Fault lies within: to fix the economy, look inward

There weren’t much high hopes when Finance Minister Mohammed Aurangzeb started delivering his budget speech on June 12th 2024. The government’s top priority from the start was to appease the International Monetary Fund (IMF) and meet its prescribed targets as Islamabad sought a longer and larger bailout programme.

It managed to secure a 37-month, $7-billion Extended Fund Facility on Friday, merely months after concluding a $3-billion Stand-By Arrangement. Talk about the never-ending need for dollars.

Despite the lack of hope, there was a part of us that really did believe Aurangzeb’s earlier statements when he said that non-filers will be targeted, economic reforms pursued, and much-needed changes made.

However, what transpired at the lower house simply seemed like a missed opportunity, showcasing the government’s apathy towards the plight of the nation’s inhabitants and its inability to usher in meaningful changes.

It was the same old recipe of taxing the already burdened salaried group and the formal economy. It begged the question if the government only sees registered businesses as the ones reaping benefits from the wealth of the nation?

It also raises questions that despite the economic turmoil and a dire need to raise revenues amid regular calls for widening the tax base, the decision to keep the agriculture sector largely under-taxed benefits the majority of lawmakers sitting in parliament, who are predominantly land owners.

In contrast, the government favoured its extremely competent workforce with even more perks and privileges, raising both their salaries and pensions, while the commoners wondered why milk price in Pakistan became more expensive than in France.

Following the budget announcement, the government as expected came under a barrage of criticism with concerns raised over high energy costs, lower productivity and incoming wave of inflation, compelling Prime Minister Shehbaz Sharif to confess before the National Assembly that the budget was nothing but a dictation from the IMF.

This is largely true, and no one is discounting the importance of another bailout package with the international lender for Pakistan, but not thinking out of the box and seeking solutions by the authorities in Islamabad is not doing any favours for the coalition government.

One could recall IMF Managing Director Kristalina Georgieva’s statement last year in September: “We want Pakistan to collect more taxes from the wealthy and protect the poor.”

It seems the government only decided to partly follow the “tax more” directive while preferring to ignore the rest.

However, by imposing more taxes on the formal economy, the government may, for the time being, consolidate its fiscal side, but structural issues will continue to persist, say economic experts.

Moreover, the increase in taxation “which is regressive in nature will only hinder growth,” they warn.

So far, in the few weeks after the budget has come into effect, cement, petroleum dealers, retailers, salaried group, flour millers have also protested against taxation.

Time to take a step back, and give the economy a re-think.

The government should take the “heavily burdened formal sector, of which salaried employees are an important component, into confidence by offering a roadmap on how and when their burden will be alleviated through cutting back in public expenditure and by broadening the tax net,” the Pakistan Business Council (PBC), a corporate advocacy platform, poste on social media platform recently.

“If communicated well, most in the formal sector will accept that their sacrifice is worthwhile and temporary in nature,” it added.

Secondly, the government should also address its habit of looking at friendly countries i.e. China, Middle East for foreign inflows.

Times have changed, and global dynamics are not what they used to be 10-20 years ago.

“In China there is a massive real estate crisis. In the US, the level of scrutiny for foreign lending has increased significantly, while countries in Middle East, which are heavily investing to attract foreign inflows, are only interested in profitable ventures,” say experts.

Lastly, and more importantly, the solution lies inward.

It is the government’s own mismanagement that is driving this economic turmoil.

“The inherent issue in Pakistani economy is government expenses and the increase in taxation is not the solution,” say experts.

“In recent years the government borrowing from the market to meet its expenses has skyrocketed, which is largely being done thorough State Bank of Pakistan (SBP) Open Market Operations (OMO).”

The problem is that rampant borrowing by the government is to meet its expenses, “which are largely non developmental rather than for increasing growth”.

“Therefore, the SBP should show some autonomy and cease OMOs. This will compel the government to reduce its expenditure.”

As per the latest SBP data, government borrowing from scheduled banks reached a record high of Rs8.56 trillion during FY24, an increase of over 132% then the Rs3.72 trillion it borrowed during FY23.

On the other hand, looking at the total federal budget outlay for FY25 amounting to Rs18.877 trillion, nearly 52% will be used to pay off interest expenses, while over Rs1 trillion will be utilised for pensions, and Rs1.4 trillion on subsidies, leaving little space if any for development expenditure that could boost growth.

“If pubic taxes continue to fund unproductive areas, this will actually lead to further inflation creating more fiscal imbalances,” said experts.

Thus, the government – whether federal or provincial – must reduce its size.

It should get rid of a number of unnecessary ministries, and address its salary and pension structures. Otherwise, the path from here on is only downward.

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