The headway made in the recent talks between India and Pakistan on the Kartarpur corridor marks a way forward towards normalization of relations between the two nations. The two sides have agreed to allow 5,000 visitors of all faiths to pass through the corridor per day without a visa.

The agreement has cleared the way for making the corridor operational by November 2019, given the historic importance of the 550th Birth Anniversary of Guru Nanak Dev Ji. That will also connect the Sikh shrines of Dera Baba Nanak Sahib in India’s Punjab region to the Gurdwara Darbar Sahib in Kartarpur, Pakistan.

Undoubtedly, this is an extremely positive development raising hopes for the two nations of extending engagement on other issues too. Pakistan’s initiative on the corridor reflects its desire to open religious sites for devotees from across the border. Such steps could create a conducive atmosphere for the two countries to resume bi-lateral talks that have been suspended for the past several years.

Pakistan and India had walked back from the brink of conflagration in February this year. The Indian incursion, first time since 1971, was the main cause of escalation. Deft handling of the crisis by the Pakistani leadership may have helped de-escalate tensions. But it is not over yet.

With artillery guns blazing along the Line of Control, the situation remains volatile and even a minor incident could spiral out of control. The clouds of war may have receded but they have not gone away completely. There is an urgent need to deescalate the present situation.

Indian Prime Minister Narendra Modi has returned to power with much greater electoral mandate riding on the wave of Hindu nationalism. A major question now is whether Modi 2.0 would show some prudence or continue to take a confrontationist path. Pakistan has repeatedly called for constructive dialogue between the two countries to resolve all outstanding issues. But there is still no response from the Indian side.

Except for a brief informal chat between Imran Khan and Modi on the sidelines of the Shanghai Cooperation Forum summit last month, there has not been any contact between the two countries at the senior government level. Neither is there an indication of resumption of talks anytime soon.

Despite the downturn in relations, the development in the negotiations on Kartarpur corridor is very encouraging and shows a way forward. Even if structured talks are not resumed the two countries can still take some confidence building measures to ease tensions. One immediate step is to strictly implement the ceasefire on the LoC. More frequent contact between the two DGMO’s could be useful.

A major casualty of the conflict has been break in the people to people to people contact because of suspension of visa barring the citizens to travel to each other’s country. It is not the first time such restrictions have been imposed but the suspension of visas is harsher this time. The suspension of cultural exchanges has widened the gap and allowed extremist narrative to drive public opinion. The relaxation of visa regime will be an important step in lowering tensions.

It is extremely important to keep some kind of back channel contact open, particularly in the time of heightened tension. The two countries had maintained secret contacts at the level of national security advisors, but for the past several years NSA position in Pakistan has remained vacant adding to the problem. That contact must be revived.

Perhaps the most active role in the last few months has been played by track two initiatives. In the absence of a track one discussion between both governments, the track two has played an important role in efforts to lower the temperature when the official contacts are suspended. The participants in the process coming from different fields wield significant influence in their country and can help mobilize public opinion for peace. It also provides a very useful forum for exchange of views, assessing developments in each other’s countries and discussing the way forward. Suggestions for lowering tensions have been discussed at the recent Chao Track held in Bangkok. Moving forward on dialogue and engagement remains the only path to normalization.

Debates about Pakistan’s economic stewardship have become a core feature of public discourse since the PTI government assumed power last year. Two mini-budgets and the removal of a finance minister later, the much-anticipated federal budget for 2019-2020 was read out by the Minister of State for Revenue on 11th June, amidst protest and uproar by opposition parties. The budget has since been intensely debated on prime time talk shows, social media and in subsequent parliament sessions.

Public discourse is usually an effective barometer for gauging public mood and information regarding governmental policies, and voters’ interest in policy decisions. But steep political polarization across the country, as well as the forceful onslaught of misinformation on social media have made it difficult for most citizens to differentiate between political rhetoric, public policy and official economic data. This essay attempts to create some clarity around common misconceptions about the economy, and critique policy measures taken by the incumbent government. In particular, it responds to myths propagated by social media influencers exhorting citizens to take remedial measures that ‘fix’ the economy during the short term.

1. Revenue collection

The government aims to raise total revenue of Rs. 5.5 trillion over the next fiscal year, an increase of almost 25% compared to last year. Whether collection reaches even close to this ambitious target is highly contestable: in a year of low economic activity, receipts from indirect taxes will fall considerably, which make up more than half of this year’s revenue target. The large portion of indirect taxes – levied on basic food commodities now – points to the continued regressive nature of the country’s tax regime.

2. Tax Reform

Despite promising reforms in this domain, including broadening the tax net, the government has thus far only followed the steps of its predecessors. FBR reforms have been slow to come by, casting serious doubt over whether the tax body can meet the revenue target. There is no talk of implementing an inheritance tax or incentivizing informal businesses to come into the tax net. Non-filers too are now allowed sale and purchase of assets, thereby removing any incentive they had before to file taxes. Presenting a revenue target significantly higher than last year with no considerable reform, the government should be prepared for the possibility of a steep budget deficit. And as the deficit balloons, this would only lead to cuts in the Public Sector Development Program (PSDP) funds, delays in projects and an increase in borrowing from commercial banks, thereby reducing the amount of funds available for the private sector.

3. Export Promotion

On the external front, the government has done little so far tohelp increase exports. The budget does propose abolition of customs duty for imported machinery and raw materials, which would have led to a decrease in costs of production, and consequently, competitive prices with all else unchanged; however, measures such as the suspension of zero-rated status (which previously exempted exporters from paying sales taxes) for five primary export sectors (leather, textile, carpets, surgical goods and sports goods) will add to exporters’ difficulties and balance out any relief through the custom duty removal. The Finance Advisor has been correct in clarifying that the removal of zero-rated status essentially means that only goods sold domestically will be taxed, whereas taxes collected for exported goods will be refunded. But bureaucratic inefficiencies coupled with a government running a large deficit will delay the delivery of these refunds, further tightening liquidity for exporters. In the presence of high costs of borrowing (with a policy rate hovering around 12%) and steep energy tariffs, the pains felt by exporters will continue over the foreseeable future.

Unfortunately, there has been little or no talk so far of reforms that could help improve performance of the export sector. Pakistan’s cumbersome tax regime, according to which duties are collected by both provinces and the center, significantly impacts compliance costs for businesses. A simplified tax regime would make things easier for exporters, and also boost Pakistan’s ranking on ease of doing business. Furthermore, exploring new destinations for the country’s exports is essential if the current account’s exposure to global shocks is to be decreased. Even for existing export destinations, including those that have extended preferential trade agreements (such as the GSP status granted to Pakistan by the EU), regulatory compliance needs to be increased to maximize gains from such agreements. Finally, exporters must move towards producing and selling high-value goods that have higher income and price elasticities. For now, low value goods which make up the bulk of Pakistani exports will continue to earn little, face steep competition and remain volatile to global demand shocks.

4. Foreign Direct Investment

Long-term sustainable growth in the future depends on investments made today. And Pakistan’s FDI numbers are not improving. While countries like Saudi Arabia and UAE have committed to investing billions of dollars and signed MOUs on multiple large scale projects, these will take years to materialize. Oftentimes, such government-to-government investment MOUs do not materialize at all, since the investing country expects special incentives such as non-compliance with domestic tax or business regulations. While news of sovereign investors building large scale infrastructure is hailed a foreign policy achievement, the fine print of contracts awarded and terms of agreement are seldom made public.

About two-thirds of FDI into Pakistan in the past three years has come from China, with contributions from other countries remaining stagnant or falling altogether. Total FDI has declined by almost half from July 2018 to March 2019, compared to the same period last year. This may well suggest that efforts made by the current government to increase FDI have so far not borne fruit. Pakistan’s dependence upon FDI is due to its low domestic savings rate: Pakistan’s annual savings-to-GDP ratio is about 20% while those of Bangladesh and India surpassed 30%. So far, no comprehensive policy has been put in place to address this, while attempts to attract investment from abroad have also not worked.

5. Quick Fixes

To top it all off, there are quick remedies on offer to restore the economy: selling foreign exchange held by households and banning imported consumption goods (such as tea and cheese) that make up a negligible portion of our import bill. These measures have found adherents who are faithfully trying to reverse Pakistan’s economic depression. Such quick fixes have never worked as they have no grounding in economic fundamentals. Misguided patriotism has led some to cite the example of Turkey, whose citizens sold dollars in large quantities to save the Turkish Lira’s crash some few months ago. Sadly, the Turkish Lira’s fall against the dollar continues anyway as the structural challenges causing the Lira’s crash were not addressed.

Such ideas displace the onus of responsibility of economic stewardship from governments onto citizens, and clamp down policy critique. It will serve all governments better, across the federation of Pakistan, to educate citizens on the complexities of economic policy management and the processes that impact each other over time. Appeals for patience through troubled times ahead while lambasting previous governments for economic mismanagement will extend the PTI’s political lease in the short term. But to enable the transformation of Pakistan’s economic system, there should be a closer study of structural challenges, and knowledge of how incentives can be shifted and intra-relationships altered. A government that has campaigned on change must not shy away from undertaking structural economic reform, and realize that stabilization and growth strategies are not mutually exclusive. Only the latter can get the economy back on its feet.

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n what is being billed as Pakistan’s most austerity laden budget in decades, new taxation and fiscal retrenchment measures are set to herald a difficult era of economic contraction. The government’s economic team, missing a full time finance minister to steer the economy through this turbulent period, has privileged macroeconomic stabilization under an expected IMF bailout by sacrificing economic growth which in turn is expected to dive to a dismal 2.4 percent.

The burden of revenue generation is set to fall on salaried individuals. New income and indirect taxes have been levied in the budget amidst an ambitious 20 percent increase in the revenue target. A decrease in the minimum taxable income, the addition of four new income tax slabs, and a regressive tax incidence, up by 200 percent for middle income individuals, has added to the tax burden of the few citizens already in the tax net. With inflation set to cross the 13 percent mark after a decade on the back of a devalued rupee and increase in energy prices, the burden on lower and middle income households will rise exponentially.

The government has insisted that tough austerity measures are necessary to disrupt Pakistan’s slide towards bankruptcy. The onus for difficult economic conditions has been set squarely on the shoulders of the previous administration’s appetite for public and foreign debt. But this is only half the story. The PTI too has accumulated more debt in its first eight months than any previous government during the same period. Public and external debt has risen from Rs 29.88 trillion at the end of the PMLN’s tenure to Rs 35.09 trillion by end of March this year. The government’s indecision on an IMF programme and the subsequent uncertainty in markets has eroded confidence in the government and exacerbated macroeconomic indicators over the past ten months. The inability to balance the need for stabilization with an eye towards keeping growth on the charts is reflected in the budget.

Like the several IMF programmes before, the absence of a plan to eventually graduate from stabilization to growth is worrying. Equally concerning are mixed and contradictory policy announcements, especially on export oriented industries. While the government has announced reduction of duties on import of machinery and raw materials for the textile industry, the withdrawal of zero-rated exemptions on sales tax from five leading export industries including textiles, leather, carpets sports, and surgical goods will stifle exports. The zero rated facility for gas and electricity too has been withdrawn and will increase input prices. The only concession in the budget has been the government’s promise to refund sales tax on an automated facility. Pakistan’s limited exports will fall. The continuing slide of exports despite the devaluation in the rupee, indicates a fundamental lack of competitiveness in Pakistan’s exports.

The government has exempted customs duty on more than 1,650 raw materials and industrial inputs for the manufacturing industry, including the paper industry. But the decrease in customs duty is accompanied by an interest rate hike to over 12 percent denting private investments in new manufacturing units. The removal of the restriction on the purchase of property by non-filers has been removed in the budget, this comes as a boost for genuine buyers. But the simultaneous levy of capital gains tax on FBR rates irrespective of holding term of property and the rise in FED on cement will dent construction as investments in the property sector decreases.

The government’s policy for the next year is predicated on reducing aggregate demand in the economy. While the reduction in aggregate demand will result in a lower import bill, the impact on domestic production will be damaging in the long term. The disincentives built into the budget for export industries and the lack of significant incentives for private investors in the services and manufacturing sectors will skew economic outcomes making growth off-take even harder in the coming years.

Unfortunately, the austerity driven budget for the next year is not accompanied by any reform plans to restructure the economy – an essential step for recovering from stabilization and entering a growth phase. The only policy measures outlined in the budget have been limited to increasing the tax net through punitive measures. Instead of creating adequate incentives for self-selection into the tax net, the government’s planned measures for increasing the tax base are limited to ‘hunting down’ non-filers – a tried and tested method that has had little or no success before. The lack of a road map on restructuring loss making public sector enterprises, incentivizing industrial growth, improving the cost of doing business are missing.
While the government’s monetary and fiscal measures are adequate in their effort to contain the fiscal deficit and the current account deficit, these policy measures come at the expense of any growth momentum developed over the last five years. According to the World Economic Outlook report by the IMF, Pakistan will grow at a sluggish rate of 2.5 percent on average for the coming five years. The 2019 budget forecast is a reflection of that prediction. An overzealous pursuit of macroeconomic stabilization at the cost of even a modicum of growth will mean rising unemployment and poverty levels in Pakistan as the government struggles to meet pressures on public service delivery. The results of stabilization are already being felt and its impact will only grow more acute in the months to come.

Shortly before Eid, an android application for moon sighting was made available on Google Play. A calendar that can be accessed through Pakistan’s first official ‘moon-sighting’ website now indicates scientifically determined dates for major Islamic events.

The app and website kicked off a conversation about rituals and their symbolic currency in a country that still takes its cues from religious praxis. The Ruet-i-Hilal Committee’s monopoly over moon sighting is now subject to public and political debate. With it, is an age-old question: can tradition and modernity coexist in a state where both are singularly contested, and both view each other with suspicion?

There are two reasons why we don’t have a clear answer.

The first is a failure to establish clear parameters of what modernity means, and what it should look like for the median citizen who privileges faith, but also panders to conventional paradigms of consumerist progress. Today, Pakistanis are flocking to cities faster than any other country in South Asia. Yet one in eight urban dwellers lives below the poverty line, and one in 10 children in Lahore, Peshawar and Karachi remains out of school. This new cohort believes it is more modern than the previous generation, but does not benefit from opened-up choices in education, at work and among lifestyles critical to modernity and economic freedom.

The second reason is a public discourse that sacrifices critical inquiry at the altar of conjecture, analogy and myth. It was only seven years ago that a self-styled engineer burst onto Pakistan’s TV screens claiming to have invented a ‘water kit’ enabling cars to run on water. The then cabinet met thrice to discuss the water vehicle, while the media rushed in to celebrate a new national hero. All this took place while the inscription on Pakistan’s first Nobel laureate tombstone was being frenziedly edited on a district magistrate’s orders.

For a low-value agrarian economy that has struggled to sustain a clear narrative for modernity, or its place in national life, these contradictions should be unsurprising. Our yearning for progress often wrestles with political entrepreneurs with arbitrary notions of modernity. Scientists in elite universities in our bigger cities shy away from teaching evolution. Government-sponsored science textbooks are unscientific. Pakistan may be the seventh most vulnerable country to climate change, but only a few years ago, our then climate change minister blamed Indian power plants for a heatwave in Karachi.

Without a social systems framework to nest their aspirations in, Pakistanis today live in what they are told is a modern age, hyper-exposed to editorialised threats (ie fifth-generation warfare) and hybrid enemies brought to them on plasma TVs and Samsung smartphones. The nativisation of the telecom revolution has skirted around social class barriers, democratising cellular technology and therein the internet. Pakistan has 60 million 3G/4G users and some of the cheapest data prices in the world. CPEC will expedite these processes, with 800 kilometers of fibre-optic cable and expansions by China Mobile connecting more Pakistanis to the internet than ever before.

Hence, we find ourselves digitising a median citizen who is not experiencing education, social and political reform — processes that undergird wholesome national transformation. Pakistan has under 100 researchers per one million citizens and national expenditure per researcher is declining. Pilgrims outnumber taxpayers. Meanwhile, the siren of the smartphone has created a new medium for consumers who use conservatism as a marker of identity, and Whats­App as a register of social expression.

Another challenge to modernity is from the public square itself. If the public square has been less than successful in segregating tradition from the notional importance of scientific inquiry, it is worth recognising the policy failures that have led to this. Gross spending on R&D is an important indicator of how much is being invested in the future of science. Pakistan’s is less than 0.3 per cent of GDP; India’s is 0.9pc. Weak patent enforcement offers low rewards for innovation and knowledge creation.

Too often we forget that home-grown visionary scientific leadership resulted in Pakistan’s international participation at the high table of global science and research, including at CERN. But the inconsistencies are glaring, in part because these achievements have not been situated in a coherent narrative of national progress. At home, technology is instrumentalised for coercive purposes rather than education. Last year, Pakistan was ranked 73 out of 100 (100 being the worst) in a global Internet Freedom Status index. So it makes sense why the sighting of the Ramazan and Shawwal moons instigates controversy. We may be a voracious primetime audience, but have yet to democratically negotiate modernity and the changes it ushers in.