EDITORIAL: A Donors Coordination Committee (DOC) meeting was convened by the Caretaker Finance Minister with participation of representatives of multilaterals/bilaterals. Her address followed similar lines as what previous finance ministers (elected) stated during DOC and similar meetings: appreciate their ongoing support, reaffirm the government’s commitment to macroeconomic adjustment, acknowledge challenges facing the country and claim that the government was actively pursuing reforms to achieve fiscal consolidation, monetary policy, currency market sustainability, energy sector, business environment and social safety nets.
Two observations are in order. First, with general elections scheduled for 8 February 2024 the caretaker Finance Minister’s tenure is unlikely to extend beyond the installation of an elected government or till the end of the ongoing International Monetary Fund (IMF) Stand-By Arrangement (SBA) scheduled to end on 12 April 2024 and hence her pledges may be perceived to have a limited shelf life.
And second, the caretaker cabinet took oath on 17 August 2023, more than three months ago, and while the Caretakers have meticulously adhered to the SBA conditions relating to administrative measures, raising tariffs to achieve full cost recovery, yet structural and governance reforms remain pending - a pendency which can be defined as historical as elected, authoritarian and caretaker governments have all shied away from implementing politically challenging conditions which in Pakistan’s case comprise of sustaining elite capture of budgeted resources and expenditure.
Budgeted resources continue to be heavily reliant on indirect taxes, a regressive tax whose incidence on the poor is greater than on the rich, to the tune of around 60 percent, and while direct taxes, based on the ability to pay principle, account for the remaining 40 percent of collections, yet 75 to 80 percent of direct taxes are levied in the sales tax mode, an indirect tax, which partly explains Pakistan’s poverty levels are a high of 40 percent.
Additionally, it also explains why those in the middle income quintile are subjected to a higher inflation rate relative to those who earn above 44,000 rupees per month. Sadly, fiscal consolidation has not implied reforms in the inequitable and anomalous tax structure but an inordinate sustained focus on total revenue generation.
What is unfortunate is that even eminent independent economists have taken to parroting an ambitious tax target from taxes that may simply be untenable given the existing economic impasse or those which violate the constitution.
To make matters worse, recent Pakistani finance ministers, be they former donor agencies’ staff members or not, have consistently failed to convince lender agencies of the non-relevance of certain economic policy measures in Pakistan’s context, including the lack of linkage between the discount rate and inflation, or indeed in terms of linking the discount rate to core as opposed to headline inflation.
And the general public is increasingly irritated at the lenders’ insistence on raising tariffs to achieve full cost recovery, which absolves the government of implementing structural reforms and instead passing the buck for sector inefficiencies to the consumers.
Business Recorder would support a shift in the focus of donor agencies from administrative measures to time-bound governance reforms that have the capacity to make medium- to long-term improvements in performance of various sectors.
And finally, the budget expenditure allocation fuels the impression of elite capture. The allocation for Benazir Income Support Programme is only 471 billion rupees this year, with a quarterly stipend enough to feed a family of five for just one week, while the remaining 13.3 trillion rupee current expenditure is either earmarked for civilian and military administrations, for subsidies (around one trillion rupees that remain untargeted), and for pensions where reforms are urgently needed.
It is therefore imperative that the government slashes current outlay and preferably through voluntary sacrifices at least for the current year where the ongoing economic impasse is leading to industrial closures and joblessness; it’s also fuelling inflation.
Copyright Business Recorder, 2023