A three-year development plan for the IMF’s exit strategy

NAHA needs a comprehensive three-year action plan for domestic reforms, in addition to stabilizing external accounts, to ensure a smooth exit from the International Monetary Fund (IMF) program and moving on to an independent, non-decreasing price path.

The broad aspects of such changes are well known. What is needed is consensus building between political parties, the federal and state governments, and the private sector.

Key elements of the plan must be completed with deadlines, responsibilities and milestones, and must be approved by parliament to ensure continuity, stability and predictability – missing elements responsible for poor reporting previous development efforts.

The government must focus on increasing investment, managing budget deficits, delivering services, solving the energy crisis and improving public services.

The development program should focus on raising the investment to GDP ratio to 20 per cent by FY28, with a fiscal deficit of 5pc of GDP and a primary surplus of 3pc, providing basic services to the governments of areas, overcoming energy challenges, and reforming public services.

Investment in key sectors

Public sector investment in its financial resources must increase to 5pc through fiscal consolidation measures. Public-private partnerships and private investment must increase to 15pc with doubled credit to the private sector, especially SMEs, farmers, and sectors such as construction, housing and tourism.

The main reason why the country keeps running into balance of payments problems is that domestic production capacity in industry and agriculture falls short of aggregate demand when it crosses the 4pc growth barrier and results in imports come from other countries. To remove this constraint, the agricultural, industrial and export sectors must be expanded with investment and productivity gains to make them competitive.

Private equity and venture capital funds, development finance institutions, takafuls, insurance companies, and pension and endowment funds must be empowered to participate in equity and debt market transactions.

Private investment has suffered a sharp decline due to coercive and oppressive measures, harassment and threats to existing investors, and unfavorable business conditions. Distinguishing proper profit-making from rent-seeking is critical to attracting new investment.

In agriculture, the productivity of small and medium farmers can be enhanced by providing certified seeds, fertilizers, pesticides, adequate water, agricultural inputs and credit. Contract farming in some crops has proven to be successful and should be encouraged to be replicated in other crops as well.

Rainwater harvesting can increase water supply. Warehousing, cold storage, farm-to-market routes, refrigerated vans, and farm shops will help reduce waste, imports, and reduce price pressure.

Private sector investment in the production of intermediate goods must be increased, focusing on industries such as petrochemicals, oil and gas exploration, and engineering materials. In addition, regulatory reforms should eliminate outdated regulations that hinder business growth.

Strengthening public finance management

On the fiscal side, the country must focus on reducing domestic debt and interest payments to prevent future over-borrowing.

The income to GDP ratio should be set at 15pc, with tax contributing 12.5pc and non-tax 2.5pc. The allocation of Federal Board of Revenue (FBR) and provincial and local taxes will be 10.5pc and 2pc, respectively. The expenditure-to-GDP ratio should be targeted at 20pc, with a significant jump in development expenditure to 5pc.

FBR should drive digitalization to reduce taxpayer interaction, use AI-driven analytics, promote digital invoices and QR codes and simplify tax processes, among other things . Provincial governments can generate additional revenue by collecting agricultural income tax from large landowners and improving urban property tax collection.

Urban immovable property tax should be assessed and collected by city corporations and committees and councils. Other measures may include cadastral investigations, removal of repairs, and heavy fines for non-use of land.

On the cost side, the burden of interest payments would be reduced by reducing the policy rate if inflation is kept under control. Additional savings will come from planned subsidies for food, energy and fertilizers.

Reorganizing the federal and provincial governments, reducing redundancies, and privatizing loss-making state-owned enterprises (SOEs) will also bring significant savings.

On the development side, more public and private partnerships for infrastructure projects should be encouraged. Public expenditure should be increased for research and development in agriculture, industry, climate change, digital tools, vocational training, etc.

The unequal distribution of burdens between the Center and the provinces can be reduced by adopting a joint approach to public finance management. The budget plan and allocations to the federal and provincial governments (without interfering with the NFC award) should reflect the priorities and goals of the country, approved and maintained by the National Economic Council.

The flow of local government

The daily life of the average citizen depends on livelihood, children’s education, health care for the family, safety and security, clean drinking water, sanitation, transportation, etc.

Collecting local resources is very easy as the perceived benefits are obvious. The constitution defined the third tier of government without a separate schedule defining the functions of local governments.

Such a program needs to be enshrined in the Constitution. The NFC award will then award grants for the federal, state and local governments separately.

Big cities like Karachi, Lahore and Islamabad can generate their own income through the allocation of funds, while NFC allocations should consider poverty and human investment, rather than population size.

Energy sector reforms

The energy sector has become a major obstacle to industrial growth and exports and is unaffordable for middle-income consumers. Transport leading to a competitive market for buyers and sellers should be achieved by creating private distribution companies (Discos) or placing them under management contracts, with earnings based on relevant indicators and performance.

Private companies will work to increase electricity connections so that capacity charges are reduced. A politically difficult decision will have to be taken to end the pricing of the same goods across the country.

Targeted subsidies for energy should be managed through the Benazir Income Support Program (BISP), to ensure that only the needy benefit. Expanding transmission capacity, removing inefficient public gas generation companies, and restructuring gas transmission companies are also important steps for the development of the energy sector.

Reform of public services

The skills and abilities of over three million civil servants in Pakistan have been eroded over time and weakened government institutions. Developments aimed at producing quality-based, high-quality professionals who respond to public needs have been established.

The entire structure of civil servants, from recruitment to compensation, must be reformed,​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​ Equality of opportunity, transparency and promotion and performance based on compensation should be the hallmarks of modern public service.

Finally, temporary movements such as falling oil prices, increasing money supply or falling global interest rates should not deter policymakers from following the above agenda vigorously and without interruption. .

The author is a former governor of the State Bank of Pakistan

Published in Dawn, October 6, 2024