The present government may be serious about resolving the daunting economic problems of the country, but is unlikely to achieve positive results because of its piecemeal – rather than wholesome – approach to economic management.
The government is looking at each problem in isolation from others – without fully grasping the interlinks in economic policies, and without taking into account the side effects on other areas and objectives of a particular policy prescription to tackle a given problem. This is partly due to the fact that most of the economic policy advice is taken from nonprofessional bureaucrats, administrators, accountants and vested interest groups from the private sector who have no grasp of, or interest in, macroeconomic links.
The recent weakening and sidelining of the Planning Commission and the State Bank of Pakistan have aggravated the problem. A government that follows mutually inconsistent policies cannot achieve consistent economic results.
Let us give a few examples to make the point that the individual policy solutions adopted to address a particular problem may aggravate the macro situation if policy interlinks are not fully understood and taken into account. This will be followed by a broad outline of the macroeconomic framework within which specific economic policies should be developed.
The government is rightly focussed on addressing the loadshedding problem on a priority basis but without giving due consideration to the implications of a particular solution for other problems faced by the country. The accumulation of a large circular debt was one of the factors for below-capacity utilisation of the installed capacity for electricity generation in the oil-based private sector power plants. The step taken to eliminate the outstanding circular debt financed by more borrowing from the domestic banking system may or may not help reduce the periods of loadshedding but it will certainly accentuate the debt situation and add to inflationary pressures.
The government is also right in targeting to increase the low level of investment. But achieving such a target required a strong set of policies to substantially increase the low domestic rate of saving. In its absence, either the investment target will not be achieved or there will be an accentuation of domestic inflation and external account vulnerabilities.
To address the unemployment problem, one of the proposals under consideration is to provide cheap loans to young people. This will most likely increase debt defaults and add to the vulnerabilities of the banking system rather than solve the unemployment situation. If unemployment could be eliminated through such gimmicks, other countries would have adopted them a long time ago.
More credit availability to the private sector without a sharp reduction in government bank borrowing would explode money supply, increase inflation and contribute to a sharper downward slide of the exchange rate.
Maintaining a negative real interest rate structure to keep the public debt management under control or to provide cheap loans to borrowers will not only add to the misallocation of resources but also be instrumental in keeping the saving rate low and transferring the income from the poor to the rich. Similarly, if the exchange rate continues to depreciate because of excess liquidity in the economy reflecting excessive government borrowing, the country will get trapped in a vicious circle of more debt serving liabilities and more government borrowing.
In the budgetary area, to meet a large development expenditure – in addition to rising debt servicing and high defence spending – the government has decided to rely much more than before on foreign and domestic borrowing. This short-sighted solution of the scarcity of revenue resources in relation to public sector expenditure requirements will push the country further into a debt trap and increase the inflationary pressures.
Superimposed on all this is the ambition to run bullet trains and build more highways. There is nothing wrong with building infrastructure and even engaging in prestigious projects. But it ought to be done within the budgetary constraints. Given the low tax-to-GDP ratio, such projects collide directly with more allocations for education, sanitation and health facilities for the large underprivileged class. It is particularly annoying when the government is unable to introduce major tax reforms that would bring into the network the vested interest groups of landlords, industrialists, small traders and service sector operators.
The government’s reliance on taxation through withholding techniques, using the convenience of tax collection as a criterion for taxation, and resorting to printing of notes rather than taxing the rich, will hurt domestic financial saving and at the same time aggravate the income inequalities and increase poverty.
In the matter of the external payments crisis, the government has decided to take more loans from the IMF and others foreign sources, which will reduce the imminent threat of external debt default. But in the absence of reforms to address the structural problems faced on the external front, the government is laying the foundation of a bigger debt crisis for the future, and also moving away from its commitment of breaking the begging bowl and becoming self-reliant.
There are tradeoffs in adopting individual economic policies and, in the absence of a macroeconomic framework that meets the test of consistency and takes into account policy inter-relationships, the pursuit of a piecemeal approach to policy formulation is likely to end up in a bigger economic mess.
The three most potent instruments of macroeconomic policy framework are fiscal, monetary and exchange rate policies. Those need to be interwoven on a consistent and professional basis and not through scattered administrative and politically motivated decisions. The macroeconomic policy framework should dictate individual economic policies rather than scattered and stand-alone economic policy decisions determining the macroeconomic outcome.
The government should set a target of the rate of investment of about 24 percent of the GDP to realise a growth rate of around seven or eight percent based on a growth strategy that aims to achieve the target through export expansion and employment generation. A growth rate of around seven or eight percent in commodity producing sectors is needed to generate a large exportable surplus and to reduce existing unemployment in addition to productively absorbing the new entrants to the labour force each year.
Foreign investment should be attracted in the commodity producing export sectors, while domestic investment should cover all the vital areas. The present practice of allowing foreign investment in the consumer goods and service sectors would need to be revised.
Once the target for investment rate is set, it is important that all the economic policies are reviewed to increase the domestic rate of saving from less that 10 percent of the GDP at present to around 20 percent. For this to happen, the incentive structure of the fiscal, monetary and exchange rate policies must be shifted in favour of private saving rather than consumption, which is the situation at present.
In addition, public sector operations should be reformed initially to eliminate the negative saving of the public sector and ultimately to generate public saving. This would require, in addition to strict control on public sector current expenditure, a re-designing of the taxation policy.
The monetary policy should be integrated with, and not subordinated to, the fiscal policy. Similarly, the exchange rate policy should be seen as an integral part of a macroeconomic framework and not as an isolated symbol of economic strength or an exogenous instrument of public debt management.
If the monetary, fiscal and exchange rate policies are treated as equally important components of a macroeconomic framework to achieve macroeconomic objectives, the individual set of policies can be formulated consistently with such a macroeconomic framework. The country can then begin to see a gradually falling inflation rate combined with improving trade account imparting a healthy impact on the value of the rupee. These are all prerequisites to accelerate the rate of investment and the rate of economic growth and to reduce unemployment and poverty.
If the government continues to look at each problem in a stand-alone manner and seeks out quick fixes while avoiding structural policy reforms, the overall state of the economy is bound to continue to deteriorate even in the context of partial success in addressing some problems here and there.

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