Economy: a difficult road ahead as well

On February 8, 2024, nearly 129 million Pakistanis will exercise their right to vote in what will be the 14th General Election in the nation’s history.

Out of 336 seats in the National Assembly, elections will be contested on 266. These elected members will later represent the millions in parliament and are then supposed to be involved in crucial decision-making that dictates the future course of the country.

This time around, seemingly, the contest for the top slot i.e. the Prime Minister’s Office, is between Pakistan Muslim League Nawaz (PML-N) and the Pakistan Peoples Party (PPP).

The two dynastic political parties have remained friends and foes throughout history, while Pakistan Tehreek-e-Insaf (PTI), which emerged as the largest political force in the country in the previous election, remains in the background.

The party, led by former Prime Minister Imran Khan, has lost its ‘bat’ symbol and its candidates are now contesting the elections as independents.

Meanwhile, Imran Khan has remained behind bars since August of last year.

The PTI founder has been sentenced for years in several cases, which his party believes are politically motivated.

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The political volatility comes at a time when Pakistan, recently claimed by the interim government as the fifth largest democracy in the world, is experiencing its “worst economic crisis”, amid record-high inflation and soaring debt, leaving a majority of its residents struggling to make ends meet.

“Despite taking drastic steps to cut expenses, we are still struggling to meet our basic needs,” said Samreen, when asked about sky-rocketing prices. “Rates of essentials, especially food items, have skyrocketed, while incomes remain stagnant,” added the 50-year-old.

Samreen is not alone in her struggle as the latest data issued by the Pakistan Bureau of Statistics (PBS) revealed that the Consumer Price Index (CPI) inflation reading in Pakistan clocked in at 28.3% on a year-on-year basis in January, while the average inflation rate during the ongoing fiscal year stood at 28.73%.

PBS data indicated record inflation was majorly driven by food and energy prices, which constitute nearly 60% weight of the CPI basket and grew 30% and 39%, respectively, year-on-year in January 2024.

Pakistan’s headline inflation reading clocks in at 28.3% in January

This sharp increase in inflation is not only taking a toll on the lower and middle-income groups but also negatively impacting the industrial sector, which suffers from dwindling demand and high energy costs, and is compelled to lower its energy consumption.

This development has also raised alarm bells among the government authorities including the National Electric Power Regulatory Authority (NEPRA).

Moreover, the country’s debt situation continues to worsen, and as per reports it has ballooned to Rs62.9 trillion at the end of June 2023, on account of higher government borrowing needs and depreciation of the local currency.

Prices of essential food items show upward trend

In Pakistan, like elsewhere, politics and the economy are deeply inter-linked, with political decisions significantly impacting economic policies.

Most experts also blame the current economic mess on the mismanagement of political decision-makers.

Therefore, whatever game plan the incoming government brings in order to take on economic challenges would play a crucial role in the country’s survival.

“We expect a coalition government to come into power, not unlike the Pakistan Democratic Movement (PDM) alliance, after the elections,” Saad Hanif of brokerage house Ismail Iqbal Securities told Business Recorder.

A similar sentiment was earlier endorsed by the interim government’s information minister Murtaza Solangi as well, who expected a return of the same political forces in parliament albeit “with whatever ratio people decide in terms of their priority”.

Whoever forms the government, their first job will be to commence negotiation with the International Monetary Fund (IMF), as the second review of the ongoing $3-billion Stand-By Arrangement (SBA) inked last year in June is due in March.

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“The Washington-based lender has said that it will only negotiate with an elected government for the release of the third tranche i.e. about $1.1 billion, thus the government would need to fulfill all the conditions assigned,” said Hanif.

The ongoing SBA is scheduled to end in April, thus the first priority of the new government shall be the negotiation of a new and bigger programme with the IMF, in order to address the country’s balance of payments issue (BoP), said Tahir Abbas, Head of Research at Arif Habib Limited (AHL).

The IMF programme is crucial for Pakistan to maintain its reserve position, and ensure currency stability. However, there are concerns that meeting the conditions of a new IMF programme may bring in a new wave of inflation as the recent energy price hikes are majorly linked with the lender’s recommendations.

But with fewer options available, experts believe this will be a bitter pill which needs to be swallowed by the masses.

Additionally, economic experts widely agree that Pakistan needs major reforms in almost every sector.

“I would not term the conditions assigned in the current IMF programme as reforms, they were more fiscal adjustments,” said Abbas.

“Reforms would be how the government stops State-Owned Enterprises (SOEs) from bleeding more. How would it rationalise its expenditure and utilise subsidies effectively,” he added.

Apart from lack of reforms, Pakistan also struggles with lower taxation, as respective governments have failed to increase the tax base.

The IMF has also stressed on the government to take strict action on this issue, as the country’s tax-to-GDP ratio remains at only 12%.

“In Pakistan, parental issue is taxation,” Kristalina Georgieva, Managing Director of the IMF, had told Bloomberg TV, back in November. “We are saying it has to be at least 15% to have the revenues to sustain the functioning of Pakistan,” she added.

The government could achieve this through taxation in new areas i.e. agriculture and retail segment, and by implementing the reforms approved by the interim setup pertaining to the Federal Board of Revenue (FBR).

The government should also keep a tight hand on the black market and smuggling, which were implemented by the interim government. “This will keep the price of commodities stable,” said Saad Hanif.

Apart from administrative measures, the government should also focus on promoting exports and Foreign Direct Investment (FDI).

“If we are able to attract export-oriented FDI, this will not only help in increasing exports, but also enhance the reserves position and reduce reliance on external donors,” said Abbas.

With limited fiscal space on offer, it will be tricky for the government to initiate major development projects or fund crucial sectors such as education and health.

Shamshad underscores need for continued reforms, revenue enhancement

But for the time being economic steering should be its top priority, which can be achieved through ensuring political stability, alongside effective governance and sound economic policies.

The article does not necessarily reflect the opinion of Business Recorder or its owners