By Syed Haider Raza Mehdi.
As we enter a new phase in governance in Pakistan, expectations are high as are the challenges we face.
Here’s a high level view!
At the top of the pyramid, at a macro level, is the looming economic crisis Pakistan faces. The immediate challenge being the balance of payment crisis and the need for $12 billion inflow to plug this near existential gap.
The obvious options are a recourse to the IMF for the bailout. Recent reports suggest a $4 billion from the Islamic Development bank, IDB. There’s also talk of issuing and floating conventional and Sukuk bonds, internationally. Some reports are about additional help from China and Saudi Arabia etc.
Personally my view is that the new administration will somehow manage to overcome this immediate challenge and plug the hole.
But the really big question is what then?
This is where we will see whether the new administration can deliver.
The answer lies in putting in place the foundations of a long term, sustainable system which kick starts industrialization in a big way, increases exports, generates much larger volumes of income from domestic and international sources and stops the hemorrhaging of state enterprises.
To generate more domestic income requires a major overhaul and reform of our tax regime, both policy making and collections. Creating separate policy making and collection will be key, now both currently under the FBR. A clear conflict of interest. Agricultural tax will be key. Broadening the tax base vs taxing the same segments is essential
The next is a complete overhaul of economic, development and banking and credit policies which take a long term view and are sustainable, to revive local industry. This results in huge dividends such as establishment of new industries, expansions in existing ones and revival of sick industries.
This generates more employment, more tax revenue and on the international front, with the right policies results in significant import substitution (less imports of foreign goods now being produced locally), resulting in critical foreign exchange savings. An agriculture revolution is the big one. We import $500 million of nuts and fruits and over $2 billion worth of palm oil and soya bean oil. A major push towards local cultivation is essential and stoppage of subsidies on crops such as wheat and cotton!
One of the biggest benefits of such policies will be a significant increase in exports, earning highly valuable foreign exchange. In this area providing competitive energy tariffs and renegotiating our Free Trade Agreements with other countries, especially China and Turkey would be critical.
A critical and thorough review of the terms planned for the Special Economic Zones, under CPEC is essential to ensure our local industry doesn’t suffer or become uncompetitive!
There’s talk of a 10 year tax holiday, lower energy rates and lower labor rates for companies operating in these zones. While these are important to attract Chinese and other companies to come and invest, it is important that it does not come at the expense of our local industry.
Any policy for these SEZ’s must deliver three things for Pakistan. Net increase in tax revenue. Net increase in our local industrial growth. Net increase in exports. Anything else means we’ve handed over these benefits to others and killed our local industry. A corollary is a clearly defined non negotiable policy on the use of local Pakistani labor.
Plugging the resource gap which senselessly feeds, bleeding state owned enterprises from State revenues is critical. PIA, Steel Mills symbolically represent this terrible terrible rot. The strategy here is simple. Classify these State Owned Enterprises (SOE’s) into three categories.
One for fire sale. Sell them as is. Don’t spend any more time and money to try to resurrect them. These are one’s that are purely commercial. Let whoever in the private sector wants to buy them, as is. If no buyers. Close them. There will be social fallouts as employees lose jobs. Can be mitigated by handsome golden handshakes, but we can’t afford to keep shovelling precious state resources into this never ending, bottomless pit!
Two. Fix and sell. These require professional, honest and competent management to turn them around, make profitable and then sell. These are also organizations that are purely commercial but will get a better price if turned around. Again social impact of job losses etc and golden handshakes to mitigate the issue.
Three. Fix and retain for strategic and national interest reasons. These are those that represent critical national interests and even if they have a commercial aspect, should be retained. But they must be managed under independent boards, competent and honest management and free of undue political and government control.
Then is fixing the energy issue. The current circular debt by some accounts is now over Rs 1 trillion. This requires not just fixing the distribution and collection system but also building dams, using wind and solar, changing the fuel mix, implementing net metering and renegotiating tariffs with the IPPS.
The current tariffs are unsustainable. Both residential and commercial consumers cannot sustain these extraordinary high tariffs. A huge cement block around Industry’s ability to regain international export competitiveness are these very high tariffs, nearly double of countries like India, Bangladesh, Vietnam etc.
While renegotiating tariffs may give us breathing space, the long term solution, as said earlier lies in building dams, adopting wind and solar power generation, fuel substitution from liquid fuels to gas!
Exploration in oil and gas must be a top priority, including inviting foreign firms to invest. ExxonMobil has returned to Pakistan after nearly 40 years and investing heavily in oil and gas exploration. Estimates range from 3 to 7 billion dollars of investments over 5 to 7 years with a potential of making Pakistan an LNG exporter and increase its current oil production seven fold!
A country that generates huge income from its domestic and international activities, creates the right environment for its economic and industrial engine will then have much more resources to spend on its infrastructure, law and order, clean drinking water, better health care and education and jobs for its people.
If the country has resources to spend on its people, then for a committed and honest administration to organise the key elements of good governance become minor details. Right structure, with the right people, implementing right processes, using appropriate technologies to deliver the right solutions.
Organisation. People. Process. Technology. Solutions. It’s that simple
I’ll offer my views on issues of law and order, justice, transparency and accountability, civil military relations, foreign policy etc in a subsequent article!
Salaams and Prayers
Haider Mehdi