Pakistan’s Economy Caught Between The Devil And Deep Blue Sea: Report
Pakistan’s economy is caught between the devil and the deep blue sea and there does not appear to be the required expertise to think out of the box to address the impasse due to the flawed policies of the past or to negotiate more effectively with the Fund staff, Business Recorder reported. Pakistan instead has been claiming that it has the capacity to meet its external obligations post-July 2023.
Pakistan Bureau of Statistics has calculated the Sensitive Price Index (SPI) for the week ending 11 May at 48.02 per cent year on year. The Large-Scale Manufacturing Sector Index reduced to a negative 8.11 per cent from July-March 2023, clearly and unambiguously indicating stagflation with rising prices while output stagnates, as per the Business Recorder report.
This state of affairs has been intensified by flawed economic policy decisions that include dependency on the low-hanging fruit for tax revenue while resisting any attempt to widen the tax net for political reasons. At the same time, the Pakistan government’s current expenditure continues to increase massively each year, which is 75 per cent in the first eight months compared to the previous year.
While expressing helplessness to reduce any item as politically untenable, governments have remained dependent on borrowing from domestic sources which are highly inflationary especially during times of low growth as at present and anti-growth as it crowds out private sector borrowing and external sources that puts pressure on the balance of payments position every few years, as per the news report.
This explains why Pakistan is currently at 33rd position on average three-year International Monetary Fund (IMF) programme in its 76-year history, according to the Business Recorder report. The solution for the problem lies in either undertaking politically challenging tax reforms focused not on raising revenue as has been the aim to date but to reform the tax structure to ensure that the ability to pay principle is paramount.
While Pakistani authorities have safeguarded the interests of the elite. As per the news report, the Pakistan Muslim League – Nawaz (PML-N) must widen the tax net to include traders and the Pakistan People’s Party must refrain from extending incentives to sugar exporters and taxing the farm sector.
The news report called it imperative for the authorities to seek voluntary sacrifices by the recipients of current expenditures barring the allocation on Benazir Income Support Programme (BISP). However, with only Pakistani Rupees (PKR) 400 billion rupees earmarked for BISP under a budgeted current expenditure of PKR 8694 billion rupees, as per the news report.
The issue can be resolved by the Pakistani government reducing current expenditure by about Pakistani Rupees 1.5 trillion rupees over and above slashing development expenditure that has already been implemented but is having negative repercussions on the growth rate and raising revenue through direct taxes.
At the same time, the Pakistan government needs to be realistic in its budgeted data, for example, year after year the provincial surplus is grossly overstated and it is PKR 800 billion rupees in the current year. Even half of this amount is no longer achievable today after the devastation caused by the floods in 2022.
Pakistan might face a further complication in next year’s budget if the federal budget is presented by the incumbent government while Punjab and Khyber Pakhtunkhwa interim budgets till elections are held will not be able to project a surplus for the entire next year.
The International Monetary Fund (IMF) in its recent statement said that Pakistan must stay within the policy framework agreed for the ninth review, as per the Business Recorder report.
It further said that sufficient financing from partners which, if the Pakistan Finance Minister is to be believed, is the only lacuna in reaching the staff-level agreement or, in other words, without the staff-level agreement funds will not be forthcoming at affordable rates from friendly countries and other multilateral/bilaterals or be accessible from the commercial sector abroad at affordable rates. (ANI)
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