EDITORIAL: The gap between the boom-and-bust cycle is contracting in Pakistan, indicated by the staff-level agreement on a 3 billion dollar Stand-By Arrangement (SBA) with the International Monetary Fund (IMF) that, economists agree, will be followed by a longer term Extended Fund Facility (EFF) due to sustained fiscal imbalance.

While the boom-bust cycle is defined in terms of a rise (boom) in output accompanied by rising investor interest and job opportunities followed by a bust (decline) occurring due not only to worsening economic fundamentals but also market perceptions of investors and consumers of possible saturation.

In Pakistan, irrespective of whether the country is on a Fund programme or not, the economically viable objective of achieving full- cost recovery has never been achieved by implementing structural reforms that would compel an administration to improve the performance of key sectors, particularly power and tax sectors, but instead through passing on the buck to the consumers through raising base tariffs/charges.

The power sector has remained a source of serious concern even after 23 Fund programmes with a circular debt of over 2.5 trillion rupees today; and sadly the suspended EFF, with 2.6 billion dollars remaining undisbursed, and the SBA, envisages raising utility rates - through the annual rebasing exercise, the quarterly tariff adjustments as well as passing on the imported fuel cost rise on to the consumers.

In addition, the power sector is further hampered by economically unviable decisions taken by previous administrations in terms of approval of projects reliant on expensive fuel and agreeing to contracts that overwhelmingly favour the independent power producers.

The tax structure continues to rely heavily on indirect taxes – with over 70 percent of all direct tax collections sourced to withholding taxes on services/goods or in the sales tax mode that allows it to be passed on like an indirect tax.

And while the Fund insists on raising total revenue, the budget for the current year relies on raising taxes on existing tax payers rather than on widening the tax net to include traders for entirely political considerations. And relying on petroleum levy, another indirect tax, to generate revenue to the tune of 869 billion rupees in the current year, in spite of a massive decline in consumption due to high inflation, reflects an optimism that maybe misplaced but which is concerningly rooted in the fact that petroleum levy is not part of the divisible pool of taxes and therefore not to be shared with provinces.

The governments, incumbent as well as all previous administrations, have never resisted their compulsion to raise current expenditures, in an effort to retain political support of key stakeholders. The budget for fiscal year 2023-24 envisages a 26.5 percent rise in current expenditure from the revised estimates of last year and a 53 percent rise from what was budgeted last year.

The rise in this non-development expenditure is a major contributor to inflation today. The rising disconnect between revenue and expenditure is met through borrowing from: (i) external sources all of which were locked to reaching a staff-level agreement with the Fund since October 2022 that include pledged support from bilaterals/multilaterals, issuing debt equity (Eurobonds/sukuk) and borrowing from commercial banks abroad at reasonable rates; and (ii) domestic commercial banks that crowds out private sector borrowing and therefore constrains growth - while the high discount rate of 22 percent has raised the budgeted debt servicing component of current expenditure - and accessing the savings of households deposited in National Savings Centres.

So far the SBA staff-level agreement has led to a buoyant stock market and the arrest of rupee slide vis-a-vis the dollar (though gains have become marginal within a week of the announcement) as fears of a looming default have receded.

However, it is relevant to note that neither of these indicators foretells a rise in output (boom) as the private sector continues to grapple with a rise in its input costs or a decline in rising poverty levels as the poor and the lower income earners remain unaffected as they remain locked in a struggle to barely eke out a living.

It is, therefore, imperative that we realise and accept the fact that while we may have ‘dodged the bullet’ by getting the staff level agreement on a standby arrangement with the IMF but we are still mired in a debt trap. In other words, we have successfully averted default and postponed the hour of reckoning by gaining some time.

To avoid default it is essential that the government brings about a massive reduction in its expenditure and undertakes reforms in the tax structure, takes bold decisions on state enterprises that bleed the budget and close down divisions/ministries on subjects that are the domain of the provinces.

However, with the Caretakers scheduled to take over by the second week of August, with no mandate to make amendments in the budget or undertake structural reforms, one would hope that they do not engage in any over-spending relative to the budgeted allocation that may queer the pitch for the incoming elected government and render the IMF SBA in disarray.

Copyright Business Recorder, 2023