From tax strain to economic gain: Pakistan’s journey toward growth

Pakistan has recently experienced multiple rounds of fuel price hikes, significantly impacting both consumers and businesses. The government has raised petroleum product prices three times in the last month, despite ongoing claims that the economy is stabilizing. While the global oil market shows signs of stabilization, the continued high tax burden on fuel prices remains a serious concern.

The price disparity between base fuel costs and retail prices is largely due to taxes. Petroleum levies and carbon taxes alone significantly raise the cost of petrol and diesel. For instance, the petroleum levy adds Rs 75.52 per litre on petrol and Rs 74.50 on diesel, which nearly doubles the price at the pump. While taxes are necessary for government revenue, they are contributing to rising inflation and increasing the cost of doing business in Pakistan, creating a vicious cycle that discourage new businesses from starting and stifle the growth of existing ones.

A striking example of this is the closure of around 200 textile mills and the winding up of multinational companies (MNCs) in the country. High taxes, along with operational costs, have forced many businesses to shut down, resulting in a direct loss of jobs, skills development, and opportunities for poverty alleviation, key areas where Pakistan’s economy needs urgent attention.

Instead of imposing more taxes on businesses, cutting down on the taxes might be a much needed stimulus to the business climate in Pakistan. Reduced fuel taxes, such as, would make companies less expensive to operate which would allow them to be more profitable and productive. This would promote national and international investment that is essential towards job creation and economic development.

Once companies manage to cut their expenses, they can grow, recruit new workers, and invent. This multiplier effect would not only contribute to economic growth by directly benefiting businesses but it would also stimulate demand on goods and services which, in turn, would bring about additional economic and employment activity.

Moreover, even the government would end up benefiting. A reduction in taxes can boost the economy and increase the amount of revenue collected in terms of business taxes as businesses expand and employ more workers. This would also lead to more tax payments in the long run as the government would be economically healthy due to the increased business activity.

A relevant example can be seen in countries that have had a similar developmental challenge, like Bangladesh. Although the country has challenges akin to Pakistan, Bangladesh has been keen on lowering taxes in main sectors of the economy such as textile and manufacturing. Through tax breaks and a decreased burden on businesses Bangladesh has been able to spur economic growth, now both local and international investments are seen to have created an environment that has led to increased government revenues.

If Pakistan follows a similar strategy by lowering fuel taxes and creating a more business-friendly environment, the country could unlock significant economic potential. Lower fuel taxes would decrease the cost of doing business, making it easier for businesses to start, grow, and hire. As businesses grow, they will pay more taxes, creating a stable economic cycle where businesses drive growth, which, in turn, supports government finances.

In addition to these tax reforms, Pakistan must demonstrate its commitment to fiscal responsibility by cutting unnecessary government expenditures. This might involve reducing bureaucratic inefficiencies, streamlining government offices, and merging ministries. Pakistan can also demonstrate to the IMF that it aims not only to maximize revenue but also to reduce unnecessary costs, thereby creating a more sustainable fiscal policy by addressing administrative waste.

In certain situations, hastening the privatization process would also be a crucial component of this economic restraint. Despite the role that state-owned enterprises (SOEs) play in the government’s operations, a number of them have turned out to be a financial liability, due to the inefficiencies the enterprises have accumulated over time, resulting from the interference of the political system and governance issues. Underperforming SOEs might be selectively privatized to free up government funds and employ them more effectively, or government funds could be reinvested in areas more likely to be affected.

The IMF would be greatly persuaded by such a combined approach that included government expenditure cuts, tax changes, and partial privatization of underperforming SOP, among other measures.

For Pakistan, by demonstrating that the government is taking steps to stabilize the budget deficit and make government spending more effective and efficient, the IMF can be persuaded to restructure the terms of the loan and provide more flexible and growth-oriented measures.

Pakistan can adopt a paradigm where businesses are encouraged to grow through lower operating costs, rather than limiting them through over-taxation. This would later lead to a stronger economy, increased employment, and higher taxes due to a stronger economy.

The recent increases in fuel prices, driven by high taxes and levies, have added undue pressure on both businesses and consumers. By reducing taxes on fuel, Pakistan can create an environment conducive to business growth, economic development, and long-term revenue generation. Learning from the experiences of countries like Bangladesh, Pakistan can adopt similar strategies to foster a sustainable, self-reliant, and growing economy.

Copyright Business Recorder, 2025