There is some semblance of macroeconomic stability in Pakistan as inflation decreases, interest rates fall, and the currency stabilizes, primarily due to domestic and global high base effects. However, achieving sustainable economic growth remains elusive, and there is little interest in new investments.
Three crucial variables need addressing to revive economic growth and encourage investment: lowering energy prices (particularly power tariffs), reducing taxation, and ensuring political stability. Without these measures, even if inflation drops to the anticipated 5-8 percent and interest rates are further reduced, it will not be enough to spur meaningful growth.
The most immediate and impactful measure is reducing energy prices. Many sectors, particularly export-driven ones, are hesitant to fully utilize their capacity because the marginal cost of production exceeds selling prices. Forcing older Independent Power Producers (IPPs) to revise contracts is counterproductive, as it discourages investment and undermines the potential for privatization and deregulation in the energy sector.
The second major issue is the high tax burden. No one is inclined to invest in such a heavily taxed environment. The government should consider eliminating the super tax, which acts as a penal tax. Many businesspeople are becoming non-resident Pakistanis, choosing to keep their savings abroad. Formal sector individuals are heavily taxed, and talent is leaving the country, leading to a brain drain.
Political stability is the third critical factor. Conversations with numerous business leaders reveal that while economic stability is important, political stability is equally essential for long-term investment. The ongoing tensions between the courts and the government only worsen the situation.
Both the government and key state actors must address these economic issues, which are also socially suffocating the population. The IMF board meeting this week provides some relief, as the Fund has shown considerable leniency in the current programme. According to government sources, the submission to the IMF regarding borrowing at 11 percent from a global bank is part of the $2 billion financing gap, but no such financing has been undertaken. The IMF’s spokesperson confirmed that commercial financing at such high rates is unnecessary for the programme’s financing assurances.
In another positive development, the review process will now be biannual, with the first review scheduled in six months, reducing the immediate need for a mini-budget. Although the FBR may fall short by Rs200 billion in its first-quarter revenue targets, the State Bank of Pakistan (SBP) has reportedly transferred Rs2,700 billion in last year’s profits to the finance ministry—Rs200 billion more than budgeted. This liquidity has allowed the government to reject recent treasury bill auctions, further lowering secondary market yields.
Global commodity prices are also softening, which could provide additional fiscal space without putting further pressure on inflation. Oil prices are falling rapidly, which presents an opportunity for the government to increase the petroleum levy without raising consumer prices. Now is the ideal time to do so, as diesel prices have dropped to a 20-month low. Delaying this move could lead to harsher consequences down the road.
Brent oil has decreased by 45 percent from its 2022 peak, and palm oil prices have halved. The same trend is evident across other commodities.
The commodity super-cycle that followed the COVID-19 pandemic is reversing, helping reduce inflation and stabilizing the external account. This, in turn, allows the SBP to lower interest rates without devaluing the currency. The Federal Reserve’s aggressive rate cuts are also contributing to this positive momentum.
In summary, the conditions for growth based on past economic cycles appear favourable. However, growth remains elusive. Power consumption has decreased by 17 percent in the last month, and other high-frequency indicators show a similar decline. Demand has not returned, and supply constraints persist. The base effects of earlier economic conditions can only take the economy so far. To achieve sustainable growth, the three factors—energy prices, taxation, and political stability—must be addressed.
Copyright Business Recorder, 2024
Ali Khizar is the Director of Research at Business Recorder. His Twitter handle is @AliKhizar
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