The remarkable economic performance observed in recent times has generated considerable interest and optimism. However, this success has inevitably given rise to important questions concerning its potential for long-term sustainability. While economic achievements can be cause for celebration, understanding the factors underpinning this performance and evaluating whether they can be maintained is crucial for informed decision-making and forecasting. In this context, it becomes imperative to delve deeper into the current economic landscape, identify the drivers of this impressive growth, and assess the challenges and opportunities that may influence its endurance in the future.

In the second quarter of 2023, Pakistan’s economic landscape presents a mix of achievements and challenges. The government appears to have made significant strides in meeting its fiscal and revenue targets, garnering international confidence in the process. However, a closer examination reveals potential pitfalls and political implications, urging us to consider the sustainability of these outcomes.

Pakistan appears to have outperformed its initial economic goals for the July-September quarter. The interim government seems poised to secure a $710 million IMF tranche in December. However, the road ahead will present challenges, as the IMF review team is anticipated to suggest additional, possibly unpopular, targets for the ongoing quarter. The results released by the finance ministry paint an optimistic picture. With a fiscal deficit of just 0.9 percent of GDP in July-September, a subtle yet significant improvement from the previous year’s 1 percent, the country appears to be making positive economic strides.

This success has also allowed Pakistan to surpass another target: achieving a primary surplus of Rs417 billion, exceeding the IMF’s requirements. Nevertheless, some economic experts express doubts about the sustainability of the outcomes. Upon closer examination, the experts identify two primary factors contributing to the attainment of the fiscal deficit target: substantial cash surpluses from Balochistan and Sindh and a significant increase in the petroleum development levy during the July-September quarter.

Other fiscal adjustments include substantial cuts in federal subsidies and developmental spending. While these achievements may appease the IMF, they are likely to have political repercussions. The surge in the petroleum levy will directly impact provincial finances derived from the federal divisible pool, and the introduction of higher fixed monthly charges on gas bills challenges the spirit of federal devolution. These measures could generate billions for the federal government but come with potential political costs.

However, political parties, particularly the PPP, the main advocate of provincial autonomy, have remained silent on these developments. Regional fiscal dynamics also warrant attention. During the rule of the Pakistan Democratic Movement (PDM)-led government, finance ministers from Punjab and Khyber Pakhtunkhwa expressed concerns about achieving cash surpluses under the IMF agreement. The top leaders of the PDM and the PPP, which was part of the coalition government but not the multi-party alliance, publicly suggested filing cases against those finance ministers for their statements.

However, in the July-September quarter, Punjab exceeded its expenses by Rs28.6 billion, and KP by Rs10.31 billion, while Balochistan and Sindh maintained commendable cash surpluses. Such fiscal disparities amidst upcoming elections raise suspicions, suggesting potential political maneuvering. The silence of the beneficiaries in response to these peculiar developments is conspicuous.

Another significant challenge was keeping the circular debt below the agreed limit with the IMF. In July-September, it reached Rs2.54 billion, which remained within the limit. It is anticipated that the overall circular debt will decrease further during this quarter. Moreover, there were no additional grants in the first quarter, and the government’s salary bill increased at a rate lower than inflation. Achieving these targets indicates that the finance and energy ministries are likely content with their performance.

On the revenue front, the government successfully met both its tax and non-tax targets in the July-September quarter. Total revenue for this period reached Rs2.68 trillion, equivalent to 2.5 percent of the GDP. Within this, tax revenue amounted to Rs2.21 trillion (2.1 percent of GDP), representing a slight improvement from the previous year’s Rs1.78 trillion (2.1 percent of GDP). Non-tax revenue in the first quarter amounted to Rs468.81 billion (0.4 percent of GDP), a notable increase from Rs234.9 billion (0.3 percent) in the same period last year. The Federal Board of Revenue (FBR) also exceeded its revenue target by collecting Rs2.04 trillion in the first quarter, surpassing the goal of Rs1.98 trillion. Furthermore, the pending refund ceiling was reduced from Rs247 billion to Rs198.5 billion.

All structural objectives were successfully achieved, with no tax amnesty, preferential tax treatment, or exemptions. Additionally, the processing time for imports and exports was reduced to 52.8 hours from 98 hours, and banks gained access to civil workers’ asset declarations. The FBR is confident that the upcoming IMF review will reflect positively on tax collection.

The forthcoming monetary policy review by the central bank is expected to confirm compliance with the IMF’s conditions. The State Bank of Pakistan (SBP) has also expressed confidence in meeting all other IMF conditions, including targets for the forward book, net international reserves, and net domestic assets. A recent crackdown on exchange rate manipulators and illicit trades has further reinforced this influence, resulting in the stabilization of the rupee at around Rs277 per dollar, down from a peak of Rs335 in September. This has immediately provided relief, particularly through a significant reduction in fuel prices.

To sustain these fiscal achievements, policymakers must address the challenge of monitoring cash repositories such as bank lockers, which are estimated to hold around $10 billion. Currently, there is no law in Pakistan that requires locker holders to declare the assets stored within. Policymakers are also considering the gradual phasing out of the Rs5,000 banknote. However, implementing these measures is expected to be challenging, a reflection of the broader complexity involved in fixing the entire economy.

While Pakistan’s recent economic accomplishments, including revenue surpassing targets and improved currency stability, are commendable, policymakers face crucial challenges ahead. Ensuring the continuity of fiscal successes demands vigilance over unregulated cash repositories and potential currency reforms. The true test lies in the ability to navigate these hurdles and sustain the positive momentum in the broader context of fixing the country’s entire economic framework.