Still a long way to go

January 12, 2025

Given the political polarisation, it might be too early to rejoice at the positive economic indicators

Still a long way to go


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here is no doubt that the economy has made a strong recovery. But most of the fiscal consolidation was achieved by implementing the IMF conditions rather than introducing structural reforms, such as broadening of tax base, privatisation of loss-making state-owned enterprises and reforms in the power sector.

The current account deficit, which was $1.6 billion in first two quarters of FY24, turned into a surplus of $944 million largely because of lower oil prices in the international market, which reduced the import bill substantially.

Remittances were up by 33 percent and exports increased by 12.5 percent. The single digit inflation also helped the central bank to cut the policy interest rate for the 5th consecutive time. It has now down from 22 percent to 13 percent over 18 months. Market capitalisation of Pakistan Stock Exchange rose by an astonishing 80 percent and its 100 index rose to a record high.

According to the State Bank governor, Jameel Ahmed, the reduction in interest rates helped the government reduce its mark-up cost by Rs 1,500 billion, almost equivalent to the Public Sector Annual Development Programme. He said this year the government has to pay $26 billion for debt servicing. Out of this it has already paid $10.4 billion. $5 billion loans from friendly countries like China, Saudi Arabia and the UAE will be rolled over. Besides $3 billion support has been committed by international donor agencies and financial institutions.

The central bank governor said that over the last two quarters of FY25 the bank will have to arrange $5 billion to meet its debt obligations. He said given the robust growth in remittances, exports, the repayment of this amount won’t be a problem. He said the central bank reserves have touched $12 billion mark.

Prime Minister Shahbaz Sharif and Finance Minister Muhammad Aurangzeb can claim credit for achieving economic stability. The prime minister has also praised the Army chief, Gen Asim Munir, for his help in ensuring economic stability. However, the cost of this economic consolidation was borne by the common man, who faced economic hardship through heavier taxes and massive rises in power and gas tariffs.

Besides taxing the already taxed and hiking the rate of indirect taxes like the GST, excise and custom duties, the government was unable to implement tax reforms it promised under the IMF programme. The finance minister has repeatedly said that all sectors will be taxed. However, apart from somewhat tightening the noose around non-filers, he has achieved very little.

The provincial governments have so far shown very little interest in collecting tax on agriculture income. The largely untaxed retail sector too is giving the government a tough time. The FBR chairman has acknowledged the fact that this sector is a hard nut to crack. The PML-N led government is in a Catch-22 situation. Whatever support base it is left with is among the businesses it needs to tax. It realises that a forceful implementation of proposed tax measures will further weaken it politically.

The government’s efforts to privatise the state-owned enterprises have been a half-hearted exercise so far. Bidding for the PIA turned out to be a disaster as the only bidder offered Rs10 billion for the purchase of 60 percent stake in the national flag carrier.

At 9.2 percent, Pakistan’s current tax-to-GDP ratio is significantly below the global average of over 20 percent. For the FBR, despite achieving a 30 percent increase compared to the previous year, the ambitious target of Rs 12,970 billion for FY 2024-25 appears daunting. A revenue shortfall of Rs 344 billion in the first five months of FY 2024-25 has highlighted the challenges in meeting these targets. Frequent mini budgets to address revenue gaps disrupt economic stability and erode public confidence in the government’s fiscal policies.

The regressive nature of Pakistan’s tax regime disproportionately burdens the salaried class and small businesses. Recent amendments, such as the removal of tax benefits for the export sectors and increased levies on salaried individuals, have strained disposable incomes and impeded business growth. These measures, aimed at broadening the tax base, fail to address the underlying issue of tax evasion and the informal economy, which constitutes a significant portion of Pakistan’s GDP.

Despite the imposition of the circular debt surcharge of Rs 3.23 per unit on electricity consumers during FY2023-24 and the much hyped audit and scrutiny of Independent Power Producers, the circular debt has soared to Rs 2.4 trillion and it seems unlikely that the power tariffs will decline in the near future.

In its last monetary policy statement, the State Bank observed that the core inflation had declined marginally in November while consumers’ inflation expectations had inched up. The inflation outlook is susceptible to several risks, including additional measures to meet the revenue shortfall, resurgence in food inflation and an increase in global commodity prices.

So far, the government’s efforts to privatise the state-owned enterprises have been a half-hearted exercise. The bidding for the PIA turned out to be a disappointment as the only bidder offered Rs 10 billion for the purchase of 60 percent stake in the national flag carrier.

Only the real-estate development company, Blue World City, with no aviation industry experience, participated in the bidding process, placing a bid that was below the reserve price of Rs 85 billion. The bid was rejected by the privatisation ministry.

The government was also unable to make any progress on the privatisation of state-owned power generation companies and power distribution companies.

Prime Minister Shahbaz Sharif’s Uraan Pakistan, a five-year national economic transformation plan aimed at revitalising the national economy, and the finance minister’s call for developing a consensus among political parties on a Charter of Economy are old wine in a new bottle. So far, there have been no concrete efforts to evolve a strategy to address the structural problems of the economy.

Disputed election results, controversies about the judiciary’s role, terrorism along the Pak-Afghan border, attacks on Chinese workers and the sectarian conflict in Kurram, too, have also dragged the sentiment down.


The writer is a broadcast journalist

Still a long way to go