WEB DESK: Dr Hafiz Pasha, head of the Institute of Policy Reforms, has, in a report, pointed out the deficiencies in data compilation by the authorities which need to be taken into account seriously.
Aggregate size of the China-Pakistan Economic Corridor (CPEC) was $45 billion, out of which $10.6 billion was devoted to transport infrastructure. The Institute recognises that the Corridor will be a potential game-changer but the government is expected to prioritise the infrastructure project execution such that they remain within an overall fiscal envelope aimed at gradual debt reduction.
The big hump of public investment because of the Corridor would necessitate huge expenditures which would be on top of the proposed allocations for PSDP in the coming years. On the assumption of the 40 percent implementation of the Corridor in 2016-17 and 60 percent in 2017-18, the Corridor projects would cost Rs 400 billion and Rs 660 billion in the next two years, respectively. Based on pruning in allocations on the ongoing projects, the federal government would have to spend Rs 350 billion in FY17 and Rs 550 billion in FY18.
This would imply a jump in the level of government investment by 1.2 percent of the GDP in FY18 and 1.7 percent in FY19. However, the latest medium-term economic framework prepared by the IMF after the Eighth Review makes no provision for such a rise in government investment in the next two years. In fact, a significant drop in government investment is expected from the projected 3.8 percent in 2015-16 to only 3.4 percent and 3.6 percent, respectively, in the next two years.
In the forthcoming Review, it needs to be emphasised that the present medium-run macroeconomic framework was inadequate. The projected level of government investment would have to be raised from 3.4 percent to almost 4.6 percent of GDP in FY17 and to 5.3 percent of GDP in FY18.
There would also have to be corresponding increase in the projected fiscal deficit from 3.5 percent to 4.7 percent of GDP in 2016-17 and from 3 percent to 4.7 percent in 2017-18. According to the Institute’s report, there were also other implications. Imports financed by foreign assistance would be larger, public external debt would rise at a faster rate and commercial borrowings for power projects will add substantially to private sector external debt.
The observations as made by Pasha’s institute are a very poor reflection on the economic management of the country, particularly by the authorities in the economic ministries. It could be very well be argued that how the officials tasked to look after the economy could ignore the consequences on the level of investment and fiscal outcome when the CPEC was already announced and likely to be implemented soon.
The fact that the impact of the CPEC was also not factored into the medium-term projections contained in the 8th Review Report was also surprising. The concerned bureaucracy in the government and the IMF officials could say that expenditures related to the CPEC could be accommodated by pruning the PSDP accordingly or through raising revenues of the government sharply but such a wishful thinking is hard to materialise.
As we have seen in the past, the present government is very fond of grandiose projects and not inclined to reduce the expenditures which is necessary for reducing the size of PSDP to accommodate expenditures on the CPEC. On the other hand, there hardly seems a chance of a substantial rise in tax revenues.
The resistance of traders to the levy of withholding tax on cash withdrawals from banks is a proof that government has no stomach to face the ire of vested interests. The IMF would also not be looking at our shoulders and dictating its agenda for structural reforms after the conclusion of its programme next year.
As such, Pakistani authorities themselves have to work much harder to ensure that economy is stabilised and projections for the coming years are based on realistic assumptions. Obviously, as emphasised by Dr Pasha, if public investment does not rise, budget deficit as a percentage of GDP increases and the CPEC is implemented according to the schedule, there is every possibility of a sharp jump in public debt, abnormal rise in prices, pressure on the external sector, contraction in private sector credit and lower growth rate.
If all these negative developments have to be addressed timely, economic managers of the country need to listen to his views carefully or co-opt some other economists of repute for the needed effort of making the right projections. At the same time, the political leaders need to be told about the limitations of expenditures likely to be imposed by the progress on the CPEC so that their tendency to be profligate and overshoot the mark is curbed to a certain extent.