PDM and the economic meltdown

Despite some tall claims, Ishaq Dar has continued the policy of import restriction introduced by his predecessor

PDM and the economic meltdown


akistan’s economic outlook is becoming bleaker with every passing day. Several factors are contributing to this including reluctance on the part of the Pakistan Democratic Movement government to take prudent remedial measures in an election year.

The continuing political instability and bad governance have diminished the hope of economic prosperity.

Interference in state affairs by the unelected has been pushing the country into political and economic crises from time to time. The current crisis is fast emerging as a national security threat. In power since April 2022, the PDM government appears to lack the ability to take timely decisions. Institutional interventions aside, as chief executive, Prime Minister Shahbaz Sharif is answerable to the people. Exercising authority under the constitution to remove any interference and ensuring smooth running of the country’s affairs is his responsibility. Hesitation on the part of the prime minister has resulted in an inordinate delay in the appointment of the attorney general, despite the approval of his nominee by the president. The nominee is reported now to have declined the offer.

On the economic front, the Consumer Price Index registered a 0.5 percent rise in December 2022. At 24.5 percent, the current inflation rate is an all-time high. Making things worse, the State Bank of Pakistan has raised the policy rate to 17 percent from 16 percent, the highest in 24 years. The declining foreign exchange reserves are causing panic and enhancing the misery of the business community. Finance Minister Ishaq Dar is a strong supporter of keeping the exchange rate at a ‘desired’ level. He justifies this in terms of the country’s heavy dependence on imports. He has been in office since the last week of September 2022 but has failed to facilitate imports and present a pragmatic framework to boost exports and increase foreign exchange reserves, other than by borrowing.

Despite some tall claims of reviving the economy, Dar has continued the policy of import restriction introduced by his predecessor, Miftah Ismail. The government remains in violation of the agreement with the International Monetary Fund signed by the Pakistan Tehreek-i-Insaf government in 2019.

The large-scale manufacturing index is on a constant decline. November 2022 figures showed a 5.5 percent decline; for July-November it plunged by 3.6 percent on a year-on-year basis. The government’s policy of restricting imports to stop the outflow of dollars is severely affecting many businesses and exposing the country to the risk of shortage of medicines and other essentials.

On the other hand, in the last 10 months the rupee-dollar parity has declined from 190:1 to 260:1 in the open market and the depleting foreign exchange reserves are putting the country at the risk of default.

Management of the exchange rate and restrictions on imports have not worked. The two avenues of inward foreign exchange, exports and remittances are witnessing constant decline. Due to an abnormal increase in the prices of inputs, high interest rate and significant devaluation of the Pak rupee, the cost of doing businesses has skyrocketed.

Gigantic losses in state owned enterprises are contributing heavily towards the country’s fiscal imbalance. The delay in implementing structural and policy reforms is widening the fiscal gap. The citizens are paying a heavy economic price for political instability and the fiscal mess. 

Independent experts are criticising the PDM government for a deadlock with the IMF, resulting in a delay of the Ninth Review. The IMF is taking a hard stance. It is unwilling to continue facilitation unless the agreed conditions are fulfilled. While addressing a ceremony on January 24, the PM reiterated that Pakistan wanted to complete the programme and was ready to meet the IMF conditions.

Fulfilling the IMF conditions, as hinted at by the PM, will add to the misery of the citizens, especially the less privileged. The agreement with the IMF, among other things, requires that in the case of shortfall in the revenue targets for Q1 of the financial year 2023:

imposition of general 17 percent sales tax on fuel products

streamlining of GST exemptions including on sugary drinks, and other unwarranted exemptions such as those benefitting exporters; and/ or

increasing Federal Excise Duty on Tier I and Tier II cigarettes by at least Rs 2 per stick

The government has agreed with the IMF to not launch any tax amnesties or grant any tax exemptions/ concessions through statutory regulatory orders without prior approval from the National Assembly. The government will also continue to pass the full impact of international oil price fluctuation to the consumers, bridge the circular debt in electricity and gas sectors and free float the rupee.

To broaden the tax base, substantial expansion of the personal income tax base by another 300,000 persons is mandated using withholding tax data of the businesses and identifying and registering new individuals, including through use of third-party data. The government will also bring service as well as the real estate sector under the tax net, fully operationalise treasury single account, prepare a comprehensive strategy to address the high levels of non-performing loans in some banks, including bank-specific plans to reduce them and to write off fully-provisioned NPLs by end-June 2023.

Since we opted to approach the lender of the last resort in 2019, it was mandatory to implement agreed conditions. However, our rulers chose the easy way to meet revenue targets by raising the prices of daily-use items and extorting the maximum from the existing taxpayers. Resultantly, we have hyperinflation, growth retardation and enhanced unemployment, pushing small and medium enterprises onto the ventilators.

As per media reports, the circular debt is rising and the government is unable to pay the independent power plants. A report claims that the energy sector circular debt is increasing by Rs 129 billion per year. Despite the initiation of a circular debt management plan for the financial year 2023 and reform progress with the help of the World Bank, Asian Development Bank and the IMF staff, accumulation of circular debt shows that the speed and implementation of reform initiatives agreed upon in the IMF’s Country Report released in February 2022 has remained slow.

Reforms have not been undertaken in state-owned enterprises to enhance their performance, improve governance and efficiency to curtail their fiscal risks. Though the National Assembly adopted the SOE law in July 2022, it is still awaiting Senate’s approval. The government has failed to reduce its footprint in the economy, including through privatisation of two LNG-based power plants, a development finance institution and a small public bank.

Gigantic losses in SOEs are contributing heavily towards the country’s fiscal imbalance. The delay in implementing structural and policy reforms is widening the fiscal gap. The citizens are paying a heavy economic price for political instability and the fiscal mess.

Dr Ikramul Haq, an advocate of Supreme Court, is an adjunct faculty at Lahore University of Management Sciences

Abdul Rauf Shakoori is a corporate lawyer based in the USA

PDM and the economic meltdown