Growth must be backed by structural reforms

EDITORIAL: Caretaker Finance Minister Shamshad Akhtar while addressing the 26 Sustainable Development Conference organised by the Sustainable Development Policy Institute stated that economic and political instability over a period of time greatly disrupted Pakistan’s economic growth, adding that economic growth must be backed by structural reforms.

Her reference no doubt is to the failure of successive administrations to implement the structural reform conditions pledged under the previous twenty-three International Monetary Fund (IMF) programmes, on average of three years duration each, which is clearly discernible: (i) given the steady rise of power sector circular debt, currently estimated at 2.3 trillion rupees; (ii) a tax structure heavily reliant on indirect taxes, to the tune of 60 percent acknowledged in the budget, a tax whose incidence on the poor is greater than on the rich, but ignored is the fact that 75 percent of all direct tax collections are being levied as withholding taxes in the sales tax mode, which is an indirect tax, while under other taxes petroleum levy, a sales tax, accounts for nearly 29 percent in the current year’s budget.

It is this inordinately enormous reliance on indirect taxes that accounts for 40 percent poverty levels today with the prospect of civil unrest looming large on the horizon.

The Caretaker setup has attempted to deal with the power sector circular debt issue through raising tariffs, a policy followed by previous administrations, though today it is a source of visible anger amongst the lower income levels as their capacity to pay their bills on time is severely compromised – a factor that is exacerbated due to the persistently 30 plus percent consumer price index inflation in the past year.

And a crackdown on electricity theft, a policy initiated during the previous Pakistan Muslim League-Nawaz (PML-N) administration (2013-18) has so far generated a little over 50 billion rupees, which is appreciated but is a drop in the ocean given the scale of the circular debt.

What is required is for the government to renegotiate contracts with Independent Power Producers (IPPs), especially those under the umbrella of the China Pakistan Economic Corridor, as the Pakistan Tehreek-e-Insaf (PTI) government had successfully renegotiated contracts signed under all previous power policies.

The prevailing situation in the power sector, one would hope, is taken as a warning by the Special Investment Facilitation Council (SIFC) in agreeing to contracts that may be burdensome for the common man in years to come.

The capacity of the caretakers to change the taxation structure is limited as it necessitates parliamentary approval in securing the passage of the Finance Bill.

The Bill for the current year approved a levy of windfall profits on banks and in this context the Caretaker cabinet approved a levy of 40 percent on windfall profits on 14 November — the day prior to the IMF announcing the success of the first Stand-By Arrangement review.

Reports from the Federal Board of Revenue (FBR) indicate that efforts to widen the income tax net have been initiated with the process of attachment of due taxes of around one million identified non-filers (through data sharing with Nadra) from their bank accounts and the suspension of their utilities as well as SIM cards.

Needless to say, more significant reforms are required and one would assume that the next elected government would have to implement reforms that envisage a shift from indirect to direct taxes as an upfront condition if the next IMF programme is to be agreed. And this reform measure would be popularly supported by the general public as it clearly would have to end the elite capture of revenue measures.

However, what the caretakers can and must do is to slash current expenditure — a measure that they are uniquely placed to undertake given that they were selected after a consensus between all the stakeholders was reached — politicians and institutions alike.

To date, there is no evidence that the caretakers have given any attention to this measure though the Public Sector Development Programme has been massively slashed, as was the norm during elected and military governments with obvious negative repercussions on growth.

In addition while farm output has risen dramatically this year — cotton, wheat and rice — usual as the soil is enriched after heavy floods one year, yet with other input costs higher than the regional average notably high interest rates (resulting in negative 291.1 percent credit to private sector — July to 6 October 2023), high utility charges and high transport costs due to petroleum levy, large-scale manufacturing sector is unlikely to show a major improvement (registered 0.5 percent July-August 2023 as per the Finance Division).

It is evident that massive reforms are required that would herald an end to the elite capture, which is possible and sustainable under an elected government. Disturbingly, Nawaz Sharif is claiming success in the economic arena during his previous stint in government, a claim belied by the fact that his own party had to reverse flawed policies post his ouster, and the PTI government inherited the worst-ever current account deficit, the PPP (Pakistan People’s Party) is focused on the number of seats it can win in the next elections and the offshoots of PTI have under their focus the mismanagement and corruption from September 2018 to March 2022.

What one would hope for is that these parties focus on articulating the way forward and present plans that would spell out in concrete terms the much-needed reform-oriented economic policies.

Copyright Business Recorder, 2023