FeaturedNationalVOLUME 16 ISSUE # 19

Shifting gears to higher growth

New Finance Minister Shaukat Tarin believes Pakistan’s economy cannot grow substantially to meet the needs of the people, if the country continues its contractionary adjustments under a $6b bailout package of the International Monetary Fund. He wants to renegotiate “harsh” IMF terms and meet new targets and conditions by expanding the economy instead of suffocating it. He aims to boost public development spending, broaden the tax net and freeze power rates to check inflation. However, it will be difficult for him to revive the economy without leaving the programme or its targets, at a time when Pakistan’s current account deficit has started rising again and the growth strategy could further widen it. It could also add to inflation.

Prime Minister Imran Khan had hinted at a change in his economic policies, dictated by the IMF, when he removed his Finance Minister Dr Hafeez Shaikh after he held successful talks with the IMF to restart the package stalled after the onset of Covid-91 pandemic in Pakistan. Under the new conditions, the government was to increase taxes by a whooping Rs1.272 trillion in the next budget and hike electricity rates by almost Rs4.97 per unit in the remaining months of the current fiscal year. Obviously, it was not practicable, especially at a time when the pandemic continues to pose serious challenges to Pakistani lives and the economy.

After acting upon contractionary policies even before the start of the IMF package, the government has realised that stabilisation is no more affordable for Pakistan’s economy that should now shift gears to higher growth. Testifying before the National Assembly’s Standing Committee on Finance, Tarin said the higher power tariff was leading to corruption and affecting economic growth. “The conditions agreed to under the IMF programme were very harsh and the government would take alternative measures to reduce circular debt instead of tariff increases. Similarly, the tax net would be expanded instead of an increase in taxes to achieve revenue targets,” he explained.

Keeping in view Pakistan’s hardship after the third wave of the pandemic, the IMF has said that it stands ready to help Pakistan navigate the difficult situation it’s facing due to the Covid-19 crisis and a slowing economy. “We stand ready to support Pakistan to navigate the difficult situation it is facing due to the Covid crisis, while helping to ensure the objective of debt sustainability with strong and sustainable growth. We are looking forward to continuing discussions with the Pakistan authorities when the time comes for the sixth review,” the IMF said in a press statement.

According to the government, the country has been in the stabilisation mode since 2019, but it is no longer sustainable and if the policy continues, there would be no economic growth for the next two years, which could complicate the issues. Inflation, power sector, revenue and agriculture and growth are key challenges facing the country and there is no quick fix solution to them. The situation is compounding after Pakistan’s current account deficit has started rising again. The country posted a current account deficit of $47 million in March for the fourth month in a row. The data issued by the State Bank of Pakistan showed the current account deficit for March was slightly higher than that of February ($31m). In January, the deficit stood at $229m while it was $625m in December. Exports of goods have shown no significant improvement during the first nine months of the current fiscal; exports of goods were at $18.7b compared to $18.3b in the same period of last fiscal. However, imports of goods have shown a strong growth as they reached $37.4b against $34.1b in the same period of last fiscal year.

According to the Asian Development Outlook (ADO) 2021, Pakistan’s economy will grow by 2pc in 2021 as Covid-19 restrictions ease. Assuming the vaccine rollout is successful and economic stabilization measures are implemented, growth is expected to accelerate to 4pc in 2022, with improved consumption and investor confidence. “It is vital for Pakistan to continue to combat the pandemic by rapidly deploying vaccines and continuing with reforms to support economic recovery, including strengthening social protection and supporting the private sector,” it said in its latest report. It underscored that improving access to finance for small and medium-sized enterprises is essential to unlocking business opportunities and stimulating new jobs. The report says the industry appears poised for robust growth in FY2021, led by manufacturing and construction. Services are expected to rebound as retail and trade picks up. Whereas, agriculture is projected to see slower growth, mainly due to a sharply lower cotton harvest following heavy rains, pest attacks, and continued contractions in cultivated areas of land.

However, the biggest challenge for the government will be inflation. It has almost lost all by-polls because of high prices of food and bad governance. Prices remained abnormally high in Ramazan. Chicken sold at over Rs500/kg in Lahore. Flour and sugar were not available at government rates anywhere in the country. People have not seen harsher Ramazan in their lives. The Consumer Price Index jumped to 11.1pc in April over the same month a year ago. It was the highest rate of inflation in the past 13 months. In February 2020, inflation had jumped to 12.4pc. According to the Pakistan Bureau of Statistics (PBS), electricity rates were 29pc higher than a year ago and almost all food items recorded a double-digit rise in prices, including wheat, sugar, and flour. In April, chicken prices shot up almost 100pc, followed by an 81pc increase in prices of tomatoes, 42pc eggs and wheat prices were up by 27pc over a year. Cooking oil prices were higher by 19pc, sugar 18pc and flour 17pc in April. The inflation rate in urban areas increased to 11pc in April and in rural areas to 11.3pc. Food inflation also rose more in urban centres than in villages. In cities, it increased from 11.5pc to 15.7pc, a jump of 4.2pc within a month. In rural areas, it jumped from 11.1pc to 14.1pc, a surge of 3pc within a month.

Food and essentials have gone beyond the reach of the common people. The government will have to take urgent measures to bring down their prices. It also needs to increase its revenue and decrease its spending to save money to spend it on the welfare of the people. It is a race against time.