Grim outlook
The repercussions of the combination of low growth and high inflation are becoming increasingly evident day by day. Following warnings from various international financial institutions regarding deteriorating human development indices, the World Bank has now also issued a cautionary statement, indicating that “over 10 million additional individuals in Pakistan are at risk of falling into poverty.”
This outcome is a direct consequence of stubborn inflation rates ranging between 25-30 percent coupled with a sluggish growth rate of 1.8 percent. International institutions are highlighting these issues, which the State Bank, Federal Bureau of Statistics (FBS), and the finance ministry should have been addressing vocally for quite some time.
The World Bank’s biannual Pakistan Development Outlook predicts that the country will miss all major macroeconomic targets this year. Unfortunately, this is hardly surprising, given the historical trend of finance managers consistently failing to meet budget targets.
Unless a miracle occurs, Pakistan is likely to fall short of its primary budget target yet again, resulting in a deficit for the third consecutive year despite the IMF’s insistence on achieving a surplus.
The implications of this shortfall in negotiations for an Extended Fund Facility (EFF) following the Stand-By Arrangement (SBA) remain to be seen. However, it is expected that it will lead to even more stringent “upfront conditions” from the IMF, as experienced by client countries like Pakistan, to swiftly comply.
Even the most conservative estimates place the current poverty rate at around 40 percent. With the World Bank warning of an additional 10 million individuals at risk of slipping below the poverty line, prospects for improvement appear bleak.
The government lacks fiscal flexibility to implement any substantial pro-poor subsidy programs, as long as it remains dependent on an active IMF program to manage debt obligations and mitigate the risk of default. Furthermore, the heavily skewed taxation system, which disproportionately burdens the poor through indirect taxes while exempting the elite, poses a significant obstacle to meeting IMF benchmarks. Consequently, the next Development Outlook from the World Bank may present an even grimmer picture of Pakistan’s poverty trends.
There is little indication of significant improvement in economic growth, especially with utility prices on the rise once again. Meanwhile, poverty alleviation efforts seem stagnant, leaving the government in the role of a passive observer as the poverty crisis worsens.
Pakistan finds itself in a familiar phase of the debt cycle, where fiscal constraints spill over into various sectors, exacerbating issues such as poverty, unemployment, and social discontent. This is reflected in the country’s recent drop to the bottom of the UN Human Development Index, as highlighted in the 2023-24 report—a development that, while not surprising, remains deeply concerning.
The Human Development Index (HDI) evaluates progress in three key areas: longevity, education accessibility, and living standards. While Pakistan’s decline to a position below countries like Haiti and Zimbabwe underscores the dire state of affairs, it’s only part of the grim reality.
The government is financially crippled, unable to address this collapse, and prospects for improvement remain distant. Following provincial allocations under the NFC award, the government lacks sufficient funds even to cover debt interest payments, exacerbating the situation.
It’s imperative that the elite now bear their share of the burden. The persistent reliance on middle and lower-income groups for tax revenue has exacerbated Pakistan’s human development regression.
However, there’s little evidence of a shift in mindset at the top. Despite discussions about taxing affluent individuals with political connections who evade contributing to the treasury, the perceived response from the prime minister has been to protect their interests.
As Pakistan prepares for another IMF program, it must ensure that harsh conditions aren’t disproportionately imposed on the working class. Continued reliance on regressive indirect taxes, which disproportionately burden the poor, risks sparking violent protests.
Make no mistake: this path leads inevitably to the next phase of the debt cycle. While the global HDI has rebounded to pre-Covid levels, Pakistan’s trajectory has reversed, raising ominous concerns.
These warning signs have historically been disregarded by successive Pakistani governments, perpetuating the suffering of the populace. Many endure a quality of life only marginally better than that of war-torn regions.
Once again, the government finds itself financially strapped. Any relief must come from the IMF in the form of relaxed subsidy arrangements, contingent upon the generation of additional fiscal space—an endeavor hindered until decisive action is taken to tax the affluent.
The Human Development Index (HDI) paints a bleak picture of Pakistan’s current state, with the nation falling below countries like Haiti and Zimbabwe. This decline reflects not only a deteriorating quality of life but also systemic issues that demand immediate attention. The government’s financial constraints, exacerbated by persistent reliance on regressive taxation, threaten to deepen the crisis. Urgent action is needed to address these challenges and pave the way for a brighter future.
Pakistan stands at a critical juncture, grappling with a human development crisis that demands urgent intervention. The government’s inability to address this collapse, coupled with persistent socioeconomic inequalities, underscores the pressing need for change. As the nation fights its financial challenges, it must prioritize reforms that promote fairness, equity, and inclusivity. Only through concerted efforts to address systemic shortcomings can Pakistan hope to reverse its downward trajectory and build a more prosperous and equitable society for all its citizens.