EDITORIAL: A recent report of the finance ministry, published on September 2, has highlighted the primary challenges facing the economy, offering a crucial if not exhaustive overview of the obstacles at hand. The distinct impression that one gets after a reading of the report is that our economic managers are a little too willing to attribute the ills of the economy to external factors – the Russia-Ukraine war, extreme weather events – and while these linkages are valid, not enough attention is paid to the missteps of the authorities that have contributed to the economic morass. Even so, an overview of the issues marring the economy and how policymakers perceive them is well in order.
As has been well established, the Russia-Ukraine war resulted in an upward trend in prices of petroleum products internationally, and with Pakistan perennially vulnerable to global price shocks, a sharp rise in fuel prices was witnessed over the past two years, leading to a multi-pronged effect on economic activity.
The report notes that not only did direct consumption of petroleum products contract, other associated markers that indicate the health of the economy also took a hit, including electricity production, industrial demand, goods transportation and construction.
Additionally, our exposure to global price shocks has also ensured that the population has been left unprotected from the impact of unstable prices of edible oil as well, as we are largely dependent on imports of the vital commodity, leaving us susceptible to sudden surges in prices internationally. This has adversely impacted the GDP, household consumption, and more worryingly, has caused a worsening diet structure, deteriorating nutrition levels and precarious food security.
As the report underscores, the persistently high fuel and edible oil prices have been significant drivers of the relentless inflation, especially the record-breaking food inflation that the population has been grappling with.
The steady increase in administered prices of vital commodities, along with the ongoing depreciation of the rupee, has eroded household purchasing power, thereby exacerbating poverty - another one of the key challenges highlighted by the ministry, which has noted that poverty levels have also been fuelled by the calamitous 2022 floods.
The report warns that in the future 8.4-9.1 million more people may be pushed into poverty as the devastating floods resulted in the destruction of 1.8 million hectares of cropland across the country, apart from damaging public infrastructure and property.
It is obvious then that climate change has had a far-reaching effect on the economy, influencing everything from agricultural yields to food security and infrastructure resilience. Addressing climate change, therefore, is crucial for our future economic health, but the government’s attempts on this front are yet to match the scale of the challenge.
Compounding these obstacles is the fact that any attempt to counter increased poverty by giving out targeted subsidies to poorer sections is hampered due to our constrained fiscal space, bringing us to yet another problem area confronting the economy.
As the report notes, when it comes to the fiscal front, the expenditure side especially has been under pressure due to high mark-up payments, widening the overall fiscal deficit to 2.3 percent of the GDP in the first six months of FY2024.
While there is no running away from our debt servicing obligations, the fact remains that the appalling lack of political will to tax under-taxed segments of the economy, as well as the government’s almost criminal failure to clamp down on its exorbitant expenditures, are the main underlying reasons for our perpetual economic disarray.
The truth is that the only long-lasting way to build resilience against external shocks, global events and extreme weather phenomena is to ensure that the government works to expand our narrow tax base and truly tightens its belt to bring down its excessive expenditures.
Copyright Business Recorder, 2024