Structural reforms

Ishrat Husain

Once macro-economic Stability is achieved and maintained the next step is to resume the path for socially inclusive economic growth, job creation and poverty reduction. This would require some deep-rooted structural reforms whose benefits would become apparent after some time but whose foundations have to be laid now. The pre-requisite for sustained growth is that we as households, government and corporate Sector increase our domestic savings ratio. Unless that happens our investment ratios would remain inadequate to generate the desired growth rates of 6 to 7 percent to absorb the youth entering the labour force. If we want these higher growth rates but do not mobilize domestic savings and non debt creating external flows such as exports, remittances and foreign direct investment, we would have no option but to keep relying on large external borrowing. The effect of that strategy has been observed by all of us in the last thirty years. To achieve a sustainable and socially inclusive but fast growing economy we have to adopt a new model of democratic governance in which the state, markets, civil society and communities play a synergetic and mutually linked roles.

State through its executive, judiciary and legislative organs has to ensure that the benefits of economic growth reach a wider set of population, contracts are enforced and justice is expeditious and inexpensive and laws and statutes are designed not for the benefit of small groups but for the majority. Social protection for the poor and vulnerable and Investment in human development should form the essential ingredients of the state’s responsibilities.

Market forces should be used for allocating resources efficiently but incomplete or imperfect or noncompetitive market structures would be regulated to remove distortions and opportunities for collusion, connivance, cartelization and rent seeking.

Legislature would simplify, streamline and strengthen the laws and statutes to ensure that these are not misused by a particular segment of the population for their personal or parochial interests.

Judiciary has to ensure that the sanctity of contracts is observed and contracts are enforced, access to justice to the poor is enabled through expeditious alternate dispute resolution mechanisms.

Civil society and communities have to play a proactive role as watchdogs on the state and markets and also participate in the delivery of basic services such as education, health, sanitation, etc.

There are some specific structural reforms that have either been initiated or are needed to being the country back to reach its potential.

(a). The 18th amendment to the Constitution and the 7th National Finance Commission have very rightly devolved administrative, legal, and financial powers and authority from the federal to the provincial governments. However, this devolution has remained incomplete so far. The provinces had not transferred powers and resources further down to local governments, where most of the interaction between an ordinary citizen and the government takes place. The new local government laws approved by the provincial assemblies of KP and Punjab are designed to substantially devolve these powers to the grass root level empowering the communities to make decisions about their development and welfare of their citizens. As Pakistan is rapidly urbanizing, the administration and management of metropolitan areas, cities and towns would be entrusted to autonomous, directly elected metropolitan, municipal corporations and town councils which have been assigned responsibilities along with financial resources and ability to mobilize taxes, fees, user charges, cases for provision of services and development in their respective jurisdictions.

(b). The administrative machinery of the civil services as a whole has almost reached the verge of a breakdown. Therefore, reforms in the police, civil services, organizational structure of the Federal and Provincial Governments and public utilities are being undertaken to reset the direction. The capacity of civil servants to remain neutral and objective, which used to be their hallmark, has to be rebuilt and their morale and motivation revitalized so that they are able to regain their lost space in the country’s governance structure and processes. Equality of opportunity, transparent and merit based selection, promotion and career progression, performance measured on the basis of key performance indicators, continuous learning and training, as well as compensation based on performance and weeding out of those who are falling behind the curve are necessary but difficult reforms that could eventually upgrade the quality of civil services at all tiers of the government.

(c). Management and Regulatory practices in the government need to be modernized and overhauled. Over-centralization and the concentration of power, overly long hierarchical chains, multiple consultations for the sake of form and procedure rather than substance, turf building and turf protection, and the tendency to pass the buck have created a big gap between promises and performance. Public Financial Management Law approved by the Parliament has made a beginning by delegating financial powers from the Ministry of Finance to line Ministries. The rules of business have to be rewritten to assign clear responsibilities to ministries, giving them the requisite authority to fulfill their obligations and holding them accountable for results. Inter-ministerial coordination and conflict resolution is beginning to take place at the level of the secretaries’ committees. Regulatory guillotine are being applied to axe outdated laws, rules, regulations and processes. E-government tools under implementation would help ensure transparency and expeditious pursuit of business and coordination efforts.

(d). Poor educational standards, low literacy levels, large numbers of out-of-school children, rote learning and memorization, outdated and irrelevant curriculum offerings have made our educational system non responsive to the economic and social needs of the country. Limited access to schooling particularly post primary in the backward districts while the well to do families send their children to the best private schools have widened inequalities. The government under Ehsaas Scholarship Program has taken the initiative to facilitate talented students from poor families to get undergraduate education at public sector Universities and Colleges throughout the country. There is huge demand both within the country and outside for technical manpower but we are producing only school and college graduates who are not employable. A major program to promote technical & vocational training, make higher education more relevant, reorient scientific research towards national problems has been initiated. Start-ups and entrepreneurship programs have been set up in five major cities. Human capital is the basic factor that would determine whether a country is able to participate in knowledge economy and technological revolution of the 21st century. STEM education right from the primary schools all the way to the Universities has to be promoted for inculcating inquisitiveness, creativity and innovational thinking.

(e). In the financial sector, access to capital remains restricted to a very small minority while the majority of the farmers, firms, self-employed, employees and households who make large contribution to the country’s income are unable to obtain financing from formal institutions as they do not have the collateral and security to offer. As the lower income groups do not have any tangible assets - skills or capital - they have no other option but to be dependent on their landlords, arhthis or money lenders – all of them part of the elite class. Micro-finance has opened up the vista for the poor and the coverage has reached almost one quarter of the eligible borrowers. National Financial Inclusion Strategy through Digital financial services is an attempt to broaden the base and provide access to the underserved sectors. Data analytics would be used to predict the behavior of potential borrowers, and construct credit scoring models that would enable financial institutions to make credit decisions at low acquisition cost and also mitigate the risk of default. Algorithms are now available to guide the credit decisions and the banks in Pakistan should adopt this methodology to expand their outreach to underserved sectors and underprivileged individuals and firms. Capital Debt market should be developed so that large credit worthy companies can meet their demand for expansion and new investment not through banks but capital market.

(f). Government enterprises are incurring huge losses as they have been captured by their workers, managers and political and bureaucratic supervisors. Whenever any Government wishes to take some tough measures it is immediately confronted by strikes, shutdowns and suspension of transport causing immense hardships to the daily life of common citizens. The government backs down and the status quo ante is restored. By restructuring or privatizing these enterprises not only losses would be curbed helping improve the fiscal situation and increasing spending on Human Capital formation but improved efficiency gains would contribute towards higher growth. It is not realized that the privatization of nationalized commercial banks and the Pakistan Telecom has resulted in huge gains for the budget in form of corporate profits, dividends etc. The residual value of government equity showed a remarkable upswing instead of continuous injection for recapitalization of banks. Pakistani banks today enjoy high capital adequacy ratios and low non-performing loans. Telecom liberalization has significantly reduced user charges and provided mobile phone services to 170 million people and access to internet to 70 million people by auctioning spectrum for 3G and 4G. The government has embarked upon a program whereby these enterprises would either be restructured, sold to strategic investors, merged or liquidated as the case may be.

(g). The present efforts to widen the tax base and document the economy are facing stiff resistance. In the past these efforts could not bear fruits because of protests, strikes and political pressures. The present government is committed to enforcing a whole set of taxation reforms. Restructuring of the federal Board of Revenue (FBR) and provincial revenue collecting authorities, simplification of tax codes, increased use of electronic data bases talking to each other, minimal contact between tax payers and tax collectors, risk based audit, bringing new tax payers in the tax base, gradually reducing withholding taxes and more transparent valuation methods for assessing import duties and sales tax, reduction of import tariffs, mobilization of urban property tax and agriculture income tax are some of the measures that would correct some of the distortions, minimize leakages and corruption and maximize revenue collection. These measures would help the country in lowering the Public Debt ratio to 70 percent by FY 2024 and then on a downward slope.

(h). There are some “rent thick” Sectors such as real estate, construction, railways, ports, airports, highways, media and telecommunications, mining, oil and gas , food procurement in which the Government enjoys disproportionate powers in determining the financial health of a company through administered prices, award of contracts, concession agreements, spectrum allocations and grant of licenses, tariff determination, permits. These sectors have to be made more transparent and exposed to competition. For example, in power sector the new Renewable Energy Policy has introduced an open competitive bidding for tariff determination instead of upfront cost plus, guaranteed rates of return, capacity payments. These policies prevalent since 1994 have made our exports noncompetitive and utility bill payments prohibitive for our households. Circular Debt amounting to Rs. 1.6 trillion in addition to trillions of rupees paid out of budget as subsidies is a direct outcome of these flawed policies. The government has brought down the flows of circular debt from Rs 38 billion every month to Rs 10-12 billion and has a plan to bring it to zero. Multiple buyers and multiple sellers with the Transmission company only recovering wheeling charges would enter into contracts without any interference by the government. Guaranteed rates of return on equity, would be dispensed with. Gas companies would be split into generation, transmission, distribution companies and market competition would be introduced. The present model of price setting relies upon a cost plus methodology with a guaranteed rate of return allowing uncounted for gas losses.

(i). Pakistan’s exports have performed dismally compared to its neighbors. Export-GDP ratio has declined to 7.5 percent –one of the lowest in the developing world. The composition of export goods basket has remained almost unchanged since 1990s and low tech, resource based items dominate this basket. In addition to product concentration the destination is limited to a few select markets such as the EU and the US while penetration in other dynamic markets is negligible. The government is according highest priority to export expansion by promoting competitiveness in mid tech and sun rise industrial products and services. Artificial crutches to support the sun-set industries would be gradually taken away as market determined exchange rate, realistic interest rate and low tariffs on raw materials and components would guide allocation of resources. Incentives that would be performance based and time bound ought to be given for new exportable products and for new export markets. Logistic costs to reach Ports including Gwadar Port should be comparable to those prevailing in other competitor countries. The government would support research and development and commercialization of new products and through Export-Import Bank facilitate exporters to penetrate new markets. Joint ventures with foreign companies that link Pakistani exports to global supply chain, bring in technology and marketing along with FDI should also be given incentives for limited period of time.

(j). Although the Government should not choose the winners but indicate the priority sectors in which the private businesses should invest under a policy consistent, predicable and enabling environment. The criteria that would guide the selection of priority sectors would be (i) Export-Manufacturing industries and information technology oriented services, (ii) Maximum employment generation – Direct and indirect, (iii) Transfer of technology. Using these criteria, the sectors and sub sectors that have been chosen are : productivity enhancement in cotton, wheat, oil seeds; efficient utilization of irrigation water through lining of water courses; modernization of agricultural marketing; Small and Medium enterprises; Low Cost Housing, Tourism and Information Technology. Nine Special Economic Zones would be established under CPEC attracting Chinese and other foreign investors to locate their industries.

The Commission on Science and Technology and Commission on Information Technology should bring in all S & T Organizations under one Umbrella and encourage collaboration and integration in the value chain including multi-disciplinary research.

Finally, some brief remarks on judicial reforms. The dispensation of justice in Pakistan has become time consuming, expensive, convoluted, and unnecessarily layered. State revenues and bank loans, amounting to hundreds of billions of rupees, are stuck due to litigation. Property titles and exchanges of deed have lost their sanctity because of prolonged disputes and complex processes prescribed by courts. Markets are based on sanctity of Private property and contracts. A judicial system that is unable to ensure protection and security of property rights of an individual and firm would inadvertently generate an ethos where the mighty and powerful are able to enforce these contracts on their own terms through extra legal means. After a favourable verdict is announced it still takes years to get decrees granted by the courts executed.

To conclude, the current economic situation is improving as macroeconomic stability is achieved but the benefits to the common citizens would be gradually discernable with resumption of socially inclusive economic growth and job creation. For that to happen, the State, markets and civil society have to work together in harmony and unison showing perseverance and tolerating tough structural reforms. We have to move up the development trajectories that open up opportunities and build up capabilities for the majority of the population – away from the present trajectory that benefits a minority i.e., the elites of this society.