Economic impasse and political instability

The economic challenges of Pakistan are appallingly enduring, and unless we effectively address fiscal discipline issues, expand our tax base, and eliminate resource wastage, the country’s economic stagnation is likely to persist for an unspecified period.

The survival of vital small and medium enterprises (SMEs), the backbone of our economy, is under significant threat due to high policy rates. Additionally, reliance on the conventional method of expanding tax base through additional taxes, surcharges, and duties has its limitations.

As a consequence, when the government finds itself unable to collect taxes beyond a certain point it resorts to oppressive and exorbitant taxes on existing taxpayers. It is worth noting that Pakistan’s interest payments surpass over 70 percent of total tax collection, causing a fiscal imbalance.

The current initiatives of the government to combat currency smuggling have yielded a favourable impact on the market. These measures have not only strengthened the Pakistani rupee against the US dollar but have also curtailed the influence of alternative remittance systems like hundi and hawala.

As a result, there is a substantial increase of 5.5% in inward home remittances during September 2023. Data released by SBP shows that Pakistan received US$2.2 billion in remittances in September 2023, as compared to US$2.1 billion in August 2023.

Evidently, measures taken against currency hoarders, smugglers, and those involved in currency manipulation have yielded positive results. As reported in the media, the rupee has appreciated 17% against the dollar in the open market and 9.5% in the inter-bank.

The pressing question is whether these short-term measures to stabilize Pakistani rupee’s value will have a lasting effect and effectually address the pressure of debt payments, especially considering the dwindling foreign exchange reserves? Unfortunately, the answer is in the negative as it is not possible without initiating structural reforms, otherwise a sustainable solution will remain elusive.

The recently-released update by the World Bank, ‘Pakistan Development Update (October 20230: Restoring Fiscal Sustainability’ [“the report”], portrays a grim picture of our prevailing fiscal scenario.

The report anticipates GDP growth of just 1.7% for the fiscal year 2023-24 and 2.4% for the fiscal year 2024-25 which is significantly lower than Pakistan’s actual economic potential. With a rapidly growing population, such a low growth rate may not even be sufficient to meet the country’s fiscal needs, including creation of employment opportunities. Similarly, the projected inflation rates for the same period are 26.5% and 17%, respectively.

The report also indicates that the fiscal balance, excluding grants as a percentage of GDP, will remain negative at -7.7% and -7.6% during the fiscal years 2023-24 and 2024-25, respectively. Furthermore, it states that the debt-to-GDP ratio, which was recorded at 82.3% for the fiscal year 2022-23, is expected to decrease to 72.4% and 70.3% in the next two fiscal years. The primary balance is predicted to be negative -0.4% for 2023-24 and -0.3% for 2024-25.

Pakistan faces the daunting challenge of meeting loan repayments to various lenders, including multilateral and bilateral partners, along with domestic financial institutions. Due to severe difficulties on external front, Pakistan is in a 9-month stand-by programme of the International Monetary Fund (IMF) till March 2024.

We are duty-bound to meet IMF’s conditions to keep the programme on track. In the event of a deadlock or delay in release of next tranche by IMF or securing guarantees by us from the bilateral or uniliteral partners will put tremendous pressure on the economy.

It may bring us to the position where averting default again can take its toll as our total foreign reserves are around US$ 9 billion—much lower than our estimated debt payment for the current fiscal year. There are widespread speculations regarding IMF’s requirements, especially concerning the potential implementation of new tax measures which if made effective, will further deteriorate business environment exacerbating inflation, adding to the miseries faced by the general population.

Another critical reason for low economic growth is political instability of which we have suffered long spells. According to the 1973 Constitution of Pakistan, elections are to be held within 90 days following premature dissolution of the national assembly.

However, the inability of Election Commission of Pakistan (ECP) to carry out its primary duty of conducting elections and failure to complete the process of delimitation of constituencies during the last five years have delayed elections. Although ECP has stated that the process of delimiting constituencies would be finalized by November 30, 2023, and elections would follow, no definite date has been announced.

Regarding possibility of delay in elections, there is contemplation about severe weather conditions in January 2024. Simultaneously, concerns have been raised by political parties about the actions of caretaker government and role of security agencies.

The head of PMLN, said to be returning to Pakistan on October 21, 2023 after four years of self-exile in London, will have to face pending court cases, which he claims to be allegedly registered against him for political victimisation by high-ranking military/civil officials and executed by some members of the apex judiciary.

The PTI chairman, initially sentenced in the Toshakhana case for three years but later granted bail, is still under scrutiny for various legal matters, including the alleged violation of Official Secrets Act, 1923, attacks of May 9, 2023, and a case for allegedly receiving material rewards related to returning £190 million to a property tycoon transferred by the National Crimes Agency of the United Kingdom recovered in a money laundering case. These developments cast doubt on the upcoming elections’ fairness and integrity.

Both the leaders claim that cases filed against them are politically motivated and orchestrated by influential individuals within the military and government, creating uncertainty surrounding the election’s outcome. Parties may contest results and organize protests after elections, thus aggravating instability within the country.

Post-election scenario does not appear favourable for the country in these circumstances, and it is expected to foment chaos. Instead of focusing on transformative system changes and growth-driven initiatives, the post-election government is likely to be preoccupied with handling political movements.

Additionally, the pressing need to broaden tax base to address fiscal imbalances remains unaddressed, with the current tax-to-GDP ratio of around 9.2% falling short of the country’s requirements.

It is imperative for stakeholders to acknowledge the multitude of challenges Pakistan confronts. Addressing fiscal imbalances, restructuring fiscal institutions, and enhancing intergovernmental coordination are essential for efficient public finance management.

The monstrous fiscal deficit, coupled with the federal government’s sole responsibility for debt servicing and defence, leads to recurrent budget shortfalls, typically covered through further expensive debts, currently standing at approximately 82.3% of the GDP.

Present revenue mobilization efforts are largely ineffective, with 93% of revenue collected at the federal level. For enhancing tax collection, we need to focus on strengthening inter-agency collaboration and investing in the capacity building of tax/revenue officials.

Additionally, serious consideration should be given to privatizing underperforming state-owned entities, thereby redirecting subsidies currently allocated to sustain these unprofitable ventures toward improving social indicators and infrastructure.

It is crucial to acknowledge that we are lagging behind our international peers, and this gap is widening with time. While it is still possible to narrow down this gap, failure to recognize our responsibilities may result in insurmountable challenges, jeopardizing our national security and competitiveness on the global stage.

(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