investment and prosperity.

It also seems that the political situation will lead to the emergence of a hung parliament and a coalition government without any single party dominating. As and when that scenario emerges, we must prepare ourselves for long-term economic direction.

To begin with, we need a Charter of Economy on which political, business and intellectual leaders should develop a consensus. Many individuals and organisations have floated their versions, such as Dr Hafiz Pasha, PIDE and PRIME.

While we should debate on the charter, we should also think about implementation arrangements. The economy is too complicated a matter to be left to a minister of finance. We need a minister of economy whose main job should be to lay the foundation of sustained economic growth.

The minister of economy should not be same as a minister of finance, whose job is to balance books even at the cost of growth.

I am not the first person to point out that economic governance is fragmented across various ministerial functions, and we need an integrated strategy, though not necessarily ministerial consolidation.

We have a minister of finance, who is responsible for revenue and spending, and a minister of economic affairs whose job is to manage external loans and grants.

We have a minister of planning and development, whose job is to propose and manage development spending. Then we have separate ministers for industries, commerce and agriculture – each of them responsible for growth in their own sectors.

All too often, these ministers come up with their departmental growth plans, which lead to a muddled policy outlook. The minister of agriculture represents agricultural interests and typically opposes any proposals to free up trade.

This is what happened in the case of sugar export opportunity last year that we lost due to the minister of agriculture’s opposition for six months, though the minister of industries supported the proposal of export of sugar.

By the time the cabinet decided to allow export, it was too little and too late.

As another example, the minister of planning and development aims to maximise the share of Public Sector Development Programme (PSDP) while possibly undermining economic efficiency.

That is why we need a minister of economy who can steer through these divergent interests and keep us focused on sustained economic growth.

The minister of economy should be based in the Prime Minister’s Office, just like Malaysia, without a full-fledged ministry.

The minister should be supported by a full-time economic advisory group, comprising experts from various sectors of economic governance such as trade policy, development, fiscal management and monetary policy.

The group should not have anyone who is known to represent special interests or partisan tendencies.

To empower the minister of economy, the prime minister should take back reins of the Economic Coordination Committee (ECC) of the cabinet. It is his/her constitutional responsibility, though it was delegated by Nawaz Sharif as prime minister in his third term to the finance minister.

It should be the prime minister who takes a leadership role in economic decisions. Only an elected prime minister can lead cabinet decisions and will have significant political risks for failure instead of firing and making the finance minister a scapegoat, as Pakistan has seen six finance ministers in five years.

Pakistan badly needs economic stability, which should follow political stability. This requires institutional reforms across the entire spectrum of economy, a full-time minister of economy and a degree of institutional autonomy based on rules.

A Charter of Economy provides a menu of reforms as well as rules whereas a minister of economy will be its custodian. We should now stop equating finance with economics. All political parties should start working on preparing their economic teams now.

I am writing this article to capture my first impressions from these conversations.

The Finance Bill 2023 is the continuation of an old ritual where the finance ministry and its constituent divisions spend countless days and months to allocate revenue and expenditures.

While presenting the bill, Finance Minister Ishaq Dar faced a number of complex challenges: almost zero per cent growth rate, increased incidence of poverty where 20 million people were added in the headcount to 95 million now, historically high inflation of 37%, significant shortfall in tax revenue, a coalition government facing elections, and no guarantee of IMF agreement.

It is clear from the budget speech that he has made a decent effort to make everyone happy. He has managed to increase the development spending significantly by doubling the new allocation from Rs567 billion of the revised PSDP to Rs1,150 billion of the budgeted PSDP.

He has promised a primary surplus to the tune of 0.4% of GDP – one of the key conditions of the IMF from the budgetary exercise. He has committed to increase revenue by more than 28%, from the current year’s collection of Rs7,000 billion to Rs9,200 billion.

He has also proposed to increase the scope of Benazir Income Support Programme to 9 million families and increase the salaries of government employees by more than 30%. He has also announced an increase in the minimum wage to Rs32,000.

The finance minister has announced incentives for various agriculture and industrial sectors through tax and duty exemptions in the hope of uplifting the economic growth rate.

One of the questions which was asked on our Space session was how the government would meet the ambitious tax revenue collection target.

To answer this, one needs to look no further other than the expansion of super tax to all sectors with a minimum annual income of Rs150 million. This limit was Rs500 million when the super tax was first introduced as a temporary measure.

It seems now that effectively the super tax has become integrated with the income tax of medium to large firms – previously it was levied only on large firms.

Super tax is clearly an anti-business measure and with this change, it will encourage greater tax evasion. Most of the family-owned companies will resort to splitting their businesses to ensure that their annual income does not increase to Rs150 million.

Obviously, it is not possible for firms to shut down or re-allocate their capital in a short run, however, it will deter formation of new companies and new investment.

The government must withdraw the super tax on all firms immediately. This measure will prove to be a single most important tool to help raise the level of confidence and working capital for the bulk of our businesses.

It is interesting to compare super tax with the increase in the SMEs’ turnover threshold from Rs250 million to Rs800 million. This is where the bulk of trading enterprises operate.

By a sleight of hand, our financial wizard has promised significant relief to traders while penalising industrial and manufacturing firms.

The increase in government salaries is being welcome, however, I contend that the increase in salaries should be a function of increased skills and productivity.

In this context, it is a better strategy to lay off the lower level of government employees, offer them re-training and help them regain employment or start a business. This will push the government to increase productivity from a smarter government.

The extraordinary rise in inflation, including food inflation, which has taken place in the last one year, is mostly a function of supply constraints.

Import restrictions, flour price hike, 40% devaluation of Pakistani rupee and constant rise in petrol and utility prices have added significantly to the core inflation.

This inflation is largely responsible for pushing additional 20 million people under the absolute poverty line and no cash transfer can mitigate it. In fact, it may be inflationary itself.

The government must lift import restrictions and control on exchange rate immediately and reduce indirect tax rates including customs duty to bring inflation down.

Tax gaps ought to be addressed by reducing tax exemptions and not by increasing tax rates. As the latest tax expenditure report reveals, these exemptions have increased from 2.69% in 2020-21 to 3.36% of GDP in 2021-22.

The tax revenue forgone is estimated at Rs2,240 billion. While the government has reduced income tax exemptions, which grew only by 1.77%, sales tax exemptions increased by 75% and customs duty exemptions by 52%.

This is where the powerful organisations, institutions, and politically connected firms gain the most by throwing the working class and entrepreneurs under the bus.

The Finance Bill is replete with scores of exemptions on the basis of discrimination across industry, product, institution, usage and location.

The budget has continued to legalise tax evasion by the non-filer category. The non-filer category must be disbanded immediately and those not filing tax return must be prosecuted as per law instead of offering them amnesties.

No nation has taxed its way to prosperity. We have been advocating for a low-rate, flat and broad-based tax structure with minimal or no exemptions.

Everyone should pay the same level of income tax as a percentage irrespective of the source of income. Everyone should pay the same level of sales tax upon consumption and not at the level of import or manufacturing.

All excise duties should be abolished. Customs duty should become a function of a new industrial policy instead of a revenue measure.

Let’s hope that next year’s budget speech of the finance minister of the newly elected government takes a leaf from these thoughts!