The current combination of various negative factors is likely to lead to a big exponential jump in the number of unemployed and the poor in the country. There is the likelihood that the increases will be larger than ever seen before.
What is this multitude of negative factors? First, the damage to agriculture due to the floods is colossal. The cotton crop has been decimated by almost 40% and other agricultural output is down by 10% to 15%. This has also impacted on other sectors via the supply shortages and fall in consumer demand due to the loss of incomes.
Second, physical restrictions imposed on imports since October 2022 have curbed output in various sectors, including manufacturing, construction, wholesale and retail trade, electricity and gas. There has recently been a switch to a market-based exchange rate policy and the rupee has plummeted in a few days by almost16%.
This big change in policy has been undertaken to get back on board with the IMF programme, which has remained effectively suspended since November 2022. With the IMF Staff Mission in Islamabad, the remaining programme commitments will need to be implemented soon if the perilous position of the foreign exchange reserves is to be improved significantly.
The reforms and actions which remain unimplemented include escalation of the petroleum levy to Rs 50 per litre on motor spirit, new taxation proposals to fetch additional revenue of Rs 300 billion, including possibly the reintroduction of the sales tax on petroleum products, quantum jump in gas and electricity tariffs and probably continued escalation in the policy rate of the SBP.
There is also the likelihood that in the presence of a market-determined exchange rate policy, the rupee could lose almost 40% of its value by end-June 2023 as compared to its value in end-June 2022.
The cumulative impact of the floods and resort to contractionary monetary and fiscal policies, along with large depreciation of the rupee, will lead to the worst- ever ‘stagflation’ in the country. The stagflation can be expected to have a devastating impact on the people of Pakistan in the form of a quantum jump in unemployment and incidence of poverty.
Latest estimates from the Labour Force Survey by the PBS of the national unemployment rate are for 2020-21.
Accordingly, the rate has been reported at 6.3%. This is understated because the survey reveals an employment to growth elasticity of more than 1.0, which has never been achieved before.
The elasticity has tended to remain in the vicinity of 0.6 according to the BNU Macro-econometric Model. Adjustment for the over-statement of the employment growth leads to an estimate of the ‘true’ unemployment rate of 8.5% in 2020-21.
The likelihood of at least 1% drop in the size of the GDP means that there could be a disproportionate drop in employment, especially since the more labour-intensive sectors are likely to be impacted more, including agriculture, construction and wholesale and retail trade. For example, the last big devastation by the floods in 2010 led to a drop in the level of national employment.
The level of employment in 2022-23 accordingly is projected at 67.3 million, showing a drop of 0.6 million from the likely level of 67.9 million in 2021-22. The labour force is currently estimated at 75.3 million.
This implies that 8 million workers will be unemployed in 2022-23. The number of unemployed will increase by over 2 million during the year and the unemployment rate will approach 10%, probably for the first time.
Turning to the incidence of poverty, the BNU Macro-econometric Model reveals that the determinants of the change in incidence of poverty are as follows:
(i) Negative with respect to growth rate of real per capita income and rate of increase in real per capita pro-poor spending.
(ii) Positive with respect to the rate of increase in food prices relative to the overall consumer price index and rate of increase in the level of income inequality.
Therefore, in the face of a fall in real per capita income of over 3% in 2022-23, faster increase in food prices of at least 10 percentage points and higher income inequality due to a bigger increase in unemployment of less skilled workers, there is likely to be a big increase in the incidence of poverty in Pakistan in 2022-23.
Latest estimates of the incidence of poverty in Pakistan are not available as the last Household Integrated Economic Survey by the PBS was in 2018-19. The World Bank, World Development Indicators data set estimates the incidence of poverty at 39.80% in Pakistan in 2018, with a poverty line of $3.65 per day (2017 PPP).
The year 2019-20 is likely to have witnessed a significant increase in poverty due to the Covid-19. However, the two subsequent years of relatively high growth in real per capita income indicate that the level of poverty was likely to be close to 36% at the end of 2021-22.
The projected incidence of poverty is 42.5% according to the Model in 2022-23. Therefore, the additional number of people who will fall below the poverty line during the year could approach 18 million. Here again, the absolute increase in the number of poor has probably never been seen before.
Therefore, during 2022-23, Pakistan will have to contend with an increase in the number of unemployed of 2 million and a rise in the population below the poverty line of as much as 18 million. In particular, the number of ‘idle’ male youth is likely to approach 8 million. They could be at the vanguard of large-scale social unrest in the country.
The inevitable conclusion is that the IMF programme must have a visible ‘human face’. Already, it is appreciated that the Fund has offered to accept the flood-related expenditures on relief and rehabilitation by the federal and provincial governments on the size of the primary fiscal deficit. This could be in the range of Rs 500 to Rs 550 billion, especially in the realm of current expenditure, including an up-scaling of the BISP.
The fiscal reforms which are to be implemented should follow the following strategy:
‘Very progressive taxation and cut in government overhead costs combined with strong and diverse directed cash transfers and subsidies to the poor.’
Accordingly, some proposals are put forward for progressive taxation, including the following:
(i) Conversion of fixed and final withholding taxation of different types of income into advance taxation, with the requirement of filing of total income and taxation accordingly.
(ii) The personal income taxation system of Pakistan is not very progressive. The maximum marginal tax rate is attained at an income which is 38 times the per capita income, as compared to 10 to 12 times in India and Bangladesh.
(iii) There was a time when the corporate income tax rate on commercial banks was 60%. It should be raised back to at least 45%.
(iv) There should be no concept of ‘holding period’, beyond which realized capital gains are exempt on real estate. The minimum tax rate should be 15% initially and falling to 5% for sale after 5 years.
(v) A 1% withholding tax should be levied on the trading value of shares.
(vi) Provincial governments must be urged to develop the agricultural income tax and the urban immoveable property tax, with substantial untapped revenue potential.
(vii) The 17% sales tax on food products like sugar and vegetable ghee should be reduced, and the sales tax be levied on notified retail prices on other products, especially on consumer durables and other luxury goods.
(viii) The petroleum levy on Motor Spirit be raised to Rs 65 per litre and on HSD oil reduced to Rs35 per liter. Unlike Pakistan, in most countries the price of HSD oil is significantly lower than the price of Motor Spirit.
(ix) Harmonization of the sales tax on goods and services with the same standard rate throughout the country and a common tax return to reduce tax evasion and facilitate the input invoicing process.
As far as the pricing policy is concerned, the increase in gas and electricity tariff should not apply to the small consumers.
In effect, consumption by electricity consumers below 200 kwh and gas consumption below 2hm3 per month should continue to pay the same tariffs as at present. Further, during the next five months, the coverage of the BISP should be doubled in the flood-stricken areas.
We hope that the Ministry of Finance will put forward the above proposals in discussions with the IMF as part of the strategy for additional taxation through progressive measures and emphasize on the need for a direct subvention to small consumers with no increase in electricity and gas charges, along with wider coverage by the BISP and other pro-poor targeted interventions. Also, in view of the colossal damage inflicted by the floods we hope that the IMF will also present a more ‘human face’ in the review process.
Copyright Business Recorder, 2023