Apr 232008

Abid Hasan

The writer is a former operations adviser for the World Bank.

Like all developing countries, Pakistan is facing a huge crisis as a result of abnormally high commodity prices. But Pakistan’s crisis has been seriously exacerbated by irresponsible economic management over the last two or thre years and a fundamentally flawed growth strategy relying on domestic consumption as the main driver of growth. With reserves dwindling every week, Pakistan could have a foreign exchange crisis in 12-18 months without corrective action. Except for the few million households which have benefited disproportionately from the pro-rich policies of the previous government, the vast majority live on the edge and disparities are growing. Citizens’ anger, as evidenced recently in Multan and Lahore, is building to a boiling point.

The time for the blame game is now over. An economic and social meltdown is inevitable without bold and immediate actions. These include, stabilising the macro-economy, targeted income support to all poor and low-income households to cushion the impact of inflation and unemployment, accelerating domestic supply of energy resources, a crash programme to increase food crops and accelerating exports.

The first priority should be putting in place a sound home-grown macro-economic framework and stabilisation programme, one which has the IMF’s seal of approval, to address the fiscal and trade imbalances, while at the same enhancing pro-poor expenditures. A sound programme would reassure the business community and international investors and financial institutions that the new government is serious, responsible and disciplined.

A key part of the stabilisation programme should be an urgent and comprehensive elimination of wasteful and uneconomic expenditures. This should consist of: freezing and/or slowing down most ongoing PSDP projects, other than those nearing completion and of very high priority and cutting office and management expenditures of all civil and military departments, by, say, 30 percent (and even 100 percent for hundreds of useless departments), while fully funding a few, select activities such as education, health, the police, irrigation, frontline troops, and so on.

To avert a social meltdown, as irresponsible and untargeted oil and wheat subsidies are withdrawn, the second priority should be to spend at least 10 percent of government revenues (i.e., Rs100-120 billion) on pro-poor programmes directly benefiting the poor. This could be done as follows: immediately establish a programme to provide targeted monthly cash support to all poor and low-income households to ease the burden of high food inflation and high unemployment. There could be many ways to provide household-based cash support. One non-discretionary and quickly implementable mechanism, one which is least prone to abuse, could be a monthly stipend of, say, Rs350-400 to every child in government and low-fee NGO schools. The premise here is that anyone attending these schools are by definition from poor and low-income households. A beneficiary database could be easily and quickly established from the school attendance register, and the stipends provided through banks.

This would also attract dropouts who mostly belong to poorer households. With about 20 million children in these schools, the scheme could provide Rs600-800 monthly cash to around 10 million households (almost 50 percent of the population) at an annual cost of about Rs70-80 billion.

The monthly zakat and baitul maal allowances should be raised by 50 percent and the net expanded to cover those not benefiting from the stipend programme. Also, a private-sector and civil society-led school meal system run by mothers should be funded, as should community kitchens for the poor and sales of subsidised flour to tandoors. The above programmes would increase household incomes (and reduce food expenditures) substantially for virtually most of the poor.

Only once the stipend programme is in place, hopefully in two to three months, should the government start reducing the irresponsible and untargeted oil, power and wheat subsidies. Most of the current budgetary subsidies could be fully withdrawn, including the shutting down of the utility stores-based ration card scheme, say in 9-12 months, once the above noted “cheap meal” programmes are fully functioning.

The proposed sequence for withdrawing untargeted subsidy is important to avoid a social meltdown. It should be noted that the simple non-discretionary cash stipend programme is far superior to ration-card-type schemes which are much more prone to inefficiency and corruption with government functionaries getting involved in procurement and distribution.

Also wheat subsidy withdrawal would dramatically reduce smuggling and hoarding. No amount of administrative measures can reduce smuggling and hoarding if market prices are 15-20 per cent higher than subsidised prices. In addition, withdrawal of petroleum subsidies would reduce oil imports, thereby lowering trade deficit.

The third priority should be to substantially eliminate energy shortages in two to three years, by providing Rs100 billion annually in the public-sector development programme (PSDP) for the next few years to provide grants and long-term fixed- rate rupee loans (through the infrastructure fund) for accelerated development of public and private hydro and thermal power and domestic oil/gas exploration and making necessary changes in electricity/gas tariffs, while fully protecting poor households, so that the sector is financially viable and the private sector has adequate incentives to invest in the sector.

Tariffs on high domestic consumption should be increased with commensurate reduction in industrial tariffs, expediting decision-making on private- and public-sector energy projects, and increasing wellhead prices to international prices, so that domestic oil and gas exploration activity is accelerated.

Raising the PPL’s wellhead price and providing the windfall gains directly to all Baloch households will gain the support of the local population for oil- and gas-related development in mineral-rich Balochistan.

The fourth priority should be to increase production of food grain by ensuring that farmers get world market prices, timely water and productivity-enhancement support. Special district-based and crop-specific productivity improvement teams should be immediately established (supported by a large complement of local and foreign experts) to advise on such things as crop practices, seeds and disease prevention. Allowing wheat prices to be market-determined will significantly raise farm incomes, as well as the incomes of the rural poor, and enable the government to reduce or eliminate input subsidies. The cash stipend programme would cushion the impact of higher flour prices on poor households. The goal should be for Pakistan to achieve food grain self sufficiency in one year, and in the medium term to enable Pakistani farmers to export and benefit from the global boom in commodities.

The fifth priority should be a crash programme to accelerate exports (especially SME exports) through a competitive exchange rate, timely export facilitation, firm level assistance on quality and products and reducing the cost of doing business. Pakistan can only have sustained high growth and manageable current account deficits by increasing exports. For that it is critical that profitability of exports must be at least equal to, and preferably higher than, all other domestic economic activities

Financing the costs of the above new programmes, while at the same time reducing fiscal deficits, is doable. This can be achieved by reprioritising current expenditure and the PSDP, and this alone could yield about Rs120-130 billion.

The gradual removal of the oil, gas, utility and wheat subsidy could yield Rs100-120 billion in the first year and higher amounts in following years. Furthermore, expanding the tax net, using the first best approach, to bring untaxed activities into the general tax net should be done.

Given that this will take time, a temporary and second-best quicker approach — and perhaps politically and morally difficult to oppose by the powerful untaxed sectors — is to impose a special surcharge on the wealthier segments of society. The surcharge — say, a “student stipend surcharge” — would be dedicated to financing the school stipend programme and could be imposed initially for a period of three years in the following manner: A surcharge on luxury goods, both imported or those domestically produced. A cascading surcharge on mobile phones, electricity and gas bills, applicable over a certain threshold value. A cascading surcharge above a threshold value on homes and un-built urban plots in prime residential areas and on prime agricultural land-holdings, based on standard values established annually by the government so there is no discretion involved. In addition to this, the tax on share turnover should be raised.

While the quantum of share trading and the KSE index may fall, this would have no serious consequences for the economy. With share turnover reaching 60 billion annually, a flat tax/surcharge of one rupee could potentially yield around Rs40-50 billion every year.

Overall, the surcharges, as proposed, could potentially yield Rs60-80 billion every year and be adequate to fully fund the stipend programme. A dedicated student stipend surcharge will be more acceptable to the wealthy and will be progressive in nature. It will be temporary, to finance the sudden large increase in pro-poor expenditures, until such time as general taxes increase to absorb these costs on a sustainable basis.

A bold, “out of the box” and selective programme needs to be urgently put in place to avert an economic and social meltdown, with broader structural reforms a year latter to put Pakistan back on a high and pro-poor growth path.

Email: fffhasan@gmail.com
Source: The News, 23/4/2008

 Posted by at 8:12 am

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