As Pakistan grapples with significant economic challenges, a multifaceted approach is required to address its fiscal deficit and ensure economic stability. The International Monetary Fund (IMF) has expressed concern that the fiscal deficit may widen to 7.6% of GDP, surpassing the target of 6.5%, for the fiscal year ending in June 2024. In light of these economic difficulties, the federal government has already initiated a 25% reduction in public sector development plans, from Rs800 billion to Rs600 billion, and further budget cuts may be inevitable.
Pakistan faces a complex economic landscape where its exports, remittances, and foreign direct investment do not suffice to meet the total imports bill and facilitate the repatriation of profits and dividends by multinational companies operating within its borders. The State Bank of Pakistan’s foreign exchange reserves, totaling $7.647 billion, are insufficient to cover even two months of goods’ imports. Moreover, the revival of large-scale manufacturing remains elusive, contributing to growing joblessness and poverty. Estimates from the World Bank and the IMF suggest that unemployment rates stand at 10% and 8%, respectively.
To address these challenges, the World Bank has recommended that Pakistan fully tax three critical sectors: agriculture, real estate, and retail trade, in an effort to contain the fiscal deficit. However, implementing these recommendations is far from straightforward.
While the caretaker federal and provincial governments may reach a consensus on taxing agriculture, this agreement could prove fragile when new elected governments assume power. The alignment of incoming elected governments with the economic policies promoted by the civil-military-run Special Investment Facilitation Council, especially those requiring a consensus between the Center and the provinces, remains uncertain.
Bringing these sectors under the tax net carries diverse economic and socio-political consequences for different provinces. The complexities and varying intensities of these consequences require careful consideration.
Pakistan is committed to the IMF’s gradual elimination of tax and energy subsidies. This process will continue until the conclusion of the IMF’s short-term loan tenure in March 2024. After this period, it will be up to elected governments, formed after the January 2024 elections, to manage the interplay between fully taxing partially taxed sectors, mitigating the impact on inflation and other macroeconomic indicators, and addressing socio-political ramifications. The Council of Common Interest, a constitutional platform for resolving complex issues between the Center and provinces, will play a pivotal role in charting a roadmap for these reforms.
While the full taxation of these sectors is warranted, the caretakers must exercise caution to avoid hasty decisions during their tenure, considering the complexities and provincial reservations involved.
The caretakers’ acceleration of the privatization program is a positive development, particularly for entities like Pakistan International Airlines and Steel Mills, which have incurred substantial losses to the public exchequer. However, they should restrict their role to groundwork, as finalizing the privatization of power distribution companies (Discos) is intricate and should ideally be handled by elected governments. The post-privatization impact on provincial governments and the general public will be profound and enduring, warranting elected governments’ involvement.
Efforts to address currency, commodity hoarding, and smuggling have yielded positive results, with the rupee recovering in the interbank market. Strict actions against erring exchange companies, suspension of licenses, and a military-backed crackdown on these activities have successfully contained speculative dollar buying and strengthened the rupee.
Furthermore, a much-needed revision of the Afghan Transit Trade mechanism has revealed significant revenue losses due to misdeclaration and understatement of goods’ values landing in Pakistani markets. Correcting this regime can provide a substantial boost to tax revenue. Discrepancies in Pakistan’s exports to China and other trading partners must also be addressed to enhance export revenue, reduce imports, and recover evaded duties and taxes.
In navigating these economic challenges, Pakistan must balance the imperative of revenue generation with considerations of economic complexity, provincial dynamics, and broader socio-political implications. A strategic and collaborative approach is crucial to steer the nation toward economic stability and prosperity.