Moot starts on management of Pak economy

F.P. Report

LAHORE: The Lahore School of Economics, Annual Conference on Management of the Pakistan Economy themed “Economic Challenges in a Changing National and Global Environment” started Wednesday. The conference includes six sessions aimed to investigate key challenges Pakistan’s Economy is facing especially on fiscal fronts. More precisely, the regular sessions during the conference include twenty-one papers.

The conference opened with welcome remarks by Dr. Shahid Amjad Chaudhry (Rector, Lahore School of Economics). Dr Shahid Amjad Chaudhry extended a warm welcome to the esteemed audience which included eminent scholars, policy-makers, academicians, students and other dignitaries. Earlier, in his introductory remarks, he stated that the key challenges faced by Pakistan’s economy are burgeoning fiscal and current account deficits, inadequate revenue generation, and sluggish economic growth. To address these challenges, the government needs to introduce measures to boost revenue, contain the current account deficit and revive economic growth. Going forward, together with the short-run policy adjustments in the form of monetary tightening, exchange rate adjustment and negotiating a bailout package with IMF to restore market confidence and secure medium to long term funding for balance of payments support, the government needs to introduce comprehensive reforms to promote macroeconomic stability and foster long term sustainable growth.

Talking about the conference, he briefly introduced the audience to the six sessions of the conference, where a wide-range of views would be shared by the participants. These include: macroeconomic stability; public finance in Pakistan; balance of payments challenges, agricultural sector; trade policy; and the prospects of CPEC to name a few. With his welcome remarks, Dr. Chaudhry chaired the first regular session titled “Macroeconomics”.

Dr Rashid Amjad (Professor of Economics and Director, Graduate Institute of Development Studies, Lahore School of Economics) began the session with his presentation on “Breaking out of Pakistan’s stop-go economic cycles: Does the fiscal deficit hold the key 1999-2019?”. The paper investigated Pakistan’s economic performance during 1999-2018 to identify the main growth trends and factors responsible for the overall poor growth performance in the period and to analyse the role of the fiscal deficit as the primary factor in explaining this poor economic performance. The results showed that fiscal deficit has a negative impact on economic growth and is significant in both our models over the time period 2001-18 as well as 19822018. The value of the current account deficit is negative and significant during the period 20012018 but over the longer period 1982-2018 it signs changes to positive suggesting that the higher the current account deficit the higher the economic growth. The overall conclusion was that economic policy makers in Pakistan must ensure that the fiscal deficit is carefully managed and monitored so that steps can be taken to keep it in check before the economy reaches a point when strong stabilization measures become inevitable.

The second paper in the session was presented by Dr. Moazam Mahmood (Professor of Economics at the Lahore School of Economics) and Shamyla Chaudry (Assistant Professor in Economics and Business Administration at Lahore School of Economics) entitled “The BOP crisis in Pakistan: Stabilization versus Growth”. This paper observed that there are large capital outflows in the country. It provided an analysis which combines exchange rate management together with rate of interest as viable policy tools. The authors established that depreciation alone would be of much help to manage current account deficit. They proposed the controls of capital as a doable solution as it would stabilize the economy and without hindering the growth.

Dr. Azam Chaudhry (Professor and Dean of Economics Department at Lahore School of Economics) co-authored with Gul Andaman presented his paper entitled “Balance of Payments constrained Growth in Pakistan”. The paper examined if economic growth in Pakistan is constrained by the balance of payments. By taking into account the growth of remittances, the export demand function and the import demand function, the proposed model showed that the balance-of-payments (BOP) constrained growth rate in Pakistan is equal to 4.41 % per annum. The evidence further indicated that as Pakistan’s economic growth rate increases above this BOP equilibrium growth rate of 4.41 %, the import bill increases significantly which in turn leads to a balance of payments crisis. Eventually, in order to control the unsustainable current account deficit, policymakers are forced to reduce aggregate demand which in turn leads to a contraction in imports until the growth rate falls back to the equilibrium growth rate. The results of the model showed that instead of relying on exchange rate depreciations, the long-term solution for Pakistan is transition towards higher value-added exports.

The last presentation of the first session entitled “A General Equilibrium Macroeconomic model for the Pakistan Economy” was presented by Moazam Mahmood (Professor Lahore School of Economics) and Azam Chaudhry (Professor at Lahore School of Economics), co-authored with Aimal Tanveer (Research Associate at Lahore School of Economics). In this presentation the authors shared a GE Macro model for Pakistan’s Economy, formulated by Lahore School of Economics research lab, as both a didactic teaching tool for students and a policy tool for advice to the GOP. The model which is based on a system of linear equations. Its conceptual economic framework is to identify a set of agents operating in key markets to determine macro aggregates for the economy and their prices. An initial set of estimates have given the base line for Pakistan’s economy. Which has allowed some early policy simulations. The generality of the model is also encouraging for its application to other economies.

The second session of the Conference was chaired by Dr Rashid Amjad entitled “Provincial Accounts and Decentralization”.

Hafiz A. Pasha (Professor Emeritus at the Beaconhouse National University) presented his work on “Resource Mobilization by Provincial Governments”. The objective of the paper was, first, to assess the size of the tax bases of various progressive Provincial taxes like the agricultural income tax, urban immoveable property tax, stamp duty on property transactions and the sales tax on services. Second, an estimate was made of the revenue potential of these taxes if adequate reforms in tax policy and administration are implemented. Third, the Provincial Governments also have significantly non-tax revenue sources which remain largely unexploited. The paper formulated proposals for higher recovery and for using the water rate as a mechanism for improved water efficiency. Other non-tax sources like highway tolls, fees for higher education charges, etc., were also examined in the paper.

The second session was concluded by the paper entitled “Using Nighttime Light Data to Estimate Sub-national GDP and Growth in Pakistan” written by Theresa Chaudhry (Professor Lahore School of Economics and co-authored with Mahnoor Asif (Teaching Fellow at the Lahore School of Economics). The authored applied newly developed techniques that utilize night-time light data, collected by satellite and published by the United States’ National Oceanic and Atmospheric Administration. The authors used this data, first to allocate estimates of the total GDP of Pakistan into its provincial components, incorporating both documented (official GDP) and an estimate of informal economic activity; second to estimate provincial- and district-level GDP and total income growth rates; and third to relate growth in revenue collection to growth in GDP and total income.

The third session of the Conference chaired by Dr Rashid Amjad focused on “Public Finance In Pakistan”.

The session started with the paper entitled “External Debt Management (2019-2024)” presented by Syed Kalim Hyder (Senior Economist at Monetary Policy Department of the State Bank of Pakistan) co-authored with Mehak Ejaz (Assistant Professor SZABIST, Karachi, Pakistan). With the objective to analyze the dynamics of the external liabilities in Pakistan, this research applied a probabilistic approach to estimate future debt paths for Pakistan. Furthermore, the fan charts of public debt to GDP trajectories were simulated from the estimated fiscal reaction functions.

Dr. Muhammad Ashfaq Ahmed (Director General (International Taxes), Federal Board of Revenue, Islamabad) and Dr. Inayat U. Mangla (Professor of Finance at the Lahore School of Economics) presented their work entitled “Pakistan: The Fiscal Crisis Management 2019-24: The Revenue Perspective”. The study provided a political economy perspective on Pakistan’s fiscal crisis management during 201924 period. The paper inventively plugs in the theory of political settlements to contend that Pakistan’s fiscal woes are cast in the structural formation of the polity, and that the structural fault-lines necessarily stem from insufficient political settlementization i.e. fragmentation of the base between the federation and the federating units, insufficiency of the fiscal base on account of absence of wealth tax, inheritance tax, capital gains tax, and gift tax from the statute book, brute secrecy in the economic domain, and erosion of the state’s fiscal base through reckless vanity agreementization with the outside world. In summation, the wanton ways with which the exchequer has been managed over the past few decades is no more sustainable, and that in order for the tax system to generate both healthy and sufficient revenues, substantial investments are required to be made into the system as necessary inputs before expected outputs can be derived, which would require a gestation period of a couple years, at the least, and that too after sufficient political settlement has been arrived at a broader level in key areas of the extractive function.

Jamshed Y. Uppal (Associate Professor of Finance at the Busch School of Business and Economics, Catholic University of America, Washington DC) co-authored with Mahmood Khalid (Senior Research Economist at Fiscal and Monetary Section, Pakistan Institute of Development Economics (PIDE), presented on “Pakistan’s Recurring Fiscal Crisis – Institutional Strategies for Fiscal Consolidation”. The paper explores how Pakistan’s perennial fiscal deficits are rooted in its politico-economic institutions. The paper examined political institutions and budgetary processes that may affect the fiscal policy in the context of Pakistan. The paper concluded that instilling fiscal discipline would remain intractable unless approached in its entirety in a comprehensive strategy. The long-term solutions must be found in the development of political institutions and improved governance. The real challenge may lie in summoning the political will and raising public awareness to implement the required measures.

The last paper of the session and day one of the conference entitled “Challenges in Monetary Policy Management Planning for the Future” was presented by Ahmad Masood Khalid (Professor of Economics and Dean of School of Business and Economics Universiti Brunei Darussalam) co-authored with Obiyathulla Ismath Bacha ( International centre for education in Islamic affiance (INCEIF), Malaysia). The paper proposed that the risk-sharing instruments will ease the pressure on interest rate changes and will also help to provide stability to exchange rate avoiding unnecessary central bank intervention. These instruments can help improve macroeconomic stability through the avoidance of pro cyclical policies, contagion and the minimization of trigger points for financial distress, such as sudden stops. For society at large, this improved efficiency should reduce moral hazard and lead to better allocation of resources.

Day one ended with the lively and entertaining conference dinner.