Need to facilitate private sector-led growth

Banking and Finance

Article written by Dr. Noor Fatima

In the wake of the recent US operation in Abbottabad that ended an almost decade long manhunt for the world’s most sought after terrorist, Osama bin Laden, US senators have questioned financial aid to Pakistan. The fact that Bin Laden’s hideout was in a residential area close to a military academy is going to have serious repercussions for the country in terms of inflow of foreign funds. No matter how big or small the loan amounts are, the reality is that the US clearly plays a key role in terms of its influence on the board of the IMF and also other donors. Therefore, in this backdrop one cannot overlook the possibility of even tougher strings attached with foreign aid in future.

Since it seems likely that external aid has been jeopardised due to recent events, the national economic team finds itself embroiled in a complex dilemma. The question is, how are we going to handle the situation now? What we have failed to grasp in all these years is that despite being a front-line state in the war against terrorism and diverting billions of funds from social sector development to security expenditure, it is the economy and common people that have suffered to a vast extent and therefore a breeding ground for terrorism and militancy has spawned in the country.

It is significant to address the major economic challenges confronting the country today to move towards recovery and growth. In this regard, formulating and passing the upcoming federal budget 2011-12 is going to be an uphill task for the finance managers. The projected budget indicators for the next fiscal year unveil that tax revenue collection is estimated at Rs1.95 trillion ($23 billion), which appears to be quite unrealistic. GDP is expected to grow to 4.2 per cent, which again does not appear to be an achievable target on account of chronic power crisis impeding the growth rate. The defence budget will expand by 11.7 per cent, while inflation rate is to stay in double digits and fiscal deficit will be contained to 4.5 per cent of the GDP.

If these ambitious targets are analysed in context of revenue generation, then imposition of RGST is a must due to its ability to boost revenue collection. Implementation of RGST to increase revenue and bring down fiscal deficit is one of the main conditions of the IMF for the country to avail the next tranche of its loan programme. The international lending agency’s constant demand to the government for implementing indirect taxes would provide a fuel to price-hike and no substantial difference would be made to the dismal tax-to-GDP ratio of the country. The fiscal deficit might reach 6 to 8 per cent of the GDP if the government does not bring down its expenditure level.

History reveals that large public debts of many nations had been curtailed by giving a spur to growth and not through imposition of heavy taxes only. The present case of Pakistan clearly indicates that the IMF and the government have failed to learn anything from their past mistakes, especially with regard to growing fiscal deficit, poverty and income levels. The reforms suggested by IMF are a source of overburdening the fixed income class with extensive indirect taxes and most importantly, the country would suffer in terms of development of human capital.

In the prevalent state of affairs, the answer to all our economic woes does not lie in seeking more loans from the IMF or to execute unpopular indirect taxes. It is the true spirit of entrepreneurship that can save the economic destiny of the country. The private sector can make a substantial contribution to national revenue generation and create numerous employment opportunities for the youth.

Singapore is one nation whose economy has moved forward by leaps and bounds owing to private sector participation in the national economy. Multinational corporations were attracted to Singapore to benefit from various tax incentives and developed infrastructure, which pushed the economy to move forward. To run their business operations, multinational firms search for places where the investment environment is conducive.

But, the national government should understand that such corporations will hire more people if there is a market for our trained people. It is only then that we can truly benefit from the R&D investment.

Therefore, there is a critical need to redefine the role of the state at this point in time. The austerity option would not be too helpful because without government spending and investment, private sector-led growth is not possible. Public investment increases the prospects of foreign investment in a country. Lack of foreign investment in the country reveals the fragility of state institutions and poor policy framework.

The ruling party should focus on formulating short and long-term measures to facilitate private sector-led growth and attain capital inflows. We have practically misallocated all our resources due to fulfilment of vested interests by flawed institutions controlled by powerful elites. It is time that we take concrete steps to move the economy towards high growth trajectory.

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