Fiscal policy and economic growth in Pakistan

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We also need to understand that there is no
room for complacency. There are grave
challenges which this government, interim
setup, and the post-election government would
have to tackle.
To start with, we understand that full year
current account deficit is projected at USD 16
billion. Around USD 2.5 billion debt servicing
liability has to be cleared during the next two
quarters. Import payments have continued to
grow on the back of strong domestic demand,
growing private consumption and machinery
and raw material requirements of infrastructure
projects. Gradual increase in global commodity
prices particularly energy prices will put further
pressure on the balance of payments.
On the fiscal side, Pakistan’s full year budget
deficit is projected to reach 6 per cent of GDP.
All this is happening at a time when circular
debt in the energy sector and losses of public
sector enterprises are stubbornly high.
The debt servicing and expenditure on law and
order leave little for actual development
spending on infrastructure, education and health
related goals. This would remain a cause of
concern as Pakistan may not be able to make
the promised investments towards sustainable
development goals.
The provincial governments have yet to
demonstrate significant improvements in post-
devolution outcomes indicators in social
sectors. It is a matter of shame that according to
Unicef, the stunting rate for under-5 years of
age in the country is as high as 44 per cent. This
is the third highest rate globally.
According to WHO, the mortality rate of the
same age cohort is as high as 94 per 1000 live
births with diarrhoeal diseases. Overall infant
mortality stands at 78 out of 1000 and maternal
mortality is estimated at 276 in 100,000. A
weak healthcare system is prime reason for such
outcomes and will also have implications for
the productivity of future labour force in
Pakistan.
We should bear in mind that the above
mentioned milieu is not entirely due to lack of
resources. It is also a function of efficiency and
effectiveness of public spending. The efficiency
and effectiveness considerations allow us to
make the most out of scarce public sector
monetary and non-monetary resources.
The efficiency consideration in public spending
also requires high quality civil service.
Unfortunately, most administrations in
Islamabad did not compliment budgetary
reforms with civil service reforms. Yet, it is the
public administration that remains the sole
instrument for governing public sector
development schemes.
So, can the federal and upcoming provincial
budgets influence the above mentioned
situation? It is important to understand that
fiscal policy announced as part of the budgets
allows the state to collect taxes and spend them
to influence: a) aggregate demand in the
economy, b) promote exports, remittances and
foreign direct investment, c) redistribute
incomes and wealth which in turn can reduce
inequalities, d) invest in areas where markets
may fail (e.g. malnutrition), e) promote respect
for sustainability, environment and climate
change.
Moving forward, not all of the above can be
expected in the short term, however, fiscal
policy changes for 2018-19 should be aimed at
enhancing competitiveness of exporting sectors
(to reduce balance of payment difficulties) and
timely completion of ongoing infrastructure
programme which may or may not be part of
CPEC.
Likewise, provincial budgets need to focus on
creating jobs through reducing cost of doing
business for the private sector, and direct more
public resources towards social safety nets and
environmental sustainability.
In a recent survey by Sustainable Development
Policy Institute (SDPI), exporters highlight key
issues in policy which are hurting their

3. 3
competitiveness vis-à-vis the peer economies. A
majority of these can be addressed through
national and sub-national budgetary policies.
These include: a) the need to reduce cost of
power and gas through rationalisation of
indirect taxes on both, b) reduction in tax
compliance costs, c) need to expedite customs
and trade facilitation reforms, d) bringing down
transport, storage and warehousing costs, and e)
directing fiscal support to potential and new
exporters. Current exporters have also not seen
timely releases from export development fund
and refunds held back by Federal Board of
Revenue.
While private sector should be promoted as the
engine of growth, however, as the Institute of
Cost & Management Accountants of Pakistan
notes that this is not possible until the tax
authorities address the issues related to: a)
multiple audits faced by companies within
single year with past audit cases not being
closed in a timely manner; b) putting a stop to
the notices under Income Tax Ordinance, 2001
Section 122 and 177; c) harassment faced by
business persons in the shape of freezing of
their bank accounts and at times physical arrest
even when an appeal or court verdict is awaited;
d) ease the frequency with which e-filing of tax
documentation is required; e) allow a realistic
minimum threshold for prescribed persons,
registered for sales tax, from tax u/s-153 which,
in turn, will help micro and small enterprises.
The federal budget also needs to cater for
specific needs of the provinces which, of
course, can vary depending upon the level of
current development in a province. For
example, SDPI’s survey reveals that exporters
from Khyber Pakhtunkhwa would have
different expectations from the tax and
government spending in comparison to their
counterparts in Sindh province.
Addressing special needs of under-developed
regions in Balochistan, Gilgit-Baltistan, Khyber
Pakhtunkhwa, Punjab and Sindh will have
favourable implications for social justice.
Another important question at this juncture is
how to ensure sustainability of current wave of
economic growth and what could be the future
growth levers. Our discussions with the
business community reveal five key growth
levers that could also diversify the production
and export base.
The first is to ensure a focus on promoting
services sector exports. The services economy
employs over 40 per cent of labour force. The
sub-sectors include IT, transport, storage,
communications, financial and real estate and
personal services, retail and wholesale trade,
education and health services. Until now none
of the governments have shown seriousness to
implement services sector export development
strategy. The startups in ICT sector and e-
commerce can go a long way in
promoting brand Pakistan globally.
Second growth lever could be the construction
sector. Within the overall construction sector
we identify low-cost housing as a potential
short and medium term driver of growth and
jobs.
Pakistan faces a shortage of around 10 million
houses and the demand is still growing at the
rate of 550,000 houses per year. The demand
exists in middle and low income segments. The
government will need to improve policy,
facilitate regulation, and create financial
derivatives for this sector.
Third, a key focus of the budget should be to
make undocumented economy a driver of
growth. Instead of freezing bank accounts or
imposing new withholding taxes on non-filers
(in turn promoting a cash economy), policy
measures should be aimed at luring money
inside Pakistan towards banking sector’s loan-
able funds pool. There are substantial private
savings parked in real estates within Pakistan,
undeclared 5 million local currency bank
accounts, undeclared foreign currency bank
accounts, and bearer bonds and securities.
Getting these savings out from bank lockers to

4. 4
bank accounts can increase the capacity of the
financial sector to create future credit.
Fourth lever of growth could be investment in
‘critical infrastructure’ and not just any
infrastructure. Half of Pakistan still lacks access
to basic individual and communal services, e.g.,
electricity, water, toilets and waste disposal.
This has overlapped with health, environment
and food security. These are the critical
infrastructure needs of growing cities and peri-
urban areas.
Pakistan will need to spend at least 9 per cent of
GDP on closing infrastructure gap over the next
decade. The State Bank of Pakistan estimates
that public and private sector should be
spending USD 150 billion over the next decade
to bridge this gap.
Finally, CPEC long-term plan (2017-30)
identifies agriculture value addition as a key
area of cooperation. Our fifth lever of growth
could be those agro processing industries which
could export to Chinese crop, food and
livestock markets and, in turn, help Pakistan’s
supply chain integration with the region.
While a catch-up is more likely in the crop
sector, there also exists vast potential in
livestock, fisheries and forestry. There is
significant demand from China for Pakistani
cotton, rice, fish and other aquatic invertebrates,
hides and skins. It is a matter of how fast
Pakistan can expand its supply
capacity. Halal meat for the Middle East and
European Union region remains another sector
which can only contribute to our exports if
producers understand the product and safety
standards in these regions.
The above-mentioned five growth levers will
require public investment. Here again Budget
2018-19 can help through addressing the
structural weaknesses in public sector
development programme (PSDP) and provincial
annual development plans (ADP).
These include: weak capacity of civil service to
spend in regions with most needs; inability to
prevent cost and time overruns; multiplicity of
similar projects in PSDP and ADP, improving
feasibility, appraisal and approval process (and
avoid politically motivated projects);
reduce throw forward (i.e. approved projects
awaiting financing) through funding modes,
e.g., public private partnerships, build–operate–
transfer or build–own–operate models.
Dr Vaqar Ahmed
The writer’s book ‘Pakistan’s Agenda for Economic
Reforms’ was recently published by the Oxford
University Press. He is Joint Executive Director, SDPI
and can be followed on twitter @vaqarahmed
http://tns.thenews.com.pk/fiscal-policy-levers-
growth/