This is the second of a two-part series on Pakistani administration’s focus on domestic factors while ignoring external factors which have a much greater relevance in formulation of our domestic economic policies.
Pakistani finance ministers have consistently laid the blame for a sustained fragile economy - the outcome of bust and boom cycles leading to periodic serious balance of payments issues necessitating multilateral/bilateral support - on the opposition for launching a shutter-down strike in major cities which, as per a recent guesstimate by the Ministry of Finance, accounts for a loss of 190 billion rupees per day - an amount largely attributable to a cessation of wholesale and retail trade, the largest component of the services sector, and not related to a decline in productivity.
The reasons for the shutter-down strikes have been almost exclusively political; ranging from charges of rigging in the elections, the alleged political victimization of leadership, challenging specific legislation that is deemed to be targeted against the opposition, and as an after-thought in some protest movements to poorly performing macroeconomic indicators - rising poverty levels, inflation, and unemployment.
In an attempt to strengthen its narrative that it is the only party with the overarching objective of achieving public-centric economic growth (through mega infrastructure projects that contractually favour the producers rather than the public an example being energy projects), backed by in-house expertise, Pakistan Muslim League-Nawaz (PML-N) came up with what it believes to this day is a winning slogan: a charter of the economy.
This slogan was first raised by Ishaq Dar, four-time finance minister of this hapless country, who during his last eleven-month stint (October 2022 to August 2023) brought the country to the verge of default with a host of flawed policies identified by donor agencies and domestic economists.
Little understood by party stalwarts is the fact that a charter of the economy would violate the very basic democratic precept of the existence of a plurality of political parties within a democracy, each advocating its own distinct economic strategy.
Nonetheless, this mantra continues to be invoked by senior members of the PML-N, including the incumbent Prime Minister during the press conference after the conclusion of the third round of talks with Pakistan Tehreek-e-Insaf (PTI).
Technocrats with relevant education and experience selected by stakeholders to head the finance portfolio have, by and large, desisted from regurgitating this slogan however recently Muhammad Aurangzeb the Federal Finance Minister publicly supported the signing of a charter of the economy.
In his defence, one may argue that his rationale was to ensure support for harsh upfront politically challenging conditions imposed by the International Monetary Fund (IMF) that he signed off on; that are critical to meeting our debt obligations and thereby avert the threat of default.
Pakistani administrations, military and civilian (representing all the three major national parties) have had one common element during their tenures: all have been on rigidly monitored IMF programmes with the same policy thrust with respect to specific sectors (particularly power and tax sectors). 2019 onwards, the leverage that was previously allowed by multilaterals to phase-out harsh upfront conditions is no longer available as the economy has become ever more fragile.
The Fund staff rather sanctimoniously laid the entire blame for the current fragility of the economy on successive administrations’ failure to implement agreed reforms in its Staff Level Agreement documents dated 10 October 2024: “Pakistan can make significant medium-term gains through consistent implementation of long-delayed structural reforms.
Key policies and reforms modelled include (i) fiscal-structural reforms (improved public investment and tax efficiency); (ii) human capital investment and reduced (agricultural) subsidies that facilitate labour reallocation of more productive sectors; (iii) reduced trade barriers; and (iv) stronger market competition, privatization, and SOE efficiency.”
No one from the authorities challenged this reform agenda presented by the Fund and with respect to implementation to-date the government has: (i) issued notices to non-filers and under-filers, as in previous administrations, but the tax structure in the budget for the current year remains unfair and inequitable (reliant on indirect taxes to the tune of 75 to 80 percent of all collections) and anomalous (different ownership of same industry is taxed differently); in addition, tax on traders envisaged last year in April with projections of generating over 500 billion rupees per annum has been massively altered after negotiations with traders; (ii) human capital investment remains low due to a very narrow fiscal space with large-scale manufacturing remaining in the negative realm that, in turn, obstructs reallocation of labour to more productive sectors; (iii) reducing trade barriers accounts for lower revenue collected under customs and relocation of industry abroad as utility rates and capital costs are the highest in the region due to IMF conditions; ironically, while the West is talking of fair trade and the outgoing Biden administration further weaponized the dollar through the imposition of sanctions the IMF continues to talk of lifting trade barriers; and (iv) competition conditions do not prevail in Pakistan due to a proliferation of producers organisations as well as aarthis, the middlemen between the farmers and the market.
Most products manufactured in Pakistan operate under oligopolistic conditions (with numerous producers being legally able to band together by forming powerful organisations and registering with the Securities and Exchange Commission of Pakistan).
While it is disturbing that multilaterals refuse to take any blame for their failure to correct their design flaws yet at the same time our authorities, by supporting a charter of the economy, are effectively seeking a carte blanche to implement politically challenging harsh donor conditions with impunity.
This may preempt Opposition leaders from mobilizing public opinion against the sitting government but, it does not preempt spontaneous protests by the public, as seen on account of electricity bills as well as inflation.
The forgoing indicates that our administrations have been limited in implementing economic policies to: (i) their favoured sector(s) who may have been granted amnesty, fiscal and monetary incentives in the past; (ii) the mega projects with members of the executive manipulating their internal and economic rates of return for example the Lahore and Islamabad airports that have still to generate enough traffic to justify their huge costs; and (iii) the level of data manipulation. Barring (ii) which is subject to severe fiscal constraints, the government has pledged to the IMF that it would desist from (i) and an IMF Technical Assistance would ensure that data has credibility.
There is, however, one policy that can change the leverage of our economic team leaders with multilaterals: slashing current expenditure through voluntary sacrifice by the elite recipients to reduce the pressure on raising existing taxes. That to this day remains a pipe-dream though currently, as in the past, rhetoric pledge to do precisely that is considerable.
Copyright Business Recorder, 2025
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