Economy: durable solutions remain elusive

The FY25 budget presents challenges for everyone, with few economic actors benefiting.

Despite compromises due to pressures from political constituencies and powerful circles, the government had to impose new taxes and higher rates on existing ones, given the high deficit, crippling debt levels, and IMF conditionalities for a new programme.

As a result, the government appears to have succeeded in displeasing most stakeholders, with virtually no constituency. Even with the effort to protect real estate players and retailers, these sectors are worse off in FY25.

The urban middle class feels further squeezed by the increased tax burden, exacerbating the disparity between those within and outside the tax net.

The situation is becoming increasingly difficult for the ruling party. Since the inception of PML (N), urban retailers, wholesalers, shopkeepers, and some professionals, particularly in Punjab, have been key its supporters.

Now, these traditional voters are showing signs of discontent. It’s a lose-lose situation for the government.

These new taxes follow two years of skyrocketing inflation and low economic growth.

The country’s ability to sustain any further burden is diminishing. With persistent balance of payment worries, the country cannot afford to grow over 2-3 percent soon. New taxation measures have eroded households’ disposable incomes and businesses’ net incomes across the board.

The agricultural sector is also troubled. The low (or absent) wheat support price has adversely impacted farmers, the crop cycle is already disturbed due to climate change, and the cotton outlook is bleak this year.

Furthermore, an agriculture income tax is likely to be imposed by January 2025.

The increase in electricity bills adds insult to injury. Prices have more than doubled in the last two years, and the most recent increase in base tariffs has sparked widespread outrage. Businesses are losing viability at current prices, and households cannot fit the electricity bills into their monthly budgets.

For the first time, all chambers of commerce and industry, business federations, and associations in the country are uniting to assail the IPP policy, demanding renegotiation of contracts to lower the capacity payment.

However, this may not solve the problem without reforming the overall energy value chain, reducing the government’s footprint, and improving the transmission network to match the generation capacity.

Despite this, criticism of the IPP contracts is gaining traction, with the media joining business groups to demand renegotiation. Some commentators speculate that the powers that be back the business community against the government.

One theory is that they want to check the current government by supporting the forces against it. Another is to appease Washington by making sufficiently loud noise about Chinese debt and investment.

The government has talked to Chinese on the reprofiling of IPP debt, which comprises the lion’s share of Rs2.1 trillion capacity payment due this year. They are likely to review each IPP on a case-by-case basis and try to reprofile the debt.

Some journalists and commentators speculate that the reprofiling of Chinese IPP debt and other government bilateral debt rollovers are IMF conditions for approving the staff-level agreement at the board level.

However, the Finance Ministry categorically denied this, stating that commentators are making stories based on general efforts to make debt sustainable. Other sources also confirmed that there is no debt reprofiling condition for the Fund board approval.

The actual condition is arranging the gross financing gap, estimated at $5-6 billion over the programme’s three years, with $2 billion needed in the current fiscal year. The government is confident in meeting this requirement, and the IMF programme will likely be approved by the end of August.

However, this will provide little respite to the government. The FY25 budget places it in a no-win situation.

Despite making compromises, the need to address high deficits, crippling debt, and IMF demands leaves no one content. The urban middle class, farmers, businesses, and traditional supporters are all feeling the pinch, creating widespread discontent.

With persistent economic challenges and new taxation measures, the government’s ability to navigate these turbulent waters remains uncertain, leaving them with limited options and mounting pressure from all sides.

Copyright Business Recorder, 2024