Economic challenges and prospects

 December 4, 2018
Mohammad Jamil

THE PTI government faces challenges vis-à-vis fiscal deficit, trade deficit and
current account deficit, of course not of its own making but inherited from
the previous government. However, during the last one week rupee hit
record low to 142 against the US dollar, and stocks shed 373 points at
Karachi Stock Exchange. Prime Minister Imran Khan had visited Saudi Arabia,
UAE, China and Malaysia, and radiated an aura of optimism that with loans
and investments the country would be out of the woods. However the
government is keeping the option of bailout package from IMF open; and
there is a perception that electricity tariff has been revised upwards, interest
rate has been increased and currency has been devalued to satisfy the IMF.
Meanwhile, the State Bank of Pakistan has increased interest rate by 1.5
percentage points to 10 per cent aimed at containing inflation.

The fact remains that increase in interest rate and simultaneous devaluation
of rupee would increase the cost of production and will rather fuel inflation.
Nevertheless, recent bilateral arrangements including the deferred oil
payments facility would be available from January 2019 onwards, and with
the receipt of funds from the above countries, the situation is likely to
improve. Of course, the trade and industry have been demanding
devaluation of rupee amid deepening crisis on export front, claiming that the
slump in exports is due to the high input costs such as higher mark up on
bank loans, high oil price and energy cost, which make their products
uncompetitive in the world market. So far as increase in bank rate is
concerned it is a monetary policy measure with a view to controlling the
runaway inflation, and also to encourage savings, because the reduction in
interest rate on deposits had discouraged savings.

In fact, small savings are nuts and bolts of development that help increase
the investment level. If there were no savings, there would be no investment
especially when direct foreign investment is not forthcoming. A few years
ago, the banks advanced credit to trade and industry charging 9 to 10 per
cent against previous rate of 16 per cent. In other words, the rich were
subsidized at the cost of small investors, senior citizens and widows, who
had invested in National Savings Schemes. Commercial banks also started
auto-financing schemes and advanced loans for purchase of cars and other
household appliances, which indeed increased the demand but at the same
time fueled inflation. With the rise in general price level, salaried class and
fixed income groups suffer, as their incomes erode, and more people are
thrown below the poverty line.
It should be borne in mind that inflation and unemployment result into abject
poverty, hunger and disease, which make the society a breeding ground for
criminals, extremists and terrorists. As a result of flawed policies of the
previous governments, the economy is in mess. The problem has been
compounded because Pakistan has piled up a debt mountain of about more
than 80 per cent of the GDP including foreign debt of $90 billion. It is
because of this debt burden that the government has to allocate about 50
percent of the tax revenue for debt-servicing. Furthermore, rich are not
paying the taxes due from them, by resorting to tax evasion one way or
another. Agriculture contributes about 24 per cent to the GDP, but all federal
governments skirted the issue of imposing tax on agricultural income taking
the plea that it is a provincial subject. Now IMF has suggested to further
effect an increase in the General Sales Tax (GST).

But GST increases general price level and erodes incomes of fixed income
groups. In fact, income tax is a social equalizer whereby tax is collected from
the opulent classes and allocation is made to education and health sectors to
benefit the impoverished classes. Therefore income tax should be levied on
every source of income including agriculture. As stated earlier, inflation
hinders the capacity to save for the broad masses of the country, and it
fattens feudal duck and the industrial robber barons. In developed countries,
there is handsome pension on retirement, and the governments also pay
dole to the unemployed citizens. But in Pakistan, in the absence of such
plans people have to save for old age or stormy days. But they would have
little incentive to save if inflation rises much faster than the interest or profit
they earn on their savings.
This forces the potential savers to turn to other riskier alternatives ie stocks,
bonds or funds. In late 1990s, when interest rate was low, people had started
investing in shares of companies listed on stock exchange. Since they were
not shrewd investors, they became victim of the big investors’
manipulations. Of course, there was more to that. During the last one and
half decade, our economic managers envisaged that economy be driven by
consumption rather than investment; and SBP had started reducing the
policy rate in late 1990s. Borrowers whether industrialists, businessmen,
credit card holders or those availing auto-financing facilities paid 9 per cent
against earlier rate of 20 per cent per annum. But credit expansion through
credit cards and injudicious extending of loans amounts to ‘creating money’,
which results in runaway inflation. Anyhow, direction has been set by the PTI
government, and prospects of reviving the economy appear reasonably
good.
—The writer is a senior journalist based in Lahore.