Huzaima Bukhari & Abdul Rauf Shakoori
The latter half of this outgoing year kick started with a positive note of strong vaccination success and with optimism that economic distress caused due to Covid-19 would fade out soon. However, for Pakistan, 2021 will go down as another year of financial challenges, worsening social indicators, high inflation, failed commitments, and administrative failures. Now with the emergence of the latest Omnicron variant, hopes of economic recovery are again clouded with uncertainty.
The risk of disruption due to new variants coupled with global inflationary pressure is among the key concerns and is making economic outlook more challenging. The hike in commodity prices is causing distress to the public. The most recent data by Pakistan Bureau of Statistics (PBS) confirm this constant rise. Inflation was under control during 2013-2018, however, it has been rampant since then and every subsequent year has been more turbulent as compared to the outgoing year. The State Bank of Pakistan’s Annual Report on the economy for FY 2021 highlighted that in Financial Year 2017 & Financial Year 2018 this number was only 4.81% & 4.69% respectively. The report further mentions worrisome statistics that during Financial Year 2021, inflation rate in Pakistan was around 9% which is more than double the global average of 4.3%. The poor decision of “free-floating” of rupee caused massive rupee depreciation and then failed administration jacked-up prices which led to high inflation. The Consumer Price Index (CPI) released for November-2021 was recorded at an alarming level of 11.5% on a YoY basis as compared to 8.3% during the same period last year.
Similarly, frequent changes were made in our policy rates with the sole purpose to control the inflation rate. In the recent past, Monetary Policy Committee of State Bank of Pakistan increased the policy rate by 25-basis points in September 2021 which was followed by another 150 basis points hike in November 2021. The committee further increased by 100 bps on December 14, 2021, and the current rate stands at 9.75%. In just three months, our policy rate changed thrice to negate the element of consistency that is required to boost commercial activities in the country.
Moreover, as per recent official publications, the current account deficit has increased sharply this year due to a rise in imports. Based on data of PBS, imports rose to $ 32.9 billion during July-November Financial Year 2022, as compared to $ 19.5 billion during the same period last year. Whereas the current account posted a deficit of US$ 7.1 billion for July-November of Financial Year 2021-2022 as against a surplus of US$ 1.9 billion during the same period last year. The major contributor to the current account deficit belongs to the import of fuel. However, no efforts were made to explore alternative sources to get rid of this expensive source of meeting energy requirement.
The previous government took a landmark initiative in setting up the first LNG terminal and plants in Pakistan. This action facilitated in reducing reliance on expensive crude oil for energy-related needs. However, due to mismanagement and lack of decision-making power, the current government failed to get the best out of it.
High import prices have contributed to the deteriorating balance of payments and the current account deficits in the last few months have substantially increased beyond forecasts. Moreover, the burden of these external pressures has largely fallen on the rupee which has already lost more than 40% of its worth in the last 3 years.
The rupee is depreciating continuously and setting a new record. It is a fact that stable exchange rates help to pacify the impact of imported items in the economy and the local market can absorb the cost of imported inputs. This helps in increasing output without the higher cost and ultimately keeping the general public away from high inflation. As a make-shift arrangement to fix this situation, the government has found an easy solution to borrow funds at the international level and now at the end of the first quarter for FY 22 i.e. Sep 2021, Pakistan’s External Debt & Liabilities have ballooned to US$ 127 billion. This is a massive increase of 33% that is approximately US$ 31.78 billion since the incumbent government is in power. Chronic issues like growing fiscal and current account deficits; rising inflation; growth deterioration; and depleting foreign exchange reserves have gained weight at an alarming pace.
As per the Monthly Economic Update & Outlook December 2021, FBR was able to significantly increase its collection by 36.8% to PKR 2,319 billion during Jul-Nov FY2022, compared to PKR 1,695 billion in last year’s corresponding period. This collection is 15% over the target set for Jul-Nov FY2022. According to the same publication, within total domestic taxes, the collection under direct tax grew by 31%, sales tax by 40.7%, and FED by 16.7%. Whereas collection under customs duty increased by 46.5% during Jul-Nov 2021. The evidence-based estimation by FBR states that overall FBR taxes are progressing (with 1.04 overall buoyancy) and are expected to improve subject to the attainment of positive macroeconomic indicators. The estimation states that during the last 20 years, FBR revenues have increased with an average 14% growth. Further break-up reveals that the direct taxes are most buoyant with a 1.13 buoyancy value, followed by sales tax (domestic) with 1.11 buoyancy estimates. On the other hand, sales tax (imports), customs and federal excise duty have relatively lesser buoyancies. However, more worryingly, all these claims of success are not enough for government to manage its expenditure and increase revenue collection at a pace corresponding with its needs. Consequently, the Government’s reliance on the banking system for budgetary support continues to increase as compared to June-2018 levels. The total domestic debt, as of October-21 has increased by more than PKR 10 trillion or 60%, reaching approx. PKR 27,140 billion. With accumulation of large stocks of debt, the government financing needs have made the economic situation more vulnerable.
The tax system has failed to generate sufficient resources for the state to perform its key functions. However, the quantum of revenue being generated is sourced from a limited pool of people who are burdened with various types of regressive taxation. The policy of extracting the maximum from the existing taxpayers is causing survival issues for them. This practice aggravates disparity and deepens fault lines in economic activity. The taxation authorities were supposed to address critical issues such as narrow tax base, unnecessary disparity, exemptions, problems of undervaluation and misreporting at the import stage, so that avenues of leakage could be properly plugged. Moreover, there are so many avenues that can generate enough revenues for the country that are either unregulated or taxation authorities have failed to devise a proper mechanism to tax their revenue such as agriculture, virtual assets.
The previous government’s strategy of creating a distinction between tax filers and non-filers and charging the latter with increased rates managed to generate more revenue and forced people to file their returns thus documenting economy. However, there is still a perception among non-filers that if they file tax returns, they shall be exposing themselves to tax audits and recovery proceedings. Hence, they still try to find solace in maintaining the status of non-filer. The regulatory and operational framework must be designed in a way that generates more revenue and provides facilitation to taxpayers. Historic perspectives provide evidence that Pakistan has slowly and gradually evolved into a state which collects less, spends more, and borrows enormously–and all this results in deficit. When this phenomenon prolongs, it adversely impacts the goal of self-sustainability, development, and better quality of life for the common man.
Now the fact is that the incumbent government has completed more than three years in office. They assumed charge to introduce reforms and improve governance of the country. However, they are still lagging behind. Global lenders like International Monetary Fund (IMF) programmes are taking lead in dictating economic policies for Pakistan. They have already handed over a long list of “deliverables” like removing subsidies; eliminating tax exemptions, privatization of state-owned entities, etc. Government must act fast to improve resource allocation, establish macroeconomic stability, improve institutional and regulatory frameworks, improve the business environment and implement controls to curtail corruption and corrupt practices. The current economic challenges have put the country in a compromising position, where now and then Pakistan has to look towards the lender and friendly countries in its pursuit to maintain sufficient reserves. In case this phenomenon continues, this may eventually write off the goal of self-sustainability, development, and better quality of life for the common man.
Huzaima Bukhari, Advocate High Court & Adjunct Faculty at Lahore University of Management Sciences (LUMS), is member Advisory Board and Visiting Senior Fellow 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, with Dr. Ikramul Haq