EDITORIAL: International rating agency Moody’s has warned of the risk of social unrest in Pakistan due to the growing and stringent conditions of new multilateral financing, with interest costs accounting for 40 percent of total spending in the first quarter of FY25. This description is spot on. Chickens are coming home to roost.
The political patronage and irrational spending close to elections by successive governments over the past few decades, coupled with the lopsided 7th NFC award where spending is concentrated in the provinces without sharing liabilities, have skewed the incentive structure. This has shifted the total burden of debt repayment onto federal taxes.
Higher debt resulted in higher inflation and an erosion in purchasing power, and the increased debt servicing has led to an abnormal hike in tax rates on salaried individuals and corporations.
With low tax compliance, the burden falls disproportionately on a few. Needless to say, the burden of high indirect taxation impacts the poor and middle class disproportionately. Inefficiencies in the energy sector and the excessive capacity burden of too many IPPs add to the strain.
Those responsible for this mess are in power through a highly controversial general election, leading the masses to believe their mandate has been stolen.
All these factors contribute to the risk that the rating agency is hinting at. The issue is that external gap financing is becoming increasingly difficult, and the government must maintain a primary fiscal surplus for several years to comply with IMF conditions and improve its credit rating.
This process will be painful, taking a few years before growth can be revived. The IMF (International Monetary Fund) has revised downwards private credit inflows in its new document and revised down growth forecasts—from an earlier 5 percent in FY26 to barely 4.5 percent in FY28.
Until then, GDP growth will barely match population growth, stagnating GDP per capita and restricting social uplift. The damage to purchasing power is already visible as lifestyles across the board have changed. People have prioritised spending due to shrinking real income. During FY21-24, food prices doubled, and inflation was over 20 percent for two consecutive years.
Inflation is coming down, but real income is increasing at a snail’s pace due to lower growth. Purchasing power will slowly catch up, but the risk of an exogenous shock remains, which could shake the nascent recovery. There is a disconnect between the ruling elite and the masses.
Austerity is nowhere visible among the political and establishment elite. Their lavish spending continues unabated. There is no resolve to lower inefficient government and institutional spending or to tax the untaxed. The inequality in income and tax compliance is resulting in growing anxiety in various segments of society. The middle class is shrinking, and the marginalised are becoming more vulnerable.
The government and state should rethink their strategy. Economic times are tough, and local and foreign investment is lacking.
Without these, it is hard to grow, and the risk of social unrest could only increase. It’s a ticking bomb, and the state is busy closing roads and the internet to prevent protests. This only adds to the pressure. The consequences of ignoring the people’s call for change can be grave. As John F. Kennedy had poignantly noted, “Those who make peaceful revolution impossible will make violent revolution inevitable.”
Copyright Business Recorder, 2024
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