FeaturedNationalVOLUME 18 ISSUE # 46

Unsustainable socio-economic model

Pakistan faces a pressing dilemma as its poverty rate soars to 39.4 percent, forcing 12.5 million people below the poverty line in the outgoing fiscal year. This dire situation underscores the failure of the existing economic development model to mitigate poverty. In this context, we delve into the implications of the over-reliance on indirect taxes, the root causes of the electricity crisis, and the thwarted remedies proposed by economists. Furthermore, we examine how influential figures along with powerful cartels hinder progress. It is essential to explore these challenges and consider potential solutions to ensure a brighter socio-economic future for Pakistan.

World Bank officials, during their press briefing, highlighted that Pakistan’s poverty rate had increased to 39.4 percent in the past fiscal year. This rise pushed 12.5 million people below the poverty line, serving as a clear indicator of the failure of the economic development model in alleviating poverty. According to government data, a significant portion of those who recently fell into poverty did so due to the persistent decline in large-scale manufacturing (LSM) growth, which registered a negative 15 percent for the year 2022-23 and a negative 10.3 percent for the month of July this year. This decline is primarily attributed to the low base of LSM, rather than any substantial increase in output, as suggested by the Monetary Policy Committee and the Caretaker Finance Minister.

The government’s role in this concerning situation is evident through its escalating current expenditure, which is crowding out private sector credit. Private sector credit witnessed a negative growth of 178.6 percent in the last fiscal year. While the decision of the former Finance Minister, Ishaq Dar, to increase the budgeted current expenditure for the ongoing year by 26.5 percent, compared to the revised estimates of the previous year and more than 50 percent compared to the budgeted amount for the previous year, can be attributed to a lack of economic expertise and political pressures within his party, the same justification cannot be extended to the caretaker government.

It is imperative for the caretaker administration to engage all stakeholders who played a role in their appointment and advocate for substantial voluntary reductions in their budgeted allocations. This, in turn, would alleviate the need for further tax hikes and could provide leverage in negotiations with the International Monetary Fund, potentially resulting in relief for the vulnerable segments of the population. The budget allocation for the current year for the Benazir Income Support Programme stands at 466 billion rupees, an amount that falls significantly short of meeting the needs of the newly impoverished individuals. With inflation exceeding 27 percent, the monthly cash disbursement per beneficiary is increasingly insufficient to cover even a week’s worth of essential food items for a family of five.

It is essential to recognize that poverty not only fuels public discontent that may lead to street violence but also contributes to various forms of crime, both petty and organized, including smuggling. In essence, illegal activities by smugglers and speculators are likely to resurge once law enforcement agencies ease up on their ongoing crackdown, a situation that cannot be sustained indefinitely given the required manpower and resources.

Critics will undoubtedly question the viability of economic policies that have been in place for most of Pakistan’s 76-year history, particularly in light of the growing concentration of elite interests in the current budgeted expenditure. This trend is evident in both civilian and military expenditures, encompassing wages and procurement, as well as the failure to reform the pension system, which lacks employee contributions. Furthermore, there is an increasing dependence on indirect taxes as a primary source of revenue, and these taxes tend to have a greater impact on the poor compared to the wealthy.

Hence, there should be no doubt in concluding that this economic model is no longer viable from a socio-economic perspective. This fact is evident in the widespread dissatisfaction with the recent electricity price hike. Historically, Pakistani governments, both caretaker and elected, have often attributed the rise in utility tariffs to IMF programs. However, they tend to avoid addressing the fundamental issue behind the electricity crisis, which is the signing of contracts favoring Independent Power Producers. Some of these contracts, including those under the China Pakistan Economic Corridor, may have resolved the country’s electricity generation deficit but have also contributed to consumers’ inability to meet the increased bills.

Examining fuel prices alone does not provide a comprehensive picture, given the imposition of a 60 rupee per liter petroleum levy, aimed at financing the government’s continually escalating current expenditure, amounting to 869 billion rupees in the current year alone.

Numerous studies conducted by independent economists and those sponsored by international organizations have not only identified shortcomings in the development model but have also proposed remedies grounded in sound economic principles. These proposed remedies have repeatedly been derailed by influential figures within the government, including both civilian and military establishments, as well as cartels that thrive in various sectors, even where market conditions should ideally foster perfect competition due to the significant number of buyers and sellers.

One glaring example is the sugar cartel, which not only maintains prices well above what market forces would dictate but also manages to secure export subsidies. In conclusion, solutions for each sector and subsector are readily available in reports that have unfortunately been left to gather dust within the relevant ministries. The primary issue remains the continued influence exerted by the elite, although even those elites situated at the lower end of the spectrum are beginning to experience a decline in their quality of life.

Nevertheless, there is no indication of ongoing negotiations with major recipients of current expenditure to voluntarily reduce their budgeted allocations for the year. Nor is there any progress in broadening the tax base to encompass those who remain outside it, not due to their income but due to the significant influence they continue to wield over economic decision-makers.

In Pakistan, the sustainability of the current socio-economic model is in question, given its adverse impact on poverty rates and the burden of indirect taxes on the less privileged. The electricity crisis persists due to unfavorable contracts with Independent Power Producers, affecting consumers’ ability to meet rising bills. Economists have identified remedies, yet they often remain unimplemented due to the influence of government elites and cartels. While some elites may also be feeling the strain, progress toward equitable change remains sluggish. To secure a better future, it is imperative to engage in negotiations for reduced budget allocations and expand the tax base, ensuring that economic decisions benefit all segments of society.