EDITORIAL: Federal Finance Minister Ishaq Dar’s participation in the International Monetary Fund/World Bank annual meetings (10-16 October) must have been an eye opener in two critical aspects: not only is Pakistan’s economy markedly different from what it was back in 2017 when he resigned from office, but multilaterals/bilaterals are no longer willing to accept Pakistani authorities’ penchant for supporting their political considerations over and above economic considerations through reneging and/or reversing structural reforms agreed as part of their support.
All political parties inordinately focus on indicators that show a better performance than their predecessors. PML-N (Pakistan Muslim League-Nawaz) stalwarts cite the rupee-dollar parity, the growth rate and total tax collections during their tenure in 2013-18 as achievements that were not matched by the PTI (Pakistan Tehreek-e-Insaf) administration.
However, the rupee overvaluation, indicated by over 121 real effective exchange rate (REER) in 2017, was sustained by ill-advised market interventions through borrowed external funds.
The PTI government is citing a high growth rate of 6 percent last year as an achievement while failing to acknowledge that this was largely attributable to a spurt in purchases/consumption (mostly cars/cement) after the end of Covid-19 lockdown and that too mostly from inventories rather than a spurt in productivity. Large Scale Manufacturing (LSM) also rose due to monetary and fiscal policy easing that is no longer possible since March this year when talks with the IMF stalled till upfront conditions relating to tight monetary and fiscal policies were agreed and implemented.
Successive governments have lacked focus on economic considerations which include structural reforms that administration after administration has failed to implement after agreeing to do so as conditions of donor assistance.
The list is exhaustive and includes: (i) rising energy sector circular debt that has reached an alarming over 2.4 trillion rupees, with budgeted subsidies to the power sector amounting to 490 billion rupees, excluding the recent agreement with the five export-oriented sectors to provide electricity at 19.99 rupees per unit projected to cost an additional 90 to 100 billion rupees this year; numerous studies have identified the causes of this debt, which include poorly negotiated agreements with the independent power producers (allowing for capacity payments in dollars though most of these have been renegotiated except those generation plants set up under the umbrella of the China Pakistan Economic Corridor), theft (with revenue-based load shedding dealing with this issue) and heavy borrowing by the sector whose interest is charged to the consumers.
In other words, the general public continues to pay for flawed decisions as well as the borrowing costs of the sector; (ii) sustained heavy reliance on indirect regressive taxes as a source of revenue (63.2 percent of Federal Board of Revenue taxes in the current year) while 70 percent of all direct tax collections is as withholding tax in the sales tax mode (again a regressive tax).
In addition, the government has budgeted 750 billion rupees under petroleum levy collections in the current year, regarded as low hanging fruit by all administrations, and inexplicably placed this item under non-tax revenue; (iii) public sector entities that continue to be poorly run, in some instances overstaffed and in most senior appointments are on the basis of influence rather than merit, accounting for massive budgetary injections that the government can ill afford.
The budgeted amount for this year is expected to exceed a trillion rupees; and (iv) poor across the board governance, inclusive of ever-rising budgetary outlay on current as opposed to development expenditure that accounts for a steady decline in all sectors of the economy.
Pakistan’s economy is currently facing major challenges on nearly all fronts not only because of the devastation caused by the floods, the outcome of climate change that Pakistan bears no more than one percent responsibility for, but for failures spanning more than three decades to not only arrest but reverse the structural deficiencies and fault lines that were major players in the country’s need to go back to the IMF time and again almost incessantly.
Pakistan is currently on its twenty-third programme with the Fund and our narrative that we need urgent significant assistance to deal with the flood devastation has resonated more with bilaterals than multilaterals (especially the IMF) whose focus is on implementing structural reforms.
Unless sustained efforts are made to implement these reforms and it is ensured that these measures are not arrested or reversed prior to the next general elections, Pakistan’s need to come out of the ongoing economic impasse will not only remain but its ability to do so will be further compromised.
Copyright Business Recorder, 2022