- New government must take tough structural reforms for optimal solution
There is a prevalent misconception that holding of national elections (whenever they are held) is the panacea to all our economic woes and all challenges will automatically resolve once the incumbent government takes over. The main issue is that how the new government plans to address the poly-crises it is going to inherit as none of the political parties appear equipped to resolve the economic issues plaguing Pakistan.
Concerns have also arisen about the capability and competence of state institutes in effectively managing these challenges. While it may be argued under which government Pakistan suffered the most during the last 76 years, one thing is for sure: none of the governments undertook tough structural reforms as each one of them did not want to hurt their political base. Whether it is the policy of using SOEs as employment agencies, wreaking havoc with the exchange rate or extending unfunded subsidies to the elite, all these factors have contributed to where Pakistan is standing today. The successive administrations knew all that was wrong all along but did not do anything about it. The policy makers have either been blind or did not care to enhance the overall productivity as it does not suit their purpose. There are powerful insiders that influence the decision making process to maximise their own benefits.
The primary challenges facing Pakistan are many including political instability, corruption, uncompetitive trade regime, poor infrastructure, bureaucratic red-tapism, slow pace of privatisation of SOEs, tax and tariff policies, lack of uniform rules across the board and inconsistent policies etc. It is clear that misplaced priorities and directionless policies are the real cause of the economic crises that Pakistan is embroiled into. The economy is at a critical stage and painful structural reforms will have to be enacted. There is also dire need to expand the selective tax base instead of vertically increasing by including agriculture and other mega-revenue producing segments like retail industry. Moreover, with the privatisation of SOEs, Pakistan can look at a quick recovery and long term benefits in a short period of time as this will enhance our capacity to generate revenues internally.
Expenditures in the current fiscal framework account for a substantial 19.7 per cent of the GDP, while revenue generation lags at only 10.5 per cent of GDP. A mere 2.5 per cent of GDP is earmarked for developmental initiatives. The government should prioritize expanding the tax base instead of increasing tax rates. It is crucial to integrate individuals across income levels and the informal sector into the tax system. Moreover, the allocation of undue subsidies and tax incentives to specific interest groups should be restrained.
By discontinuing these exemptions and concurrently broadening the tax base, the government may improve the tax-to-GDP ratio from its current 10.5 per cent to 13 per cent in the short term, with a potential of reaching 18% in the long run. State-owned enterprises (SOEs) present a persistent fiscal challenge, with the top 14 SOEs registering losses of Rs458 billion and accumulating circular debts that strain the national economy.
Leveraging a private-public partnership approach and partial privatization can enhance operational efficiency and reduce fiscal deficits. Elevated interest rates have further exacerbated operational costs, while high inflation has eroded purchasing power, contributing to a projected poverty rate of 37.2 per cent and a 38 per cent decline in purchasing power, driven by soaring food costs in 2023. Implementing the Treasury Single Account and phasing out subsidies has the potential to save over Rs850 billion in the short term and more than Rs1.4 trillion in the long term.
Support of the local industry and foreign direct investment are the two great avenues that can save us in the short term and build us in the long term. Looking at Pakistan’s debt servicing and precarious balance of payments position, there is need to boost industrial production and for that mobilisation of foreign resources is urgent.
More borrowing will further aggravate the situation. It is therefore, essential to prioritize a clear path of policy structure that will streamline investments for at least the next decade irrespective of any political change. Creation of one-window operation under SIFC is a step in this direction which aims at attracting $12 billion per year but the ground realities suggest otherwise. The cost-push factors (a massive increase in gas tariff, ongoing hikes of electricity charges and collection of petroleum development levy on petroleum products), combined with growing political uncertainty are bound to hurt the entire export sector, particularly goods exporting industries. This will affect individual businessmen and all small and medium enterprises — the backbone of the domestic economy — and an essential part of the supply chain of export-oriented industries. Any gain achieved in goods and services export proceeds would be marred by increase in cost of doing business.
On the export side, nearly half of Pakistan’s goods’ export earnings come from five destinations. Diversification and retention of export markets is equally important from a sustainability point of view. Despite GSP plus status, Pakistan has not been able to increase exports to the EU corridor. Competing with economic giants like China and India in exports of traditional items is impossible for Pakistan in the near future due to the ever-escalating cost of production and lack of the required level of technological advancement and innovation. Pakistan can focus on niche products to boost its market share in global trade. One option for Pakistan is to export more traditional items to the GCC region, Central and South-East Asian countries. Now, the caretaker government and the State Bank of Pakistan are making some good efforts to boost services exports, particularly exports of IT and software. It is also incentivising freelancing not just for exports but also to help the educated class of jobless people earn a decent living.
Amidst such a politico-economic situation, it will be too much to expect foreign investors to come to Pakistan and it will be too challenging for goods export industries to export more. The current circumstances call for decisive actions to bring about substantial change by putting the house in order, including the cessation of subsidies that primarily benefit the affluent, comprehensive tax reforms, the regularisation of the real estate market, and prudent expenditure reductions.