Huzaima Bukhari, Dr. Ikramul Haq & Abdul Rauf Shakoori
During the last few decades, global economies have been facing tough challenges. The recent spell started in March 2020 when Covid-19 endemic jolted domestic and international business activities, besides taking heavy toll on human lives. According to World Health Organization (WHO), as of January 11, 2023, there were 6,691,495 confirmed Covid-related deaths worldwide. Out of total 660,378,145 Covid cases, 270,617,844 pertained to Europe, 187,122,440 to America, 109,203,121 to Western Pacific, 60,745,674 to South-East Asia, 23,228,889 to Eastern Mediterranean, and 949,403 to Africa.
The deadly covid-19 virus and its variants, on one hand, restricted human interaction and on the other, governments were compelled to shut down cities and businesses to curtail deadly endemic. Resultantly, global economic growth reduced to (-)3.2% in 2020 and international trade by 5.3%, according to ‘Congressional Research Service’ of the United States of America [updated on November 10, 2021].
While the world was busy dealing with the deadly effects of coronavirus, the Russian invasion of Ukraine further diminished any hopes of speedy recovery from losses caused by endemic. The World Food Programme (WFP) in ‘Global Report on Food Crisis: Acute food insecurity hits new heights’states that Russia’s invasion of Ukraine has jeopardised global food security. The World Bank in ‘Global Economic Prospects’ [January 2023] report highlights that a sharp, long-lasting slowdown will hard hit developing countries. It predicts that global growth will be reduced to 1.7% from the 3% projected six months ago—in advanced economies it is going to be further reduced to 0.5% in 2023 from 2.5% predicted in 2022.
While highlighting regional outlooks, the report claims that growth rate in East Asia and Pacific may increase to 4.3% and 4.9% in 2023 and 2024 respectively. Europe and Central Asia will have slow growth of 0.1% in 2023, but it would increase to 2.8% in 2024. Latin America and the Caribbean expect growth of 1.3% in 2023 and 2.7% in 2024. The Middle East and North Africa will witness slow growth of 3.5% in 2023 and 2.7% in 2024. South Asia will have 5.5% growth in 2023 and 5.8% in 2024. Forecasting increase in growth in all regions in 2024, the report mentions precarious economic situation with depleting foreign exchange reserves as well as large fiscal and current account deficits.
For Pakistan, the report points out that the recent floods had played havoc and the damage was around 4.8% of the GDP. It says that floods affected one-third of the land area of Pakistan, damaging infrastructure and directly affecting about 15% of the population. According to it, the flooding also damaged agricultural production equivalent to 23% of GDP and disrupted 37% of employment for the upcoming cultivating season, thus pushing 5.8 million to 9 million people into poverty.
Pakistan is already facing fiscal challenges and working with International Monetary Fund (IMF) for the completion of its Ninth Review to overcome external financing pressures. In the recent months, the alliance government of Pakistan Democratic Movement (PDM) has tried to tighten fiscal policies and, in some cases, imposed restrictions on imports as well as export of food. The report highlights that Pakistan has to constrict its policies more rapidly in pursuit of microeconomic stability. The biggest challenge for the PDM government is building up fast depleting foreign exchange reserves—a herculean task! Though the government is trying to manage by seeking help from friendly countries, yet nothing concrete is done to fill the gap organically. Due to aggressive policies of the government, the cost of doing business has increased and small-scale businesses are struggling for survival.
On revenue front, according to ‘FBR sees Rs.1289bn tax gap for 2022’ [Business Recorder, January 10, 2023], Federal Board of Revenue (FBR) has estimated tax gap of Rs. 1289 billion during 2022, out of which Rs. 519 billion was in sales tax, Rs. 730 billion in income tax and Rs. 40 billion in customs. In its tax gap study, FBR excluded informal economy for lack of data and agriculture because of exemptions in sales tax, and income taxation, vesting with provinces. FBR missed the second-quarter target of Rs. 3.673 trillion by about Rs 218 billion. The shortfall in meeting revenue targets, besides flash floods, zero sales tax on petroleum products, contraction in imports etc, is due to weak enforcement and capacity issues. The imprudent tax policy is also playing an important role in the current deteriorating economic condition of Pakistan.
The government has limited options to streamline the country’s fiscal affairs, as the two major players (global lenders and friendly countries) are hesitant to trust us. Our relations with friendly states during the last few years have not been ideal. A country like China, known as an all-weather friend of Pakistan, is reluctant to invest further due to our erratic policies.
The incumbent Prime Minister, Shehbaz Sharif, known to be close to the Chinese, has so far failed to secure any substantial investment/debt restructuring despite his visit to China. Similarly, Saudi Arabia, another very close ally, though having announced enhanced investment in Pakistan recently, is still skeptical due to perpetual political instability in Pakistan and its imprudent foreign policy.
IMF, the other major player and lender of last resort is appearing quite inflexible in its conditions and fulfilment of promises made by us. The grant of unfunded subsidies and import restrictions by the previous government to get political mileage has severely shaken the IMF’s trust. On assuming power, the PDM government also imposed import ban that on one hand violated the agreement with IMF and on the other created difficulties for the business community even in some cases resulting in closure of businesses.
The government also agreed with IMF that in case FBR missed the revenue target set for any quarter, it would take multiple measures to raise additional resources, that may include imposition of 17% general sales tax (GST) on petroleum products, streamlining of GST exemptions, including those benefitting exporters, enhancing taxation of sugary drinks and other undesirable items, and increase in federal excise duty on tier-I and tier-II cigarettes by at least Rs. 2 per stick.
The government also committed to fully pass-through international oil price movements to consumers to contain fiscal gaps and risks. As the government is looking forward to the visit of IMF’s mission for the Ninth Review, all the commitments made by us earlier this year in September 2022 will come under review. The government must satisfy IMF on the progress made and actions undertaken so far. The financial wizards at the Ministry of Finance need to realise that the economy cannot make progress without undertaking strategic reforms. Moreover, compliance with the action plan agreed with IMF can become a pathway towards self-sustainable economy if much-needed, long-overdue structural reforms are undertaken.
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 coauthored a book, Pakistan Tackling FATF: Challenges and Solutions