EDITORIAL: The caretaker finance minister while addressing the NUST Institute of Policy Studies (NIPS) correctly identified five key areas that have increased Pakistan’s economic vulnerability: unsustainable fiscal policy due to revenue gaps and unproductive expenditure, leading to rising public debt, climate shocks with the projection that Pakistan will become even more vulnerable to weather shocks, lack of innovation and diversity in the structure of the economy and failure to integrate Pakistan’s economy with the rest of the world.
Notwithstanding the caretaker finance minister’s reported statement that had she been aware of the scale of the problems facing the economy when she accepted the position in August 2022 she would have declined, yet the fact of the matter is that these challenges have been consistently highlighted in multilateral programmes (budget support) and project loans for well over two to three decades in data uploaded routinely on the State Bank of Pakistan website (she held the position of Governor SBP for three years), Pakistan Bureau of Statistics and Finance Division websites, as well as in the media and domestic think tanks. It is for this very reason that her speech elicited a muted response in the media.
Domestic economists, think tanks and the general public would have shown a keen interest had there been initiation of reforms by the caretakers or release of an in-house detailed plan to deal with these myriad challenges.
The fact that the International Monetary Fund has declared the first review of the Stand-By Arrangement a success, leading to the tranche release, is at best a partial success under the present circumstances because: (i) the focus remains on achieving full cost recovery (an IMF SBA condition) through implementing administrative measures envisaging a rise in utility rates, that are passed onto the hapless consumers, like during previous administrations, instead of implementing structural reforms targeting to improve sector efficiencies; (ii) raising petroleum levy as and when there is a shortfall; (iii) continuing reliance on indirect taxes that continue to fuel inflation and push lower middle class earners below the poverty line with 70 to 75 percent of all direct taxes collected from withholding taxes levied in the sales tax mode that converts them to an indirect tax and is prone to be passed on like an indirect tax as revealed by the contingency plan noted in the first SBA review which envisages a rise in indirect taxes – general sales tax on textiles and leather, federal excise tax on sugar, advance income tax on import of machinery and raw materials and a raise in withholding tax on supplies and services; (iv) current expenditure is on the rise and the pledge made by the previous government that is being honoured by the caretakers is not to raise salaries or pensions beyond the 30 to 35 percent raised in the budget and not to approve request for supplementary grants though technical supplementary grants (adjusted under some other budgeted item) amounting to over 220 billion rupees have been approved so far.
One would have hoped that the caretakers had slashed current as opposed to development expenditure that would not only have reduced the government’s need to borrow and thereby increase our leverage with the IMF - federal and provincial governments not only borrowed nearly 2 trillion rupees more 1 July to 16 December 2023 compared to the same period of 2022 - but also fuelled inflation with a sensitive price index a high of 44.64 percent for the week ending 18 January 2024; and (v) improving governance is not only about restructuring a state-owned entity or privatisation but to assess whether it is more important to tweak related policies.
There is no doubt that K-Electric privatisation has shown that the desired objective zero subsidy on power would not be achieved through privatisation of other Discos because of the policy of tariff equalization with inbuilt cross subsidies administered by the federal government.
Focusing on the obvious without any plan of action on specific remedies that are available in most of the documents that are produced by multilaterals as well as domestic economists, does tantamount to a mere reiteration of the known ailment and no more. It is hoped that those at the helm would respond to the gravity of the situation and present plans with execution time lines to correct course that would require massive sacrifices by the existing major recipients of current expenditure, reforms that are identified through proper studies separately for each state-owned entity and last but not least a focus on dealing with sector inefficiencies to turn around state-managed entities rather than mere privatisation or by passing on the buck to the consumers.
Copyright Business Recorder, 2024
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