Huzaima Bukhari, Dr. Ikramul Haq & Abdul Rauf Shakoori
“He who wishes to serve his country must have not only the power to think but the will to act”― Plato
The coalition government of Pakistan Democratic Movement (PDM), led by Prime Minister, Shehbaz Sharif, assumed power in April 2022 after constitutionally removing Imran Khan as premier. The PDM government in the last 60 days has failed to provide clarity of thoughts and actions to the public and businessmen in dealing with pressing problems of inflation and high interest rates. They have been transmitting confusing signals about their tenure and their financial plans to address mammoth economic challenges. There is no doubt that when they took charge, the country was facing severe financial, political, and legal challenges like draining of foreign exchange reserves, dishonouring of commitment with the global lenders and straining of relations with friendly countries, especially those offering help to meet the pressing fiscal needs. However, the PDM government cannot use these as an excuse for not performing as per their own promises.
Notwithstanding, the economic challenges, the political allies were expected to have some plan for economic revival and provision of relief to the common man. However, the journey so far has been evolving around the appeasement of the International Monetary Fund (IMF). Clarity of purpose and direction is one the most crucial elements of the governance. However, these are apparently missing and the latest federal budget proves it. It shows the incompetence and lack of planning and direction on the part of the economic team of the PDM government, led by the Finance Minister, Miftah Ismail.
The new government was under the responsibility to introduce its action plan to implement the IMF reforms agenda so that the delay on the part of the securing next tranche should be minimized. However, the economic team of the government appears to be visionless and following in the footsteps of their predecessors. In the last two months, the US dollar has crossed the psychological mark of Rs. 200 twice. Similarly, the actions of the government so for like import ban, increase in fuel and electricity prices, austerity drive within the government offices are merely cosmetic in nature, The Prime Minister and all the key ministers of the federal and provincial government are still escorted with the huge convoy and enjoying their protocols and VIP culture. In these circumstances, the early closing of markets will not achieve much, but may affect GDP growth, employment rate, revenue mobilisation etc.
The government has been making efforts for the resumption of IMF programme by withdrawing subsidies. However, the Finance Bill 2022 violated the terms agreed with the IMF related to personal income tax to achieve extra 0.25% revenue collection. It extended relief of Rs. 47 billion to the privileged classes. The Prime Minister Shehbaz Sharif and his cabinet should keep in their mind the quote of the Thomas Jefferson: “The purpose of government is to enable the people of a nation to live in safety and happiness. Government exists for the interests of the governed, not for the governors”.
The incumbent government is caught between rock and a hard place for the revival of the IMF’s 39-month Extended Fund Facility (EEF) programme of US$ 6 billion signed by the previous government in July 2019. Till today, the government has failed to set its priority to address the issues that pertain to fiscal challenges. Finance Minister has no other thing to share except to criticise the previous government for his agreement with the IMF. He does not have anything in his bucket but to tell the nation about his unpopular decisions like the withdrawal of subsidies for energy and petroleum which has attracted public criticism and backlash. The public who was already finding it difficult to make their ends meet is now taken aback by this new tsunami of inflation. In the parallel, the foreign reserves are constantly falling, and the Pak rupee is in a constant fall.
In a very short period, the price of petroleum products has been increased by Rs. 60 per liter, which is almost a 40% increase. The rates of electricity bills have also been significantly increased and Consumers Price index (CPI) is touching a new high of 13.8%. Though the stock markets at the global level are witnessing a tough spell, the Pakistan stock exchange is in red primarily due to local political turmoil. The market session following the budget shed 1,100 points, mainly since the overall budget does not provide for any policy/strategic measures that can pave the way for economic revival. Like previous budgets, this budget is also mismatched in terms of revenue and expenditure and relies on financial lending as a balancing factor.
Further, the estimates of a provincial surplus of Rs. 800 billion seem overambitious and most probably this will also be bridged by leveraging costly funds from lenders. With the current levels of fiscal and current account balances, we cannot continue this adhoc approach of borrowing expensive funds to bridge the gaps.
The debt balloon is getting bigger with every passing day and currently 41% of budgeted expenditures are represented by interest payments. Rather than taking concrete steps to formalise the economy, the government has further widen the gulf between corporate and non-corporate/informal business sectors. The current budget offers simplified and nominal tax for retailers through electricity bills as compared to a 29% tax on profit for corporate retailers. Extending a fixed tax regime rather than profit-based taxation can wrongly promote informal sectors and cash-based dealings which will discourage documentation of the economy.
The power outage is another challenge for the current government, the country is facing power outages and the shortfall is reported to be above 7,000 megawatts. The main reason reported is the closure of several plants on account of a shortage of oil, gas, and coal. This significant shortfall has resulted in severe load shedding of 8 to 10 hours in several parts of the country. The government is shifting the blame to the incompetence and indecisiveness of the previous government as they did not make any agreement related to liquefied natural gas (LNG) and other supplies. Now, they are forced to buy LNG at expensive rates, making the situation more difficult for the already cash-strapped economy.
On the administrative front, the government needs to get its acts together and must ensure that roles and responsibilities within ministries and divisions are communicated and followed up through a robust accountability system. People in key roles must possess the desired skill set rather than based on political affiliations. This help in introducing progressive policies which help the overall economy and business environment of the country.
Another important factor is stability and continuation of policies, especially those which are already under successful execution. For example, the Auto Industry Development and Export Policy for 2021-26 were designed to boost the development of Pakistan’s automotive industry and provide significant support to the Government of Pakistan to help in addressing economic issues, ensuring import substitution, export enhancement and job creation for the local workforce. These can help make our facilities par for competitive manufacturing of auto parts and vehicles which can fulfill local market and offshore demands.
The governments, irrespective of political connotations and differences, must continue to facilitate investors who are inclined to employ funds in different sectors. The prime focus should be on providing an enabling environment with a stable economic outlook. With a fast-deteriorating economy, we cannot afford ad-hocism and short-term approach. The government in general and finance minister in particular must be cognisant of the fact that the current energy challenges, weak currency, double-digit inflation, high cost of funds, and political turmoil are antidote to growth. The only way forward to resolve these chronic issues once and for all is to initiation fiscal reforms so that the target of economic revival can be achieved.
Huzaima Bukhari & Dr. Ikramul Haq, lawyers and partners of Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS), members Advisory Board and Visiting Senior Fellows of Pakistan Institute of Development Economics (PIDE). Abdul Rauf Shakoori is a corporate lawyer based in the USA and an expert in ‘White Collar Crimes and Sanctions Compliance’. They have recently coauthored a book, Pakistan Tackling FATF: Challenges and Solutions