Shortly before Eid, our defense forces, valiantly and with tactical brilliance, established our territorial security. Soon after Eid, Finance Minister Aurangzeb will present the federal budget today and the expectation is that it will put us on the path to economic security. Thus, this auspicious Eid-ul-Adha would be the harbinger of enduring National Security.
Economic vulnerabilities have accumulated over the last three decades leading to balance of payments crises, disruption of growth and poor job creation. This has reversed our excellent achievements in improving living standards and poverty reduction. It is time to correct this.
The core vulnerabilities are: a chronic fiscal deficit financed with expensive and unsustainable domestic and foreign borrowing; and an economic structure that produces a surge in imports as growth recovers.
Together, they cause repeated balance of payments crises. We should expect the budget to address these vulnerabilities.
Fiscal consolidation must remain a top budget priority. The IMF programme hinges on this. On the expenditure side, we should expect no untargeted, underfunded subsidies and see continued reduction in waste. On revenue, we should expect fairness, i.e., more untaxed and undertaxed activities brought into the tax net and treated on par with those already paying taxes. This should reduce undue burden on the corporate sector, including on salaries.
The strategic shift we should expect in the budget is a credible programme to address the most damaging structural weakness of the economy: declining productivity and loss of international competitiveness in both manufacturing and agriculture. This is documented well in national and multilateral research. It is the primary reason for poor employment creation and our boom-and-bust cycle of growth and balance of payments crises.
There are multiple reasons for declining productivity; the most frequently mentioned are high energy cost, high taxes, regulatory burden, etc. To compensate for the high cost of doing business, well connected business houses successfully lobbied the government to give them protection from international competition in the shape of high tariffs on imports.
The government was a willing partner for three reasons. High import tariffs (that include regularity duties and “additional” customs duties, also known as para tariffs) brought in additional revenue to plug the fiscal deficit. Import tariffs rewarded the favoured business houses with protection (according the World Bank, Pakistan is the second most protected economy in the World after Egypt), and they remained well-disposed to the elected government. The politically difficult problem of fixing the energy sector, bringing the untaxed/undertaxed (retail, real estate) into the tax net and improving governance could be postponed to another day/government.
The protection route to solving the problems of low profits of business houses has inflicted a heavy cost on the economy. In the production chain (for example, plastics), it raises the cost of inputs for the entire downstream industry rendering it uncompetitive. Consumers pay higher prices for poor copies of the same product available in the global market (for example, motor vehicles). Importantly, protected local manufacturers producing for the local market have no incentive to invest in processes and technologies to make them efficient.
This approach to doing business has rendered key government ministries partners in perpetuating inefficiency and low productivity. They see their job as ensuring that business houses remain protected to enjoy high profits rather than incentivizing them to become internationally competitiveness and export.
The media campaign of business houses benefitting from protection claims that they create jobs that would be lost if protection is removed.
The reality is that the protected firms have created a tiny fraction of the jobs needed, given the growth in labor force. Most jobs are still created by small informal firms. Thus, in the absence of protected profits in the auto sector, the small auto parts manufacturers would create far more jobs selling to internationally competitive local or global firms, producing for the much larger global market.
The textiles chain is a good example. More protected yarn and gray cloth manufacturers use capital intensive technologies and produce far fewer jobs than less protected readymade garments producers who create a lot of employment producing for the global market. Therefore, high protection tends to undermine the ultimate policy goal of creating productive jobs via exports and thus contribute to strengthening national security.
The budget is expected to announce many measures focused on the supportive pillars that reverse productivity decline viz., competitive energy and tax regime, reduced regulatory burden, strengthened agriculture, adaptation to climate change, and robust social protection. The bottom line, however, is this: we should thus expect to see in this budget a credible programme of reduced protection.
A medium-term horizon for making the transition would be needed, but we should see a resolute commitment to the direction of change.
We should be confident (based on international experience, our own past experience of liberalization, and rigorous modeling) that this is the path to economic recovery.
The smart business houses will adapt successfully to become export oriented and will emerge as players in the global market. Many will team up with strategic foreign investors to take advantage of our core factor of comparative advantage: our workers producing for the global market.
Let us seize the moment and partner with our defense forces towards rock-solid national security!
Copyright Business Recorder, 2025
The writer is Executive Director, CDPR and former Dean and Professor of Economics, Lahore University of Management Sciences
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