FeaturedNationalVOLUME 19 ISSUE # 2

Pakistan’s silent crisis

Pakistan’s Sensitive Price Indicator (SPI) reflects a nuanced economic landscape. Despite a marginal decline in weekly inflation, the country faces persistent challenges, particularly in the wake of soaring energy prices. The World Bank’s recent revelations further underscore the urgency of addressing a regressive taxation system and a silent human capital crisis, signaling a crucial juncture for the country’s future.

The Sensitive Price Indicator (SPI), a crucial gauge of weekly inflation, saw a slight decrease of 0.06% in the week ending on Nov 23, offering a minor respite. Nonetheless, the SPI index remains elevated at 308.9 points, close to the previous week’s high, as reported by the Pakistan Bureau of Statistics (PBS). The decline in the index on a week-on-week basis is attributed to a reduction in food prices, while energy (fuel) prices mostly continued their upward trajectory throughout the week. In the preceding week, the SPI index had surged to 309.1 points, marking a multiyear high with a significant increase of 9.95%. This surge was primarily driven by a substantial rise in gas prices affecting consumers across the board.

On a year-on-year basis, the weekly inflation reading experienced a staggering increase of 41.13% compared to the same week in the previous year. This underscores the persistent challenges in managing inflation, especially following the substantial increase in energy prices. Out of the 51 tracked items, 18 (35.29%) recorded price increases, 12 (23.53%) witnessed decreases, and 21 (41.18%) remained unchanged during the week. Gas charges for Q1 on a yearly basis witnessed a remarkable spike of 1108.59%, significantly contributing to the overall inflation. Other commodities recorded increases ranging from 2% to 95%, including cigarettes, wheat flour, chili powder, and broken basmati rice.

Analysts predict that the recent increase in gas prices will likely keep the benchmark monthly inflation reading, measured through the Consumer Price Index (CPI), near 27% in November 2023. Additionally, it is anticipated that the gas price hike will contribute to a 2 percentage point increase in inflation for each of the next 12 months, starting from November 2023.

Despite these concerns, Pakistan’s central bank maintains its original forecast for an average monthly inflation reading in the range of 20-22%, citing a potential offset from a drop in the prices of other commodities. According to the World Bank, Pakistan is at a tipping point crisis where it must decide whether to persist as a laggard, with 40% of the population living below the poverty line under elite capture and policy decisions influenced by strong vested interests of military, political, and business leaders. Alternatively, it can choose to change course for a brighter future. This stark warning precedes the new election cycle for the upcoming government, emphasizing the need for early choices. The World Bank underscores that international lenders and development partners can offer advice based on global experiences of successes and some financing, but critical decisions and course corrections must be made within the country.

The World Bank’s revelation that Pakistan lags behind regional countries in terms of human capital and poverty reduction, even compared to much of the African region, comes at an inopportune time for the government. Inflation and unemployment are already at record highs, with an extremely contractionary IMF bailout program needed to stay solvent, ruling out any chance of the government providing relief anytime soon. As rightly noted by the bank’s global director, Pakistan’s economic growth is too low to effectively reduce poverty.

Hence, it must prepare for the ongoing trend of people slipping back below the poverty line, which commenced during the COVID lockdowns, to intensify over time. Interestingly, the World Bank (WB) also highlighted Pakistan’s “regressive taxation system” as a significant part of the problem.

The reliance on indirect taxes, disproportionately affecting the poor more than the wealthy, has gradually increased in direct proportion to the country’s financial challenges. With additional revenue required to meet the stringent conditions set by the IMF, more pressure is being exerted on the middle and lower income classes, exacerbating the twin challenges of poverty and human capital.

The WB director strongly emphasized the large number of stunted children in the country. Shockingly, 40 percent of children under five years of age are stunted, posing a serious challenge to the country’s long-term growth. These children will face disadvantages throughout their lives, experiencing malnutrition and compromised childhoods. Those fortunate enough to receive an education will lag behind due to less developed brains, and further challenges will arise when they enter competitive job markets.

Consequently, we are confronted with a whole generation that will be subpar through no fault of their own. The WB terms this a silent human capital crisis. The bank also suggests solutions such as focusing on reducing child stunting, developing the private sector, addressing the financially draining energy sector, improving water resources for the agriculture sector, and increasing investments by creating fiscal space through tax reforms and expenditure reductions.

However, these solutions, although valid, are not new and have been known to successive administrations. This underscores that our leaders bear responsibility for many of our avoidable troubles. Once a vibrant, liberal, and growing country, we have now fallen behind even some African nations due to the looting, plunder, and corruption at the top.

With another election on the horizon, we are hearing the same old promises—the shameless, exploitative quest for votes. However, it may already be too late to rescue the country from itself. There is no more time or money to transform production, exports, health infrastructure, or save financially hemorrhaging state-owned enterprises (SOEs). Nevertheless, fixing the taxation system remains a possibility, contingent on the elite subjecting themselves to taxation.

As of now, none of that has materialized. However, with the country truly on the brink, there is no other choice—even the elite, who have benefitted for so long, must contribute.

As another election looms, promises abound, but the echoes of past pledges linger. The pressing need to rescue the nation from economic distress demands immediate action. While transformations in production, exports, and healthcare seem elusive, reforming the taxation system remains a viable path. The onus lies not just on the common citizen but, crucially, on the elite who must contribute to pull Pakistan back from the brink. The country stands at the edge of a precipice, and the time for meaningful change is now.