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  • Govt must offer financing to small and medium enterprises on easy terms

Pakistan’s economy is in crisis; worst inflation in Asia, high interest rates, an unstable currency, low exports, a record energy crisis and record circular debt, low tax collection and political unrest. Pakistan is probably the only country in the world which has a non-filer tax category. Tax rates for non-filers for different categories are slightly higher than the tax rate for filers. It was probably envisaged that people will get discouraged and would start filing tax returns and would come into the tax net instead of paying additional taxes, but it had an adverse effect. Instead of increasing the tax filers number, the number has actually decreased where a large number of people have stopped filing the tax return, which shows serious mistrust on the tax department and on the government policies.

Despite all this, the Pakistan Stock Exchange is bullish these days, it has crossed 56,000 points recently. This bullish trend is not without a reason, it is positive because of a number of factors; there are signs that inflation is finally coming down, a recent auction of PIB was on a reduced rate thus showing there would be a reduction in the policy rate in future, smuggling is also somewhat controlled that will benefit the local industry and market, whereas SFIC (Special Investment Facilitation Council) is trying to address the issues of the investors and removing the hurdles. The business community is satisfied with the work of SFIC.

It is expected that in coming weeks, the agriculture sector will pick up the pace, thus will help the fertiliser and tractor sector in particular. There was a time when Pakistan was food self-sufficient and was exporting surplus items but due to imprudent policies. Now, Pakistan is even importing wheat.

Mismatch subsidy

The current level of circular debt in gas and power sector is crossing PKR 4 trillion, which is just one costly item. The government is aggressively trying to manage the power and gas circular debts. Political governments are always reluctant to remove subsidies. There is a lot of reports and discussion on power sector circulate debt but there is also circular debt in the gas sector as well. So far there is a serious mismatch in the gas sector, the cost of gas is higher than the price at which it was being sold to the public. Recently, the caretaker federal government has taken a bold decision by increasing the sale price of gas thus trying to address the circular debt of the gas sector. This step will help generate cash for gas companies like OGGCL, PPL, SNGPL and SSGC, which will then onward benefit the government being the major shareholder in these companies. Realistically speaking, this mismatch is not a sustainable model, for decades the State has been giving subsidies to the gas and power sectors in particular, though there are many other sectors where subsidies are being given. There should be a proper mechanism of giving subsidies to the deserving people and sectors, giving subsidies without considering the requirement has created a burden on the national exchequer, which is unsustainable now.

The government agreed to a USD 3 billion bailout package with the IMF in July 2023, thus avoiding a balance of payments crisis. As Pakistan is under the IMF Programme, therefore, it has to take certain measures to stabilise the economy. One of the conditions of IMF Programme is to remove the subsidies and even if these are required, then offer the subsidies to the low-income group only.

As a matter of fact, IMF gives the guidelines within which a country has to work, however it is up the country to complete the programme or not. Pakistan broke its commitment with IMF in 2021-22 and consequently, IMF took a strong stance later and also refused to provide a bailout package without taking certain measures by the government. It took Pakistan almost a year to revive the IMF Programme and that too with a lot of additional conditions and measures. In a recent interview, the Managing Director of IMF said that “Pakistan has no option but to complete the reforms and stick to its commitments, it has to improve tax-to-GDP ratio as Pakistan has one of the lowest Tax-to-GDP ratio in the region, and most importantly, don’t spend what you don’t have.

As per IMF rules, if a country’s tax-to-GDP ratio is less than 15 per cent then there is a serious problem with the economy of that country, Pakistan’s tax-to-GDP ratio is less than 10 per cent. Moreover, IMF thinks that Pakistan’s debt crisis is on the border line and the country can go to any side anytime, which is again not a healthy sign. Pakistan’s inflows do not cover its outflows, Pakistan also doesn’t have enough foreign direct investment. Historically, the gap between inflow and outfow was filled by the foreign remittances, financial support from friendly countries and expensive debt. Now, Pakistan is having difficulty getting financial support from its friendly countries, as a new generation has come in there, priorities have changed and geo-political now plays a more important role in getting financial assistance from friendly countries.

Careful policies

Pakistan’s exports are less than its imports, due to which Pakistan is a net cash outflow country and it has to heavily rely on debt financing. This fiscal year, crops of sugarcane, wheat and cotton have shown very good results, even cotton has a record high crop this year, this will ease pressure on cash outflows. This will all also have a positive impact on the growth parameters. Money circulation is also high these days, which means spending is high, which means demand is high, thus import bill will also be high and thus pressure on the rupee will persist, and thus further devaluation is possible. Devaluation of Pak rupee thus takes away all the positive impacts on the economy. It must be kept in mind that every step or measure is inter-linked and if one string is pulled thereafter, some other string will definitely move as well. Therefore, it is important to form the policies carefully while considering all the aspects.

The Ministry of Finance, Commerce, Textile and Power should work closely and a coordinated effort should be made in this respect. There are many areas where Pakistan can still offer opportunities to international investors. For example, mining, agriculture, fishing are a few areas where investment can be attracted.

The financial sector of Pakistan is also performing, people are focusing on depositing their savings in the banks and banks are making high profits thus government is collecting high corporate tax from those banks. People are also now focusing on putting their money in the business thus a lot of economic activity can be seen today. If this momentum remains intact, then there is a possibility to revive the economy in 3 to 4 years’ time. Continuity is the key, wherever a country has made the progress and has shown growth, one single common factor is continuity. Unfortunately, in Pakistan we see 180-degree shift in the polices, be it economic or foreign, as soon as the new government comes in, they change the previous government’s polices. No economy can grow without flexible and effective foreign policy and foreign relations. Now economic and foreign relations are interlinked, therefore foreign office should also work as an arm of the economic affairs ministry.

Policy makers in Pakistan should also focus on incentivizing and developing local industry thus Pakistan should have locally manufactured goods and replace the imported items. There are so many daily-used items in the market which are either imported or smuggled. In this respect, the government should form a fund for supporting small and medium enterprises by providing financing on easy terms to SMEs. Pakistan can only progress if its SME sector is progressing.