Need for all-out reforms

Economic growth is strongly related to good governance and political stability in a country. Unfortunately, during the last 75 years of our existence, both these elements have been largely missing. The four military rules not only weakened democracy in Pakistan but also compromised the functioning of state institutions including, but not limited to the executive and judiciary.

Apart from direct military rule, continuous intervention by powerful institutions in the executive’s affairs on the one hand has created unrest in the political arena and on the other, incapacitated the economy badly.

It has become normal practice in the country that law enforcement agencies are unabatedly manipulated to settle political scores by registering fake cases against opponents and putting them in jail. Somehow courts also ignored those actions, mainly by delaying decisions in matters brought before them.

Resultantly, our ranking on the global corruption perception index deteriorated by around 23 points in three years (2018-2021), and we were ranked 140 out of 180 countries in 2021.

Moreover, due to compromised and selective justice, people have lost faith in the justice system. The World Justice Project (WPJ) ranked our legal system among the lowest performing countries around the globe at 130 out of 139 jurisdictions.

All the above factors hampered the objective of establishing a stable and sustainable economic environment. Pakistan, which said goodbye to the International Monetary Fund (IMF) in 2016, after completing its programme and due to positive indicators, was an emerging economy.

However, the process of political engineering, reversed all hard-earned economic dividends. In the last four years, the country witnessed muted growth rates, a significant rise of 80% in the national debt burden, the perils continue to spill over, and aggressive correction measures have been adopted to avoid economic fallout.

The latest financial year i.e. fiscal year (FY) 2022, closed on a challenging note as the fiscal deficit widened by 55%. It reached Rs 5260 billion in FY2022 i.e., 7.9% of GDP as compared to Rs 3403 billion in FY 2021 which was 6.1% of GDP.

In the same manner, the primary deficit was 3.1% of GDP i.e., Rs 2077 billion as compared to 1.2% of GDP i.e., Rs 654 billion in FY 2021. The energy sector’s circular debt peaked to Rs 2.253 trillion, i.e., 3.4% of GDP towards end-June 2022, and in parallel, based on figures reported till March 2022, it stood at Rs 720 billion.

In order to manage the aforementioned unsustainable trend the government undertook some aggressive corrective measures with the objective of “cooling down” that are bound to adversely impact the GDP growth and optimal economic activity level in the country.

As per the recent staff report by the IMF, the GDP growth is estimated to decelerate to 3.5% in FY2023. Revocation of subsidies and impact of other pass-on decisions are the major contributing factors to this slowdown. Additionally, the abnormally heavy monsoon rains and flash floods have taken a large toll, especially of agricultural sector. The economic landscape is still engulfed with global and local uncertainties. Inflation is soaring while interest rates have reached historic high levels.

On the external front, the position is still challenging in the first month of FY 2023 i.e., July 2022 exports were US$ 2.25 billion, sliding by 3.7% as compared to US$ 2.34 billion in July last year—whereas on monthly basis it witnessed a significant decrease of approximately 23% in July 2022.

Foreign direct investment was at US$ 58.9 million during July 2022 as compared to US$ 103.8 in July 2021, declining by 43%. The restrictive measures have managed to reduce total imports in July 2022 to US$ 5 billion as compared to US$ 5.6 billion in July last year.

However, in terms of tax collection, FY 2023 started on a positive note as the Federal Board of Revenue (FBR) collected Rs 15 billion more than the assigned target of Rs 443 billion, as compared to the corresponding month of last year. The provisional net collection posted a growth of 10.2% — though the required growth rate to meet the annual target fixed at Rs 7.470 trillion is 21%.

The key tax measures introduced in budget 2022-23 aimed to impose taxes on high-income earners can be described as a welcome step, but at the same time the government has again extracted the load from existing taxpayers by imposition of super tax and reduction in the number of slabs on salaried taxpayers, for example.

It needs to devise a comprehensive strategy to bring more people into the tax net, and this should be based on their income and wealth rather than taking end-bloc steps which affect people across the board. For example, in a recent commitment with the IMF, the government has agreed that as soon as monthly data show signs of underperformance against revenue targets, it would activate contingency measures like General Sales Tax (GST) on fuel, streamlining of GST exemptions such as those benefiting exporters; and/or increasing Federal Excise Duty on Tier I and Tier II cigarettes to bridge any gap.

Apart from this commitment, the IMF Country Report 22/288 showed concerns about the previous government’s untargeted 4-month relief package that increased the fiscal deficit due to lowering the prices of petroleum products, and electricity tariffs, providing tax exemptions, introducing tax amnesty schemes, and increasing pension and minimum wages.

However, the previous government’s actions forced the incumbent government to take aggressive measures to fill the gap by imposing new taxes. Though the government has imposed a new tax on immovable property, which is considered a welcome step, yet many other taxes were imposed including super tax on existing taxpayers. Moreover, a rise in petroleum levy, as well as reduction of tax slabs, has added misery to the life of struggling families.

The government is further committed to expanding the scope of Personal Income Tax to another 300,000 people by using the data of withholding taxes of businesses, third parties, and physical surveys.

Though broadening the tax base is an important step to generating revenue, the government must keep in mind that in an undocumented economy, withholding tax data will not help in meeting the required targets. The government should focus on streamlining its labour laws and extend its regulatory reporting framework to every individual involved in any business activity.

Resumption of the IMF Extended Fund Facility programme somehow has helped Pakistan to meet its immediate financing needs. However, at the same time, it binds the government to undertake outstanding structural reforms as a priority to transform the economy to achieve the goal of self-sustainability.

The Federal Finance Minister should realise that the oft-repeated slogan of sacrificing political capital in the name of saving the country from default will not work anymore or forever. He must take remedial measures — all-out fundamental structural reforms in all areas of economic governance.

(Huzaima Bukhari & Dr. Ikramul Haq, lawyers and partners of Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS), members Advisory Board and Visiting Senior Fellows of Pakistan Institute of Development Economics (PIDE). Abdul Rauf Shakoori is a corporate lawyer based in the USA and an expert in ‘White Collar Crimes and Sanctions Compliance’)

Copyright Business Recorder, 2022