“In the last 20 to 25 years, we have not solved a single big problem”

Dr Miftah Ismail, a PhD in Public Finance from the Wharton School of the University of Pennsylvania, has had two brief stints as the Finance Minister of Pakistan under PML-N-led governments. In September 2022, he resigned from his position as Pakistan’s finance czar after a falling out with his party leadership. Kazim Alam sat down with Dr Ismail in his Karachi office recently to seek his views on the economic situation and the way forward. 

KAZIM ALAM: Do you think the economy will do better in the next five years compared to the last five years?
MIFTAH ISMAIL: I think so. The last five years have not been good for the economy. Our per capita GDP in dollar terms today is lower than what it was five years ago. We have made many, many mistakes in the last 20 years or so – hopefully, we have learned from them and will do the right thing. If we stay in the International Monetary Fund (IMF) programme, we will not grow economically very fast. However, the last five years have been so bad that we should be able to do better now.

KA: What are the top three challenges the next finance minister is likely to face?
MI: The first big challenge is managing the current account deficit. This is the reason why we have to borrow money every year, which means that we have to pay back even more money every year – and today we have a huge external debt to pay back. The second challenge is the fact that we have a very low tax-to-GDP ratio which results in very high twin deficits. The National Finance Commission (NFC) Award also contributes to these high deficits. The third challenge is productivity. Pakistanis have not become more productive, they have not become more literate and they have not become more educated and every year we lag behind in the comity of nations. We have to find the fiscal space to do something about this.

KA: Do you intend to run for public office?
MI: No. I have been blessed and honoured to be the finance minister of Pakistan twice; I have decided that there are other ways to serve Pakistan. I don’t feel like running for political office anymore.

KA: The word out there is that you are being considered for a position in the interim setup.
MI: I don’t know anything about it.

KA: In your opinion, should the caretaker government be given the mandate to tackle issues that go beyond the day-to-day running of the economy and should it be empowered to take economic decisions that are medium-term in nature?
MI: The law has been changed to allow the caretaker government to continue working on international agreements that are already done. We have to give this power to the caretakers to enable them to conduct their day-to-day affairs in a proper manner. However, to initiate major reforms, we have to take the people along, and there has to be a broad consensus. That is an issue because the caretaker government will not have this public mandate.

KA: Do you think the recently signed three billion dollar Stand-By Arrangement (SBA) with the IMF will be followed by a longer-term Extended Fund Facility (EFF) with a broader scope for structural reforms?
MI: The SBA has to be followed by an EFF or another longer-term programme, otherwise Pakistan will not remain liquid. I hope that this time not just the fiscal numbers will be targeted. Structural issues, such as privatising public-sector enterprises, and deregulating administrative prices like electricity tariffs and gas rates, will also have to be targeted. I think there should also be reforms in the taxation structure. For example, we do not tax property properly. We do not tax the agriculture sector in a correct manner. We do not tax the retail sector. Many areas have been exempted from taxation and they have to be brought into the tax net. We also have to revisit the NFC Award so that the federation does not go bankrupt financing the provinces. The provinces should be asked to raise some of their own taxes. There are many things that need to be done.

KA: Electricity tariffs are going through the roof and circular debt is out of control. Do you think this mess in the power sector is reflective of the incompetence of successive governments, and how would you solve this if you were in a position of power for a full term?
MI: There are two things that we need to understand before addressing the question of the power sector. One is the ineffectiveness of all our governments. I am not talking about a particular government; I am talking about our system of governance, the rules of business in government, how we make the rules – different institutions, the National Accountability Bureau and so on. All of the above make governance ineffective. In the last 20 to 25 years, we have not solved a single big problem. We have one of the highest population growth rates in the world, and certainly the highest in South Asia, and half of our children are out of school. Yet, we are unable to do anything about this. The other half that is in school, on average, fails in maths and science and we don’t do anything about that too. And if you have functionally illiterate people, you are not going to progress. The biggest problem is our education system. The World Bank estimates literacy poverty in Pakistan stands at 75%, which means that 75% of our 10-year-olds cannot read two age-appropriate sentences in any language. Therefore, the power sector issues are just one aspect; the failures in the gas sector, the failure to fight terrorism, to curb street crimes are the other issues that need addressing. And it is not just about incompetence. It is about individuals. It is about the fact that the system of governance in Pakistan has failed. We need to rethink this. Furthermore, for many reasons, there is incompetence in the bureaucracy and among politicians. They do not understand what needs to be done to solve the major problems. So there is an issue of competence as well. This is why we talk about reimagining Pakistan. We need to reimagine or rethink how we should govern this country; whether we should devolve powers to the local governments, whether we should introduce competition among the provinces, districts and divisions; how we should tax people and how we should spend the tax money. We need to rethink a lot of stuff. Coming to the power sector, raising prices after an IMF agreement is not a reform, but privatising the power sector companies is a reform and so is privatising Pakistan International Airlines Corporation. Too many dreams have been sold about fixing our state-owned enterprises, but this is not happening. We need to privatise wholesale, bring in competition, and only then will we see a decrease in the prices of energy; otherwise, the cost will keep going up and the IMF will say that since our cost of buying power has increased, we have to pass it on to the customer. That is another reason why there is a lot of inflation in Pakistan.

KA: You mentioned the need to review the NFC Award. What are the headline changes the government should bring to the formula used to distribute fiscal resources among the provinces and the federation?
MI: First of all, there is absolutely no confusion about the fact that I am all for the 18th Amendment. In fact, I think more power should be given to the provinces and those powers should then be devolved to the local government. However, I do think that the division of resources between the federation and the provinces is tilted too much in favour of the provinces. The provinces have become rich; they have more money than they know how to spend, which is why they keep spending so much and why their workforce keeps growing and the remuneration packages of that workforce keep increasing. The bureaucrats in Balochistan and elsewhere are making more money than the federal bureaucrats. If you give someone free money, they are not going to raise their own revenues. We need to make the provinces raise their own revenues through property (which are in the control of the provinces) and agriculture taxes. The federation needs to give less money to the provinces. Only then will we be able to control the federal deficit and then once the federal deficit is under control, we will be able to get a handle on the current account deficit.

Photo: Tanveer Shahzad/White Star

Kazim Alam is a staff member of Dawn. kazim.alam@dawn.com
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