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Dr. Ikramul Haq & Abdul Rauf Shakoori
Prime Minister, Shehbaz Sharif, during his two-day (August 23-24, 2022) visit of Qatar met with the top leadership of this brotherly country. As a result, Pakistan has managed to get a bilateral support package of US$ 2 billion that would certainly help in meeting the existing funding crunch and averting the looming risk of default. Earlier, a Press release issued by the Foreign Office stated that during the visit, the Prime Minister would hold in-depth consultations with the Qatari leadership to review the entire spectrum of bilateral relations. The focus, it added, would be on advancing energy-related cooperation, deepening trade, investment ties, and exploring greater employment opportunities for Pakistanis in Qatar.
Pakistan’s economy is undergoing critical times where the widening current account deficit (CAD) has forced the government to take aggressive measures like pre-approval before importing machinery and completely-knock-down (CKD) automobiles and mobile phones that enabled the government in curtailing constantly bleeding foreign reserves.
In June 2022, trade deficit reduced significantly coming down to half (US$ 2.7 billion) in July 2022. However, the policy of contraction forced a slow-down of economy. Indeed, these ad-hoc measures cannot sustain. Sooner or later these restrictions have to be eased and/removed. Consequently, in the coming months the Pak rupee is going to face market dynamics on its organic strength. Despite the recent improvement in current account and value of Pak Rupee, the foreign exchange reserves reduced to approximately US$ 7.8 billion in August 2022 from nearly US$ 10 billion in April 2022 at the time of ouster of Premier Imran Khan through a vote of no-confidence.
The government must focus on providing an environment where exports can flourish, and businesses can grow. This requires a comprehensive plan and direction from the government. The increased costs of inputs mainly driven by fuel and energy are making it difficult for businesses operations, especially with a policy rate of 15%, and after adding commercial bank spreads the cost of funds reaches 17% to 18%. With such excessive rates, the working capital and growth-related requirements of business cannot be addressed. This can lead to a situation where businesses can face closures causing a risk of unemployment and directly impacting government revenues.
Earlier, on the directions of International Monetary Fund (IMF), the markup rate for Export Finance Scheme (EFS) was increased from 7.5% per annum to 10% per annum and for Long Term Financing Facility (LTFF) from 7% per annum to 10% per annum. The same is now pegged with the policy rate—ensuring that the gap between policy rate and rates under EFS and LTFF is maintained at 5%.
It is time that the government should come forward to protect lower-income groups and struggling businesses. Unfortunately, the current government has failed to show any clarity of thought and concrete actions in this regard. It has adopted only the orthodox approach, allowing passing on the buck to the public in the shape of price hikes.
The high cost of electricity, reflective of inefficient decision making and reliance on expensive sources of energy, is charged to domestic and commercial consumers. It means that the public is to pay for the government’s poor decision-making. Further, despite decrease in international oil prices and recent appreciation of Pak rupee against US dollar, the government has still increased the prices of petrol.
For revenue collection, the government is relying on conventional methods without exploring new avenues. In the budget for fiscal year 2022-23, the government imposed a whopping 10% super tax on ten sectors that are already tax compliant paying income taxes as per the applicable rates. However, as in the past tax imposed for bringing the mighty retailers into net has been revoked under pressure from them.
The above confirms that the government is not serious in bringing the untaxed into tax net. Thus, it will keep on extracting revenue from easy targets and industries. This also shows the overall structural weaknesses of the economy that is constantly posing risks for a sustained recovery. Such a recovery is not possible without providing conducive environment for the existing businesses and new investors. Our economy will remain caught in a vicious cycle with such short-sighted policies coupled with perpetual political instability—it is becoming normal for the country. Pakistan cannot offer itself as an attractive destination for local investors what to speak of attracting foreign investors.
The gulf between income and expenses is growing as successive governments post huge internal and external deficits, bridged through reckless borrowings. This is mainly because our exports have not been able to achieve desired results. We need to support our existing export-oriented businesses and at the same time introduce policies that encourage new emerging sectors. The world economy is rapidly evolving, and the technological landscape is offering new growth opportunities. We need to increase our share in the global export market for IT (Information Technology) and computer services. This can help in generating a long-term and sustainable foreign exchange source for Pakistan and lower its reliance on leveraged funds.
The way forward for sustainable economic growth and inclusive development is the introduction of fiscal reforms and export-led growth initiatives. Though the government on the instructions of the IMF removed subsidies on petroleum and electricity, yet price hikes have triggered hyperinflation. However, the rulers—civil and military alike—have historically not done anything substantial to stop waste of resources by state-owned enterprises. Effective measures to control this waste can significantly improve the share of our social sector that can be utilized to upgrade the living standards of ordinary citizens.
Apart from the above, the government should improve its overall governance to prevent interference of powerful institutions in matters relating to the executive. IMF’s Press release of July 13, 2022 about the announcement of a staff-level agreement on the combined Seventh and Eight Reviews for Pakistan’s Extended Fund Facility (EFF) requires Pakistan to implement policy actions, maintain market-determined exchange rate including proactive and prudent monetary policy and function of state-owned enterprises.
The current policy rate of 15% has increased the cost of doing business in Pakistan and played a major role in retarding economy, therefore the government needs to rethink its economic approach and redesign its strategy keeping in view the fact that the current level of economic growth will create a huge problem for a population of not less than 230 million people. It is imperative that the government should address concerns of the public at large as highlighted in the IMF’s Press release by expanding social safety to protect the most vulnerable.
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Dr. Ikramul Haq, Advocate Supreme Court and writer, is Adjunct Faculty at Lahore University of Management Sciences (LUMS), 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 Huzaima Bukhari.