EDITORIAL: Pakistan Stock Exchange remains sluggish with brokers citing the delay in the staff-level agreement on the ninth review with the International Monetary Fund (IMF) as the reason for its lacklustre performance.
Often cited by our successive finance ministers as an indication of the state of the economy and by implication their performance it must be borne in mind that the stock market - merely a collection of shares of public companies - is significantly smaller than the economy and the poor, the lower middle and the middle income earners in Pakistan rarely, if ever, invest in the market.
The key stock market players, other than around 40 plus stock brokers, are limited to the upper middle to upper income earners and corporations, and bearish and bullish trends appear to suspiciously mirror mounting and/or easing criticism against the economic team leaders.
Statistics reveal that our stock exchanges are one of the lowest taxed in the region with collections of 5.6 billion rupees in 2021-22 and July-todate 4.3 billion rupees while collections in India, upped tenfold this year, are expected to generate 60,000 to 80,000 crore rupees as tax on capital gains in the stock market against 6,000 to 8,000 crore rupees last year.
Repeated advisements subsequent to undertaking detailed studies on various sectors/subsectors, be it donor funded or government funded or indeed funded by private research institutes around the country, continue to gather dust in various ministries with their recommendations remaining unimplemented.
Finance ministers, reappointed with regularity in spite of their appallingly poor performance - their selection a function of the government in place with clear institutional favourites - have all failed to deliver during the past three decades and instead have simply exacerbated problems through flawed policies and/or lack of clout within the power structure to challenge measures taken on political as opposed to economic grounds. And the result is for all to see: the current economic impasse which is deepening with each passing day.
Take the example of the country’s tax structure that remains heavily reliant on indirect taxes, whose incidence on the relatively poor is greater than on the rich.
If withholding taxes in the sales tax mode, an indirect tax, that are inaccurately credited to direct taxes as pointed out by the Auditor General of Pakistan, are taken out from the equation then indirect taxes account for nearly 70 to 72 percent of all revenue collected in this country.
The incumbent finance minister has bafflingly legitimised the non-filers (particularly traders) and absolved them from filing their returns and instead levied a higher sales tax on their purchases. This is without doubt a disincentive for the honest tax filers.
The power sector’s financial crises are also deepening with time and managers continue to pass on the sector’s inefficiencies and corruption onto the hapless public through raising utility rates and are at present, like in the past, trying to pass on the resulting political backlash onto external donors/IMF for insisting on full cost recovery, an economically sound policy instead of embarking on a reform agenda that would improve the power sector’s performance.
Rising budget deficits, with more than 90 percent allocated for current expenditure continues to this day and component allocations are justified on the following grounds: (i) rising annual mark-up and debt servicing though none of the repeat finance ministers have had the gumption to acknowledge that their policies contributed to ever-rising cost of borrowing.
Dar increased reliance on external borrowing (2013-17) by arguing that the rate of interest abroad was lower than domestically while artificially controlling the rupee rate, thereby showing low mark-up and principal payments as and when due in the budgets. This flawed policy accounted for Imran Khan inheriting the worst-ever current account deficit.
Dr Hafeez Sheikh, during his first term as the finance minister, failed to implement tax and power sector reforms agreed with the IMF which led to the suspension of the programme and during his more recent stint agreed with the Fund to raise interest rates and opted to reschedule debt at 13.5 percent discount rate – another contributor to the ever-rising cost of past borrowing.
And Shaukat Tarin, like his predecessors and successors, delayed the Fund review for more than six months on the mistaken assumption that the same geopolitical situation as in 2008 prevailed in 2022 that had macroeconomic repercussions; (ii) defence which needs to be streamlined and barring ongoing operational expenses all other items must be cut as all must sacrifice to deal with the existing impasse; (iii) civilian administration also needs to be slashed, again required to sort out the ongoing economic stalemate; (iv) continuing untargeted subsidies in spite of having the mechanism to target them, i.e., through Benazir Income Support Programme (BISP).
One would hope that BISP with only 400 billion rupee allocation this year is raised as subsidies are phased out; and (v) pension reforms are critical and for this not only increasing ghost pensioners need to be identified but also a contributory system needs to be put in place.
As matters stand today and the policies being supported today there does not appear to be too much hope for a better future in near future. The finance minister blows hot one day and cold the next with the Fund that is simply increasing the trust deficit, which is at the cost of the country today.
His statement that the IMF needs friendly countries, Saudi Arabia and the UAE, to guarantee 3 billion dollar already pledged assistance to Pakistan is believed to be inaccurate as the amount is at least double that as determined by both domestic economists and the Fund.
It is about time the eleven-party coalition government revisited the composition of its economic team that has not only failed to deliver but is creating impediments to the success of the ninth review.
That the country needs implementation of the reform agenda without any further loss of time is a fact. This newspaper starkly warns that there is no room for complacency on economy.
Copyright Business Recorder, 2023