FeaturedNationalVOLUME 18 ISSUE # 43

The urgency of informed policy decisions

The economic situation in Pakistan is currently marked by a deepening impasse, raising concerns about the country’s financial stability. This predicament is exacerbated by the reliability of data, which is essential for making informed policy decisions. Whether this issue stems from incompetence or deliberate misrepresentation, its consequences are far-reaching. In this context, we explore the critical challenges facing Pakistan’s economy, particularly the impact on the general public, the reliance on indirect taxes, and the role of the International Monetary Fund (IMF).

There is compelling evidence indicating that the economic deadlock is not only persisting but is deepening over time. Blame can be attributed to the finance ministry under Ishaq Dar’s leadership for implementing clearly flawed policies. These policies included attempts to control the rupee-dollar exchange rate when the country’s foreign exchange reserves were insufficient to cover even a month of imports. This led to a sharp decline in remittance inflows through official channels. Additionally, there was a 21 percent increase in current expenditure compared to the budgeted amount for the year. Dar’s predecessor, Miftah Ismail, managed to reach a staff-level agreement with the IMF in August 2022, and his predecessor Shaukat Tarin also succeeded in reaching a staff-level agreement for the sixth review in January 2022, just three months before the vote of no-confidence against the then Prime Minister, Imran Khan.

Nevertheless, it is imperative to consolidate the achievements of the outgoing Prime Minister Shahbaz Sharif in securing the Stand By Arrangement (SBA) with the IMF. This agreement not only facilitated the disbursement of promised loans exceeding 5 billion dollars from friendly countries but also played a crucial role in preventing a sovereign default.

The fiscal space available to the interim government is severely limited, primarily due to the current year’s budget projecting a 26 percent increase in current expenditure from the revised estimates of the previous year—from 10.52 trillion rupees to 13.3 trillion rupees. This necessitates a very stringent fiscal policy, with a target of 9.4 trillion rupees in tax revenue, compared to the revised estimate of 7.2 trillion rupees for the outgoing year—a 28 percent increase that is unlikely to be achieved in a single year, given historical precedent, without the implementation of a mini-budget.

Recently, the Pakistan Bureau of Statistics (PBS) uploaded four perplexing and uncoordinated sets of data. The Consumer Price Index (CPI), which includes imported inflation, decreased from 28.3 percent in July to 27.4 percent in August. Simultaneously, the rupee depreciated from 281 rupees to the dollar in July 2023 to 294 rupees to the dollar in August 2023, according to data released by the PBS in August’s trade statistics. Administrative import restrictions were partially lifted in accordance with the agreement under the Stand By Arrangement (SBA) with the International Monetary Fund (IMF). This resulted in a rise in imports, increasing from a total of 3.7 billion dollars in July 2023 to 4.48 billion dollars in August.

Core inflation, year on year, excluding food and energy, remained constant at 18.4 percent in both July and August 2023. However, month-on-month urban core inflation increased from 1.21 to 1.8 percent, while rural core inflation rose from 1.2 to 2.8 percent. Finally, the Sensitive Price Index (SPI) for the week ending August 31, 2023, compared to the week ending September 1, 2022, as per the PBS website, shows a negative 21.96 percent decline in electricity charges for the first quarter. This claim lacks supporting actual data.

The situation is deeply concerning, as the availability of accurate data is a fundamental requirement for making well-informed policy decisions. If the issue stems from a lack of competence, it is essential to promptly bring in qualified statisticians to address this problem. However, if it turns out to be a deliberate attempt to portray a performance not supported by the actual ground realities, the consequences could be severe, potentially leading to widespread public anger and exacerbating an already precarious situation.

It is crucial to consider that the Federal Board of Revenue (FBR) heavily relies on indirect taxes, accounting for over 80 percent of its revenue. Given recent increases in electricity bills and petroleum prices, the general public’s ability to withstand any additional price hikes, especially those not employed by the government, has been significantly compromised.

While the outgoing government budgeted for a substantial increase in state employee salaries, ranging from 30 to 35 percent, this may help them maintain their purchasing power at last year’s levels. However, the majority of the workforce operates in the non-government sector. They are not only grappling with stagnant wages due to the ongoing economic deadlock but also facing the closure of many industrial units due to a lack of demand for their products. This has led to increased unemployment, pushing numerous families below the poverty line.

To depend solely on the approval of proposals regarding electricity bills from the International Monetary Fund (IMF) suggests a lack of innovative solutions within the current cabinet. The caretakers have several decisions at their disposal that do not require IMF intervention. These include reducing current expenditure, engaging in negotiations with domestic stakeholders to implement much-needed and long-overdue reforms, and enforcing income tax collection from those who are currently not filing their returns, particularly among traders. Additionally, compelling the provinces to tax wealthy landowners at a rate similar to that of the salaried class could also be explored as a means to generate revenue.

In light of the ongoing economic crisis, it is imperative for Pakistan’s leadership to address the challenges at hand with urgency and prudence. Ensuring the accuracy of economic data should be a priority to facilitate well-informed policy decisions. The heavy reliance on indirect taxes necessitates a comprehensive approach to alleviate the burden on the general public. Moreover, the government must explore domestic solutions and reforms to stimulate economic growth rather than solely relying on external organizations like the IMF. By taking these steps, Pakistan can work towards a more stable and prosperous economic future.