The revival of the $6b International Monetary Fund (IMF) programme is being seen as a great achievement by the government for its commitment to key governance and economic reforms to support sustainable growth for job creation and poverty alleviation. For it, the government had to make tough adjustments and their effects will come to the fore in a few months.
The government says it has taken some “difficult” decisions to revive the economy but the common people have been crushed by rising prices of essentials, electricity, gas and medicines. If the first half term of the PTI government was the worst for their household budgets, the coming weeks and months too do not promise any relief to them. Pakistan’s economy slowed down drastically when it had entered the IMF programme in 2019. Millions of people had lost jobs even before the onset of the pandemic and inflation reached an unprecedented level in the country as a consequence of the decisions. The government has again taken tough decisions to stabilise the economy ahead of the revival of the package, which was put on hold last year because of the pandemic. The new measures include a steep hike in electricity tariffs, imposition of Rs140b taxes and agreeing to grant unprecedented autonomy to the State Bank of Pakistan and their fallout would not be different from what people have already suffered.
While approving $500 million to support the budget and revive its programme for Pakistan, the IMF appreciated the authorities for making continued satisfactory progress under its programme, which it called an important policy anchor during an unprecedented period following the pandemic. “Fiscal performance in the first half of FY 2021 was prudent, providing targeted support and maintaining stability. Going forward, further sustained efforts, including broadening the revenue base, carefully managing spending and securing provincial contributions, will help achieve a lasting improvement in public finances and place debt on a downward path,” the IMF observed.
In return for the revival of the IMF package, the government has committed to generating more than Rs700 billion in additional revenues through general sales tax and income tax in the coming budget, increase power tariff by over 34pc (about Rs900b) and withdraw Rs140b worth of corporate income taxes through promulgation of two ordinances. It means people will start paying a heavy price for the new measures in the next few months. Life after the next budget will be even tougher.
Inflation is expected to increase in the weeks to come. According to the State Bank of Pakistan, recent hikes in electricity tariffs and sugar and wheat prices account for about 1.5 percentage points of the 3 percentage point increase in inflation between January and February out-turns. The recent increase in electricity prices will continue to manifest in headline numbers in coming months, keeping average inflation in FY21 close to the upper end of the previously announced range of 7-9 percent, it observed. Noting uncertainty around inflation and the growth outlook, the central bank warned that despite recent momentum, risks remain due to the emergence of a third, more virulent wave of COVID-19 in Pakistan. In terms of the inflation outlook, this summer’s wage negotiations and any new tax measures in the next year’s budget could add further supply-side shocks. Optimism about a stronger US-led world recovery this year is translating into higher international commodity prices, including both food and oil, which could continue to feed into domestic inflation, the SBP warned.
According to the Sensitive Price Indicator (SPI), inflation for the week ending on March 4, 2021, increased by over 0.6pc as compared to the last week of February. It is despite tall claims by the government that inflation is under control. The SPI for the week recorded nearly 148 points against 147 points registered in the last week of February. According to the Pakistan Bureau of Statistics (PBS), prices of just five items decreased whereas 22 items showed a consistent uptick in rates. Moreover, prices of 24 items persistently remained at the same high levels with no respite for the common consumer. Generally, prices of essentials skyrocket ahead of Ramazan, which will start after a few weeks.
Experts fear Pakistan’s economic challenges have been compounded by several factors. One is its failing state-owned enterprises. The domestic debt of the companies — which include Pakistan’s national airline and railway — increased by nearly 250pc between 2013 and 2018, and they continue to borrow heavily. To add to public woes, the Oil and Gas Regulatory Authority has asked the government to increase prices for gas consumers. If electricity and gas prices are increased further, it will become unbearable for the common man, who already finds it hard to make both ends meet. The opposition will also attempt to exploit the situation. Doubts had been raised about the ability of the PTI government to fix the economy. It has proved them true.
Risks to the economy still persist even after making harsh adjustments. Lack of political consensus, instability in prices, rallies by the opposition, rising inflation, low collection of revenue and trade deficit are still major challenges to the economy. The recent reports indicate that the next few years could be even harsher for the people of Pakistan. The government may have put the economy on the right path, but it has not benefited the people. The government has added to their problems by not taking action against people who create artificial price hikes. It will have to act now to address rising unrest among the people.