Economic challenges: timely actions needed

The coalition government of the Pakistan Democratic Movement (PDM) is approaching completion of its tenure in the next few days. While presenting their last budget for the current fiscal year (FY 2024), the fourth-time federal finance minister, Muhammad Ishaq Dar, stated that Pakistan’s GDP growth for the year is projected to be 3.5 percent.

Furthermore, the budget 2023-24 allocates approximately Rs 1150 billion for Public Sector Development Program (PSDP). This includes Rs 80 billion for Prime Minister Initiatives, Rs 54.5 billion for aviation division, Rs 5.4 billion for defence and defence production, and Rs 8.5 billion for federal education and professional training division.

Additionally, the budget allocates Rs 5.97 billion for Higher Education Commission, Rs 1.4 billion for law and justice, and Rs 25.04 billion for planning, development, and special initiatives division.

In the prevailing circumstances, it is uncertain whether the amount allocated and approved by the parliament for PSDP will be fully utilized or if the budget would undergo another revision before end of the current financial year, like the previous year.

Additionally, Pakistan bears a substantial burden of domestic and external debts. The current year’s gross financing requirements for Pakistan are close to US$28 billion, while the projected current account deficit for the same period stands at US$6.4 billion. This indicates that the pressure on our foreign exchange reserves will persist throughout the year.

An alarming, rather the most alarming factor is that despite the government’s historic budget allocation for PSDP, it seems to have missed the opportunity to capitalize on new markets and claim its fair share in the era of fourth industrial revolution to increase the volume of exports.

Pakistan is still relying on orthodox methods to boost its exports and expects $30 billion in forex during the financial year, which is nothing but peanuts compared to its imports.

The gap between Pakistan’s imports and exports is widening with the passage of time and instead of taking corrective measures, Pakistan is becoming dependent on import of household items that can be produced in the country.

On the one hand, we are struggling to maintain our foreign exchange reserve up to a specific level to avert default and, on the other, our volume of import for the current fiscal year (2023-2024) is anticipated to reach US$64.7 billion, showing trade deficit of negative US$33.9 billion as envisaged in the IMF’s latest Report.

Unfortunately, this gap is expected to widen further, projecting the volume of exports for financial years 2024-25, 2025-26, 2026-27, and 2027-28 at approximately US$33 billion, US$35 billion, US$38 billion, and US$40 billion, respectively.

In contrast, imports for the same years are estimated atUS$68 billion, US$73 billion, US$77 billion, and US$82 billion, resulting in trade deficit of negative US$35 billion, US$37 billion, US$39 billion, and US$41 billion, respectively, in these years.

It is a fact that our successive governments have failed to appreciate the importance of future challenges, resulting in faulty policies or frameworks for their redressal. Consequently, the burden on common citizens has increased significantly with heavy taxes and inflation, making it difficult for them to fulfill their basic needs.

Simultaneously, high cost of doing business has posed sustainability challenges for small and medium enterprises (SMEs), which are considered the backbone of economy.

Furthermore, our tax revenue measures display a regressive approach as the existing taxpayers bear heavy tax burdens to meet revenue targets, while the authorities seem disinterested in introducing measures to tax new untaxed sectors and broaden the tax base. There is a pressing need for forward-thinking policies and proactive measures to tackle these issues and ensure a more equitable and sustainable economic environment.

Pakistan should reconsider the practice of providing subsidies and injecting funds into struggling industrial units and commercial organizations. For the current fiscal year, the government has allocated Rs. 1064 billion for subsidies, with approximately Rs. 580 billion allocated to Wapda and Pepco, Rs. 315 billion to KESC, and over Rs. 50 billion for the petroleum sector.

Additionally, Pakistan Railways will receive a special grant of approximately Rs. 55 billion during this financial year, marking an increase of around Rs. 10 billion compared to the previous financial year of 2022-2023. It is important to reassess sustainability and effectiveness of such subsidies to ensure a more prudent allocation of resources and foster long-term economic stability.

The prevailing outlook of our economy highlights flawed priorities, which suggest a lack of interest in implementing fiscal reforms despite agreements with global lenders. It seems that political interests take precedence over national interests.

Substantial volume of subsidies and grants injected by the government to provide relief to the masses ultimately adds little value and only exacerbates the misery of the poor. Instead, these funds could be strategically invested in improving social sector growth, leading to better living standards for the less fortunate and stimulating economic activities, resulting in increased government revenue. Emphasizing such reforms would be a step towards aligning our priorities for the nation’s welfare and prosperity.

We also need to place emphasis on the growth of our industries to bolster our exports and thereby reduce our trade deficit. It is essential to reconsider our alliances and foster bilateral relations based on trade. While China has consistently stood with us during challenging times, we must acknowledge that our volume of exports to China is currently trivial and does not align with the potential of both countries.

It is time for us to engage in renegotiating trade agreements with China, considering the concerns of our Pakistani business community. We should strive to secure access to markets and benefits for our business community as Pakistan offers to the Chinese. By addressing these issues, we can strengthen our economic ties and establish a more balanced and mutually beneficial trade relationship with China.

Pakistan should also not ignore its major trade partners, e.g., the United States of America, Europe, and the United Arab Emirates. It is important for us to actively engage with them, address their concerns, and foster stronger trade relations. By doing so, we can enhance our trade ties and promote mutually beneficial economic cooperation with these key partners as well as our neighboring and regional partners, especially countries forming the Golden Ring.

It is imperative that we admit the above facts sooner than later. Running a country with an over 230 million population with the burden of loans, trade deficits, and passive imprudent foreign policy and trade relations is unsustainable. Taking timely action and addressing these issues is important for ensuring a more stable and prosperous future for Pakistan and its citizens.

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

Copyright Business Recorder, 2023