What are the biggest challenges to Pakistan’s economic managers?
There are three major imbalances in the economy. First, there is the existence of crony capitalism. For a long time a small group of businessmen, landlords, industrialists and civil servants have hijacked the beneWts of economic activity and growth. Tax breaks or customs rebates or unpaid loans were provided to these businessmen, creating distortions in resource allocation. This in turn has suppressed economic growth, so the amount of investment that could have given us 6% growth in GDP was giving us only 4%.
Two, the public sector has been living beyond its means. The quarterly Wscal deWcit of the public sector has been unsustainably high at 8% to 10% of GDP. This was Wnanced by domestic debt and external borrowing but such Wscal imbalances have produced a very high debt stock, equivalent in scale to our entire GDP. That is one of our heaviest burdens.
Third, foreign exchange earnings have lagged foreign exchange consumption. We continued to import goods freely while our exports were never adequate to Wnance the imports. This forced us to go to external borrowing.How can these imbalances be reversed?Our strategy involves deep-rooted structural changes and institutional reforms. The starting point for an implementation strategy is the reform of our tax structure, which will happen in three ways:First, we need to expand our tax base, which is very narrow. A broader tax net will bring in professionals, traders and agriculturalists. We also want to reduce the tax rate so people are not penalized for working hard.Second, we have excessive numbers of taxes, and we want to streamline the system to three taxes at the federal level, three at the provincial level, and three at the local level.Three, the extensive discretion available to tax collectors has opened up opportunities for malpractice and the government now plans to introduce a system of self-assessment. Only a random 5% to 10% of cases will be audited, as opposed to the present system where every taxpayer is required to explain his position.If this system succeeds, and the tax-take is increased, the beneWts will Xow through to our Wscal deWcit, reducing our need to borrow.How will you deal with opposition to the policy?Economic reforms inevitably result in losers and winners. The losers from our tax policies are people who have never paid any taxes for the past 50 years. They will lose some privileges and income, and they are bound to resist. The government is well aware of their concerns, we are talking to the traders about them, and will incorporate some of them into the reforms. But the bottom line is that this government is not here to win votes but to revamp the economy, and that it will do.Could you describe your approach to negotiations with the IMF?We are adopting a diVerent style to our predecessors in respect of our dealings with the multilateral agencies. In the past, the IMF asked us to do a bunch of things and we signed on the dotted line. Then after the Wrst tranche was paid over, we were unable to deliver on our policies, and there was disappointment all round.The new government has developed its own programme for consideration by the IMF. That will go to the IMF and if it feels that the programme is worthy of its support, then it should come forward. We are quite prepared to discuss performance criteria relating to the size of the Wscal deWcit or the money expansion, but at least we will have established the framework for discussion. This process will result in an agreed outcome as to how the economy will evolve over the next three years, and ultimately lay out a benchmark for IMF tranche releases.That said, there are outstanding conditions that we have to meet in any IMF negotiations. These include the promise to introduce a general sales tax on trade, an agricultural income tax, and a means to resolve the dispute with Hubco. There will have to be some amicable resolution on these issues before the IMF goes to its board to approve a programme [which could start in July].What incentives can you offer foreign investors?We have removed all restrictions on remittances of foreign exchange by private foreign investors in the three areas of loans, direct investment or portfolio investment in the stock exchange. In doing this, we are reversing the law passed after the May 1998 nuclear test, which prohibited the removal of money from the country without central bank approval. This move is designed to attract foreign investors, and it has been well received. We are already seeing the return of institutional investors who left the country. What are your borrowing and funding plans?For the past year, we have not borrowed. In fact we have we have been a net capital exporter to the World Bank, the IMF and the ADB. We paid them $500 million more than the amount we received, but as no new loans were sanctioned over the year following the May 1998 nuclear test, inXows were close to zero. We paid from our own reserves. In normal years, we would receive $1 billion of new inXows, and outXows would amount to $500 million, the cost of debt servicing. But even though there were no inXows, we have been able to maintain stable foreign exchange reserves without borrowing. We have paid everyone on time, all our contractual obligations have been met, our imports have been taken care of, the exchange rate has remained within a narrow range, and the diVerential between the market rate and the inter-bank rate is stable. Without borrowing we have done reasonably well.But over a longer period, we need to re-establish relationships with the international Wnancial institutions, and that is why we are talking to the IMF. If we can have a programme with the IMF, doors to the World Bank and Asian Development Bank will open.We don’t have many bilateral donors except for Japan, which used to provide $500 million a year. But they are still very keen for Pakistan to sign the Comprehensive Treaty for the Ban of Nuclear Testing and their oYcial loans stopped after May 1998.If negotiations with the multilaterals stall, how will you manage?Managing for another year would be quite diYcult. Restoring normal relationships with the multilaterals is very important to us. If we implement our economic programme as outlined, in a disciplined and rigorous manner, that will help establish our credibility. Do you expect the IMF to take a tough line?I don’t think there is any question of them squeezing us. If we are set unrealistic targets that we cannot accomplish, it will look bad for them and bad for us. So we hope we will come together with some realistic, achievable targets for the fiscal deficit.
