The economic scenario is marked by a persistent rise in power sector circular debt, a tax structure heavily reliant on indirect taxes, and a staggering 40 percent poverty level. Despite attempts to address these issues, the hurdles appear formidable, with the burden disproportionately affecting the poor. The caretaker setup’s efforts to deal with power sector circular debt through tariff increases have sparked discontent among lower-income segments, exacerbated by inflation and the ongoing crackdown on electricity theft.

As Pakistan grapples with a complex economic landscape, recent statements from Caretaker Finance Minister Shamshad Akhtar shed light on the underlying issues hindering sustained growth. She emphasized the detrimental impact of prolonged economic and political instability on the country’s growth trajectory. While she underscored the importance of structural reforms to support economic growth, the failure of successive administrations to implement these reforms, particularly under the International Monetary Fund (IMF) programs, continues to pose significant challenges.

Shamshad Akhtar highlighted the detrimental impact of economic and political instability on Pakistan’s economic growth. Emphasizing the necessity of structural reforms to support economic growth, she pointed to the failure of successive administrations in implementing structural reforms under the previous twenty-three International Monetary Fund (IMF) programs.

The visible consequences of this failure include the persistent rise of power sector circular debt, currently estimated at 2.3 trillion rupees. Additionally, the tax structure heavily relies on indirect taxes, constituting 60 percent of the budget. This tax burden disproportionately affects the poor, given that 75 percent of all direct tax collections are levied as withholding taxes in the sales tax mode, categorized as an indirect tax. This overreliance on indirect taxes contributes to the current 40 percent poverty levels, raising concerns about the potential for civil unrest.

The caretaker setup has attempted to address the power sector circular debt through tariff increases, a policy followed by previous administrations. However, this has sparked visible anger among lower-income levels, exacerbated by the persistent 30 plus percent Consumer Price Index (CPI) inflation in the past year. A crackdown on electricity theft, initiated during the previous Pakistan Muslim League-Nawaz (PML-N) administration, has generated over 50 billion rupees but remains insufficient given the scale of circular debt.

The need for the government to renegotiate contracts with Independent Power Producers (IPPs), particularly those under the China Pakistan Economic Corridor, is emphasized. The prevailing situation in the power sector serves as a warning for the Special Investment Facilitation Council (SIFC) regarding potential future burdens on the common man in contract agreements.

While the caretakers’ capacity to change the taxation structure is limited, they have approved a levy of windfall profits on banks. Efforts to widen the income tax net have been initiated by attaching due taxes of around one million identified non-filers. However, more significant reforms, including a shift from indirect to direct taxes, are deemed necessary for the next IMF program.

The caretakers must focus on reducing current expenditure, a measure uniquely within their purview since they were selected after consensus among all stakeholders. Despite the massive slashing of the Public Sector Development Programme, there is no evidence that the caretakers have addressed this vital measure, potentially impacting growth negatively.

Moreover, although farm output has experienced a significant increase this year, particularly in crops like cotton, wheat, and rice, a common occurrence after soil enrichment from heavy floods in the previous year, the large-scale manufacturing sector is unlikely to witness substantial improvement. This is attributed to elevated input costs, notably high interest rates leading to a negative 291.1 percent credit to the private sector from July to October 6, 2023. Additionally, high utility charges and increased transport costs due to the petroleum levy further contribute to the sector’s challenges, with a modest 0.5 percent registered improvement in July-August 2023 according to the Finance Division.

It is evident that substantial reforms are imperative to break free from the elite capture, a transformation that is both achievable and sustainable under an elected government. Disturbingly, Nawaz Sharif is asserting success in the economic arena during his previous government tenure, a claim contradicted by the need for his own party to reverse flawed policies post his removal. Furthermore, the PTI government inherited the worst-ever current account deficit, while the PPP (Pakistan People’s Party) focuses on securing seats in the upcoming elections, and PTI offshoots center their attention on addressing mismanagement and corruption from September 2018 to March 2022.

The expectation is for these political parties to shift their focus towards articulating a clear path forward and presenting concrete plans that outline much-needed reform-oriented economic policies.

While the caretaker government grapples with these challenges, the need for substantial reforms is evident. The reliance on indirect taxes, especially considering their impact on poverty levels, calls for a strategic shift in taxation policies. The looming threat of civil unrest necessitates a proactive approach, particularly in renegotiating contracts with Independent Power Producers (IPPs), especially those associated with the China Pakistan Economic Corridor (CPEC).

As the country awaits the next elected government, there is a crucial opportunity for political parties to focus on articulating comprehensive plans for reform-oriented economic policies. Breaking away from the elite capture requires a commitment to sustainable change, and this can be achieved under the leadership of an elected government with a forward-looking economic agenda. The resilience of Pakistan’s economy, amid these challenges, underscores the urgent need for collaborative efforts and visionary policies to secure a stable and prosperous future.