In spite of the fact that IMF believes that our growth outlook is favourable at 5.3%, crediting CPEC as the causation for this growth, it asserts that this, CPEC, and increasing government needs are likely to push Pakistan's external financing requirements to 7.5% of GDP over the medium-term. Ordinarily, medium term cannot be more than 3 years at best, and since we proudly claim to be US$ 300 billion economy today, all that translates to government needing to borrow over US$ 22 billion in 2020. I sure hope the Chinese are willing to open their purse strings if and when the time comes!
IMF's "White Paper" points out the foreign exchange reserves have declined, circular debt has increased, public sector enterprises continue on their loss-making spree, private sector investment exports are low or declining, poverty and income inequality remains high, the current account deficit has increased, and the rupee was kept stable only by State Bank of Pakistan's intervention. So, in spite of the esteemed GDP growing, putting it sarcastically, all other economic indicators that should be up are down and vice versa; the worse perhaps being the rise of the debt monster.
Catching up on my reading, I found the views of Chief Economist DFID on Pakistan's economy, equally worrying. He believes that Pakistan is, "Underperforming relative to its peers in the region and definitely against the broader progress in Asia". According to him, GDP growth at 5.3% just does not cut the mustard; he pointed out that according to a World Bank Commission, 25 years of 8% growth is the road to success. Again, I told you so! GDP is utter nonsense!
Curiously, the solutions are different. IMF wants the government to further reduce tax exemptions and concessions, more tax in a nutshell, while DIFD Chief Economist believes that without creating a more transparent, simpler and leaner system, there will remain strong incentives to remain undocumented. It does not take a degree in rocket science to conclude that a harsher tax regime, draconian even in practice, will seriously impact growth as more and more small and medium size businesses will opt for corrupt practices rather than face fierce persecution. Personally, I unequivocally refute the argument that we have a low taxpayer base; at the very least all Pakistanis having a bank account are paying income tax, they just don't want to file a tax return and become visible to the tax collector. Notwithstanding, all of IMF's solutions to mitigate the risks to economy revolve around increasing taxes: on petroleum, on non-filers, and on services, property and agriculture income via the provinces. Unfortunately, the IMF fails to explain how to magically convert all the rupees collected through higher taxes into dollars, needed to balance the current account deficit. On the other hand, reading between the lines, the DFID Chie Economist suggests that policy incentives should nudge trading entrepreneurs towards manufacturing, better manage the managed exchange float to balance the import and export conundrum, direct FDI towards export oriented projects rather than for substituting domestic consumption; all of these focus on export and manufacturing which earn dollars. While he opposes trade policy actions, my favourite being imposition of 30% import duty across the board, he at least realizes that economic growth and hence stability has more to do with manufacturing and exports and not taxing everyone!
Curiously, we seem keen to be doing the exact opposite; notwithstanding that inordinate tax exemptions have already been granted to Chinese for investing in Special Economic Zones, which they still aren't happy with and want more, the policy decision is to allow products manufactured in these zones to be sold in Pakistani markets. If this is true, this will be the death knell for all existing manufacturing in Pakistan; how will they compete with industries paying no taxes and no duties? This consequently will mean zero taxes for the government as well. Perhaps, this is why DFID Chief Economist remained careful and largely non-committal on CPEC's economic impact on the domestic industry in Pakistan. "Even though CPEC has enormous potential, I think people could be worried about how exactly it will play out". There seemingly are real issues with the economy today, but most Pakistanis are either: in utter denial and insist that the economy is doing great since the last four years; don't understand the economy and hence don't care; believe that Pakistan will always be able to borrow more and will never have to pay its debt; are convinced about anti-fragility of Pakistan and hence feel there is nothing to worry about.
I sincerely hope all of them are right.
(The writer is a chartered accountant based in Islamabad. Email: [email protected])