A cash flow problem

It must be a hard job being prime minister of Pakistan. When he assumed office, Prime Minister Nawaz Sharif, like virtually all of his predecessors, was bombarded by a whole army of bureaucrats complaining that the whole country has gone to hell in a hand basket and that every problem is a monumental and acute one that needs to be solved immediately. It can be daunting and, for a lesser mind, overwhelming, particularly if you are not used to hearing everything bureaucrats say with a bucketful of salt.

I will not go so far as to deny the existence of multiple pressing concerns that should be on the prime minister’s agenda, but I will say this: unless he manages to solve the government’s chronic cash flow problem, he can forget any ideas he may have of solving any other major problem.

Take any policy challenge, even those not directly tied to the economy and you will soon find yourself looking for the money to make things happen. Solve militancy and terrorism? You will need a larger, better-trained police force, more judges, better and larger public prosecutors’ offices, not to mention a whole host of equipment placed in virtually every single one of the 143 districts in Pakistan. And for all of that, you need money. Want a better education system? The more than 600,000 public school teachers in Pakistan need a raise, and the schools they teach in need walls, roofs, rooms, furniture and equipment. None of that can be obtained for free from anywhere.

The most efficient part of any effective government must be the part that manages its money. For Pakistan, the major cash flow problems come not just from our by now famous inability to collect taxes but also our proclivities to spend in places where we should not, such as electricity subsidies for the upper middle class (including most of the readers of this newspaper).

According to several studies, the government loses close to Rs800 billion a year to tax evasion on the revenue side. On the expense side of its ledger, the government spends close to Rs250 billion a year in subsidies on electricity and another Rs250 billion in bailouts to the failing of state-owned enterprises. That’s Rs1.3 trillion in lost revenue and misspent cash, compared with a budget deficit that last year came out to Rs1.1 trillion. Our cash flow problem, in other words, is not because we are a poor country or because the Americans stiffed us of some promised aid. It is entirely because we choose to be dysfunctional.

So why does nobody ever fix this problem? If this is such a critical problem, and if fixing it really can turn a gaping budget deficit into a healthy surplus, why has no government ever decided to tackle this problem and be known as the saviour of Pakistan?

Because this problem — more than terrorism, more than the energy crisis — is the toughest of all problems to solve in Pakistan. Solving the cash flow problem means taking on every single powerful entity in Pakistan simultaneously. Tax collection, for instance, means taking on the textile lobby, the commodities lobby, the retail and wholesale lobby, and rural aristocrats. Getting rid of subsidies on electricity means taking on Pakistan’s increasingly wealthy and politically active upper middle class. And getting rid of failing state-owned enterprises means taking on entrenched, politically backed public sector labour unions (about the only unions that have any semblance of influence in the country).

That list is more or less everybody in Pakistan who has the ability to have their voices heard. Imagine what would happen to anybody — dictator or popularly elected democrat — if he or she tried to take them on all at once. That is not just political suicide. That is inflicting a nuclear holocaust on one’s entire political party.

So then are we doomed? Not exactly. This problem can be fixed, but it will require an incremental approach that relies on a combination of intensely fast-paced and savvy deal-making and a little bit of divide-and-rule. But more on that next week.

Published in The Express Tribune, February 27th,  2015

Farooq Tirmizi

CEO, Elphinstone

Farooq Tirmizi is the founder and CEO of Elphinstone, the financial services firm that operates SmartRupee.

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