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The daunting economic challenges

Huzaima Bukhari, Dr. Ikramul Haq & Abdul Rauf Shakoori

Since assuming power the coalition government of Pakistan Democratic Movement (PDM), , has been facing multiple challenges on economic front among which rising inflation is of course the most daunting one. In the last two months of PDM government, prices of petroleum products and electricity have skyrocketed.

Miftah Ismail, the Federal Finance Minister, and his cabinet colleagues are, however, defending price hike by telling the nation that this has been taken in the “larger interest of the economy” to avoid “default”. It is an undeniable fact that frequent increases in energy prices have been pushing the country towards record inflation. As evident from the recent (periodic) releases by Pakistan Bureau of Statistics (PBS) the Consumer Price Index (CPI) in June 2022 registered inflation at 21.3% on a year-on-year basis as compared to an increase of 13.8% in the previous month and 9.7% in June 2021. The reversal of fuel and electricity subsidies, together with the imposition of petroleum levy (PL) and general sales tax (GST) on fuel through Finance Act 2022, is bound to keep inflation unchecked. For controlling inflation, the State Bank of Pakistan (SBP) in the coming days may increase policy rate that is going to considerably enhance cost of doing business in Pakistan which implies that we are moving towards a long and difficult spell of stagflation.

Faced with this grim situation and in the limited time left for new elections, PDM government should work on war footing to defuse the current quagmire. Needless to say that continuous political instability and lack of corrective measures can lead to further challenges for the continuity and viability of businesses in the country. Purchasing power of the common man has already fast deteriorated making it difficult for a vast majority to fulfill basic necessities of life. Admittedly, the deteriorating economic situation and the terms agreed with the International Monetary Fund (IMF) leave a rather squeezed space for the government to offer any relief to the masses. However, on account of energy subsidy reform, the IMF has been asking for reducing financial and quasi-financial subsidies through better targeting of energy subsidies to help the most vulnerable.

Recently, the Chief Minister (de facto) of Punjab, Hamza Shahbaz, in a Press conference, announced free electricity for households using 100 units a month for the past six months. Earlier, he announced subsidy on flour and the provision of free-of-cost medicines in the hope that the recently announced relief measures would help the struggling segments of society. Hamza Shahbaz announced that under the ‘Punjab Chief Minister Roshan Gharana Programme’, the government “will pay bill of electricity consumers using up to 100 units of electricity per month”. For this his government has pledged Rs. 100 billion claiming that it would benefit around nine million families—almost half of the population of the province.

This move is ferociously opposed by Pakistan Tehreek-i-Insaf (PTI) and many others as a political stunt and an attempt to influence the forthcoming bye-elections in Punjab. PTI has even taken it up with the Supreme Court claiming it as a violation of the recent order for Chief Minister to perform restricted functions till new elections of 22 July 2022.

Independent observers ask why this relief for Punjab alone although PDM has government in Sindh as well? For many, this step of shouldering free electricity burden of the poorest of the poor is a sigh of relief, especially at a time when the government has taken many undesirable measures to address macroeconomic challenges left by the PTI government.

The incumbent federal government is presently dealing with the IMF for revival of its stalled programme to secure foreign funding. So far, it has not complied with any of the policy items agreed with IMF by the previous government to minimise wastage of resources. However, it merely acted on the action items burdening the common man by raising prices of energy and petroleum products. The incumbent government has further agreed with the IMF to impose petroleum levy of Rs. 50 on all products which would, in the coming months further increase inflation that has already crossed 20% mark.  

Along with rising inflation, high policy rate, frequent decline in the value of rupee and the imposition of additional direct and indirect taxes are contributing towards an unbearable cost of doing businesses besides badly impacting buying capacity of the people as well. Moreover, the government has announced 10% raise in salaries of employees which is marginal compared to current inflation rate in the country. Thus, the government needs to focus on revenue generating measures to accommodate the middle class. Hamza Shahbaz needs to reconsider his decision and exempt first 100 units of electricity of all those families consuming 300 electricity units per months.  Similar approach should be adopted by other provinces as well so that a targeted relief can be given to those who are badly in need.

The incumbent government also needs to focus on fiscal reforms. Though the Finance Act 2022 has added real estate sector in taxation regime in the name of broadening the base and targeting the rich, yet most of the initiatives are anti-growth, burdening the existing taxpayers and discouraging investment opportunities. Extorting more tax from existing taxpayers is highly lamentable. The federal government should have directed efforts on broadening tax base and lowering the rates. Both the federal and provincial governments should also make concerted efforts on aligning revenue and expenditure obligations to improve intergovernmental fiscal framework. Circular debt issue is draining our resources for which the government should address the challenges of reducing commercial and technical losses. This can be done through introducing smart metering, cutting off supply to delinquent consumers and scaling up transmission and distribution infrastructure to be at par with generation capacity as agreed with IMF in February 2022.  

The government should also pay attention to loss making public sector entities (PSE)—white elephants consuming a substantial portion of our budget. The government needs to review its existing privatisation laws to address complications so that PSE assets can be sold through open bidding without wasting time. This action will immediately generate liquidity for the government to meet its fiscal needs. The previous government agreed with the IMF to privatize two LNG power plants and two small public banks, but no action was taken.

The Pakistan Muslim League Nawaz—PML(N)—is in power with help from its collation partners. The party claims to have always delivered in the past with their leaders often quoting their period in power from 2013-2018 as “successful.” On assuming power in 2013 by PML-N, total reserves were US$ 11 billion. Their financial wizard, Muhammad Ishaq Dar, heading the economic team, was tasked with the responsibility to avert the risk of default. It is a fact that he undertook various steps to improve the financial condition of the country to generate economic activity. Resultantly, Pakistan witnessed huge investment in different sectors, completed the IMF programme and was also termed as an emerging economy. The foreign reserves of Pakistan reached US$ 24 billion in October 2016. However, in the wake of Panama Leaks, the three-times elected Prime Minister, Mian Muhammad Nawaz Sharif, was ousted from politics and when Nawaz Sharif and Ishaq Dar left offices in July 2017, the foreign reserves were above US$ 20 billion. The value of green pack against American dollar was around Rs. 105 and inflation was in the range of 4% to 5%. However, the political turmoil following these state of affairs started worsening leaving the country in an economic mess that gained momentum after PTI assumed power in August 2018. Due to incompetence and mismanagement in four years, the dollar against the Pak rupee touched the level of Rs. 190 and inflation climbed up to 13%. Our foreign reserves started depleting fast. Huge debts were added in four years without initiating any mega project. Now again, the PML(N) is in-charge of the affairs, though, this time its main players are missing.

The incumbent government is faced with the grave challenge to save the country from default.  So far, scarifying their political capital, the PML(N)-led coalition government of PDM has taken some tough decisions, necessary to revive the economy. Both the PML(N) and leadership of other parties need rethinking. Their actions might help temporarily but in the long run, the people of Pakistan cannot afford the brunt of compliance of action items agreed upon that only cause hike in prices. It is better now than late for the incumbent government to take fiscal measures to fix the huge gaps cited repeatedly—just following in the footsteps of their predecessors will only add further miseries to the lives of common people of Pakistan.


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      

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