Economy between the devil and the deep blue sea

EDITORIAL: Pakistan Bureau of Statistics (PBS) calculated a Sensitive Price Index (SPI) for the week ending 11 May 2023 at 48.02 percent year on year while Large-Scale Manufacturing Sector Index declined to negative 8.11 percent July-March 2023, clearly and unambiguously indicative of stagflation with prices rising while output is stagnating.

This state of affairs has been exacerbated by flawed economic policy decisions that include reliance on the low hanging fruit for tax revenue (defined as not only indirect taxes whose incidence on the poor is greater than on the rich but also taxing the corporate sector with a history of little if any tax evasion) while resisting any attempt to widen the tax net for political reasons.

At the same time the government’s current expenditure continues to rise massively each year, 75 percent in the first eight months of the current year in comparison to the year before, and while expressing helplessness to curtail any item as politically untenable, government after government has relied on borrowing from domestic sources (highly inflationary especially during times of low growth as at present as well as anti-growth as it crowds out private sector borrowing) and external sources (that places inordinate pressure on the balance of payments position every few years which explains why Pakistan is currently on the twenty-third on average three-year International Monetary Fund (IMF) programme in its 76-year history).

The obvious solution lies in either undertaking politically challenging tax reforms focused not on raising revenue as has been the objective to date but to reform the tax structure to ensure that the ability to pay principle is paramount.

While Pakistani administrations have all safeguarded the interests of the elite yet one would urge the PML-N leadership to widen the tax net to include traders, the PPP to refrain from extending incentives to sugar exporters as well as taxing the farm sector and for the Khan administration to desist from extending amnesties and fiscal incentives to the construction sector.

At the same time it is imperative for the administration to seek voluntary sacrifices by the recipients of current expenditure barring the allocation on Benazir Income Support Programme (BISP). However, with only 400 billion rupees earmarked for BISP under a budgeted current expenditure of 8694 billion rupees - a budgeted amount that is already vastly exceeded by a significant amount as domestic borrowing has pushed up total interest payments - 4.6 percent of the total, the onus must rest with slashing all non-operational expenditures and any politically-motivated pay raises.

The solution therefore lies in the government reducing current expenditure by about 1.5 trillion rupees over and above slashing development expenditure, already implemented but which is having negative repercussions on the growth rate and raising revenue through direct taxes – not by widening the differential sales tax on purchases between filers and non-filers, thereby legitimizing non-filers or by imposing withholding taxes in the sales tax mode, which is an indirect tax but by widening the tax net to include those outside the net.

At the same time, the government needs to be realistic in its budgeted data, for example, year after year the provincial surplus is grossly overstated, in the current year it is 800 billion rupees which was unrealistic to start off with but even half of this amount is no longer achievable today after the devastation wrought by the floods last year.

A further complication in next year’s budget would surface if the federal budget is presented by the incumbent government while Punjab and Khyber Pakhtunkhwa interim budgets (till elections are held) will be unable to project a surplus for the entire next year.

To add to the country’s economic woes the IMF’s recent statement noted that (i) Pakistan must stay within the policy framework agreed for the ninth review (an agreement that is yet to be shared with the general public though Finance Minister Ishaq Dar repeatedly claims that all policy framework agreements have been implemented and cites the 170 billion rupee mini-budget as well as upgrading the utility rates as proof positive); and (ii) sufficient financing from partners which, if the Finance Minister is to be believed, is the only lacuna in reaching the staff-level agreement - a lacuna reminiscent of a chicken and egg syndrome or, in other words, without the staff-level agreement funds will not be forthcoming at affordable rates from friendly countries and other multilaterals/bilaterals or be accessible from the commercial sector abroad at remotely affordable rates as all three major international rating agencies have downgraded government issue to junk status.

Needless to say, Pakistan’s economy is between the devil and the deep blue sea and there does not seem to be either the necessary expertise to think out of the box to effectively deal with the impasse as the flawed policies of the past remain in place or indeed to negotiate more effectively with the Fund staff instead of periodically hurling insults or claiming that Pakistan has the capacity to meet its external obligations post-July 2023.

Copyright Business Recorder, 2023