Tuesday June 18, 2024

News analysis: Country needs vision to break through economic trap

By Farhan Bokhari
December 26, 2022
A representational image of stacks of rupee notes. — AFP/File
A representational image of stacks of rupee notes. — AFP/File

AS finance minister Ishaq Dar publicly defied the IMF earlier this month and overlooked tough economic conditions across Pakistan, a wider crisis continued with no signs of abating any time soon.

The minister is presiding over Pakistan’s fast worsening economic turmoil driven by stagnation, far above target inflation, a balance of payments crisis and widespread uncertainty to name matters proverbially at the tip of the iceberg. And his recent promise of returning the Rupee versus US Dollar exchange rate to below Rs200 to a Dollar is already lost.

Avoiding a continuation of the relationship with the IMF will simply deepen the ongoing crisis. With Pakistan set to go towards its next parliamentary elections no later than about ten months from now, growing political noise across the country has already halted hopes for more than a very moderate rise in near to mid-term investments.

And with a further depletion in both foreign and domestic investments likely to occur mainly due to Pakistan’s increasingly tattered political and economic outlook, already high unemployment is set to grow.

Pulling Pakistan out of economic trap requires a vision and a sense of mission vastly missing today. Dodging the IMF would only go on worsen Pakistan’s economic turmoil.

For the moment, the ruling structure in Islamabad appears to be relying on support from close friends like China and Saudi Arabia to periodically help shore up liquid foreign reserves. In doing so, the target appears to be wade-through strategy without embracing unpopular reforms.

With Pakistan’s official foreign exchange reserves already below the danger line —sufficient for about a month of imports — a two-tiered reform process is well overdue.

On one hand, a combination of symbolic and consequential savings spree is essential to set the tone for a remarkably different future. This must range from chopping privileges of the elite as never before to send a powerful message that the rich and mighty are rising to sacrifice at a moment of national need.

More consequentially, sweeping reforms on development expenditure are a must. By one account from a senior UN official well aware of Pakistan’s developmental history, at least 45 per cent of funds on a variety of projects usually end up in the pockets of the high and mighty. At a time when the country is bleeding badly, this type of theft must not be tolerated.

At the same time, sweeping reforms must also target public sector companies that a country like Pakistan cannot afford to subsidize. White elephants like the PIA, Pakistan Railways, the Karachi steel mills and Wapda have simply wrecked the country’s finances over time.

Even privatising them at a token price where their buyers also assume their liabilities are deals worth considering. A historical financial review of entities like the PIA or the Karachi steel mills would easily reveal a glaring reality. That the money used to subside them year after year has, in time, become equivalent or more than what was required to set up a brand new and debt-free entity to deliver the same services.

On the other hand, taxing those with financial means is essential to stop Pakistan’s economic ruin. Tragically today, the overseers of Pakistan’s future are the elite who have also captured the decision making processes. Yet, the failure to reform the tax system only endangers the future of the very source of their patronage — Pakistan.

Relying on indirect taxes as repeatedly done in Pakistan’s history will just not generate the resources necessary to plug a dangerously growing fiscal deficit. Taxing the rich and their tastes for consumption must now become central to a new process of economic reforms.

Measures like differentiating between ‘filers’ versus ‘non-filers’ on matters like the sale of highend properties or luxurious vehicles, has simply defeated the purpose of reforming the economy. The ‘non-filers’ across Pakistan have dished out more money in favor of their opulence simply to remain free of becoming accountable. And with the recent relaxation to Pakistan’s already fragile accountability law, the message to tax evaders is bold — that you can easily get away with theft.

Notwithstanding Dar’s publicly spelt contempt for the IMF, Pakistan needs to embark on a tough road to reforms under tightly enforced conditions. Irrespective of the political cost for one political shade or the other, the risk to Pakistan’s very future cannot be taken lightly. Dodging the IMF must not be an option as Pakistan faces formidable headwinds surrounding its economy with implications for its very existence.