EDITORIAL: Prime Minister Shehbaz Sharif while laying the onus of an impending bankruptcy on the policies of the PTI (Pakistan Tehrik-e-Insaf) administration claimed that his administration has averted the crisis but forewarned the Pakistani nation that International Monetary Fund (IMF) conditions would be very tough.
Two observations are in order. First, claims of an impending bankruptcy or drawing parallels with the Sri Lankan economy today are not appropriate, given that Pakistan’s economy is three times that of the Sri Lanka’s and while we have suffered and continue to suffer serious setbacks (in common with many other major economies of the world) due to supply side issues sourced to, first the pandemic, and later to the Russia-Ukraine war, yet Sri Lanka, dependent on tourism as a main source of revenue, netting around 4.4 billion dollars and contributing 5.6 percent to GDP in 2018, suffered a major decline in tourists during the pandemic years accounting for just 0.8 percent of GDP in 2020.
This led to reserves of 2.8 billion dollars in January 2022 (usable reserves less than a billion dollars), compelling the country to borrow raising the debt to GDP ratio to over 115 percent in 2022 projected to rise to 120 percent in 2023.
Notwithstanding the massive rise in domestic and foreign debt during the PTI administration – domestic debt rose from 16.5 trillion rupees in 2017-18 to over 28 trillion rupees at the end of the tenure with foreign debt estimated at 95 billion dollars in 2018 to close to 140 billion dollars by the end of the tenure – yet Pakistan’s debt to GDP ratio was below 72 percent this year and support from friendly countries at easy terms has been reportedly assured with China having disbursed 2.3 billion dollars already while Saudi Arabia and UAE support is reportedly contingent on the success of the seventh IMF review with France having deferred payment due for six years.
Second, the prevailing macroeconomic crisis has not been averted for all times to come as the Shehbaz Sharif administration’s focus, as evident in the finance bill, remains on raising revenue and thereby minimizing the budget deficit, an objective in common with previous administrations, including the one headed by Nawaz Sharif.
The onetime supertax expected to generate nearly 450 billion rupees, initially opposed by the country’s largest chamber of trade and industry and the influential federation of chambers of Commerce and Industry who are reported to have since miraculously changed their position 180 degrees (perhaps reminiscent of the U-turns on ideological issues by political parties), the 4 percent poverty alleviation tax on the super-rich (with income above 300 million rupees per annum) as well as the tax on deemed income from immovable property at the rate of 1 percent of the value of the non-productive immoveable property (which is expected to be challenged in the court of law as land is a provincial subject as per the constitution) are not taxes with too much staying power.
It is important to note that the finance bill lays the major burden on generating an additional trillion rupees next fiscal year on the GDP growth rate of 4.9 percent that is unlikely to be achieved with even more contractionary monetary and fiscal policies than at present expected if the seventh review is to succeed – tax on petroleum and products, higher utility rates, as well as a higher policy rate of interest in the next monetary policy committee meeting scheduled for 7 July. This is indeed unfortunate because it reflects a thinking of the past which accounts for the current economic impasse.
This newspaper would urge the economic managers to focus on implementing structural changes (in tandem with their effort on collection of tax) with the capacity to usher in an era of sustainability. The revenue rise as envisaged in the budget must continue with the shift towards direct as opposed to indirect taxes whose incidence is greater on the poor relative to the rich, and towards universal filing of returns with no sector given the option to pay a presumptive fixed tax and not to file returns.
And of course there is a need for the government to lay the onus of taxing income from agriculture and instituting an appropriate land tax including through a more accurate valuation of the property on the provinces if it does not have the numbers to amend the constitution.
Finally, one must acknowledge that while the government has no leverage with the IMF today in terms of negotiating a phased implementation of harsh upfront conditions yet it could have created some leverage through curtailing its expenditure which inexplicably it has budgeted to raise by a trillion rupees in the current year.
Copyright Business Recorder, 2022