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Thursday, February 15, 2024

No Free Lunch – Economy under PTI government?

An academic gives her view on the economic performance of the PTI-led government, IMF loan deal, tax revenue collection measures, rupee crisis and Pakistan’s economic growth.

Prof. Dr. Samina Khalil is the Director of Applied Economics Research Centre (AERC) at the University of Karachi. Dr. Khalil has over 20-year experience of research and teaching in core areas of economics. She holds PhD in Environmental Economics and Management from the University of York, UK & M.Phil in Economics of Developing Countries, from the Cambridge University, UK. GVS asked the economic expert to give her opinions on the following questions. 

Provide an overview of the economic performance of the PTI led government during the past year.

PTI government has rightly pointed out that the present economic situation is an outcome of poor economic policies and management of the past governments. These governments have repeatedly balked at taking the bold and corrective measures when they were needed, putting at risk the country’s economic sustainability.

In my opinion, the PTI government took immediate remedial measures to slow down the unsustainable current account deficits and shore up external finances. These measures have started to yield results and the country’s external vulnerability has receded in the last one year.

During the last one year, government planning was focused on narrowing the three fundamental gaps in the taxation system – tax system is being streamlined, tax policy and tax administration functions have been separated, and the tax base is being expanded – which are the right steps to strengthen the economy. Some developments have eased the pressure.

A drastic reduction in current account deficit down to US$14bn from US$20bn in the past 11 months has been a relief at a time when external financing requirements have skyrocketed due to the substantial rise in imports. At least this government will not need to finance its current account deficit through external debt, as done by previous governments.

However, the country’s debt obligations – having risen due to commercial borrowings from international banks – have become the single largest liability requiring external financing.

The total debt volume is significantly over US$12bn after accounting for loans worth US$7bn received thus far from UAE, China, and Saudi Arabia. Managing timely repayment of this piling debt alongside the hefty current account deficit will be a challenge for the incumbent political team.

Read more: No Free Lunch: Pakistan’s rocky relation with IMF

Will the government succeed in generating sufficient revenues, and are they doing enough to facilitate businesses?

The government recently agreed on the IMF loan program and announced plans to slash civil expenditures and freeze military spending while promising to substantially raise revenues to stem a yawning fiscal deficit and pledging to collect 5.5 trillion Rupees ($36 billion) in taxes.

Discontent is still simmering in the country following repeated devaluations of the Rupee, soaring inflation, and increasing utility costs, while tax collection has been a long-standing challenge for authorities.

Pakistan is facing a challenging economic environment, with lackluster growth, elevated inflation, high indebtedness, and a weak external position,” the result of a “legacy” of uneven policies.

Despite rising deficits, Pakistan’s tax revenue was only 13% of its GDP in 2018. During the current fiscal year, the country has seen a decline in its revenues while expenditures have increased, resulting in a half-year fiscal deficit of 2.7% of GDP, the highest since 2010-11.

Is the Rupee finally out of crisis? Or will we witness further devaluation?

The Rupee’s nominal depreciation in 2018 of 33pc should deliver a good part of the needed real depreciation, though probably not all of it.

Pakistan’s non-US trading partners’ and other competitors’ currencies have also depreciated against the US dollar in 2018 (by 5pc and 18pc respectively, in median terms).

There’s no reason why a similar, more flexible exchange rate regime, anchored in a basket of trading partner currencies (rather than a single currency), should not work well. However, a more flexible regime will bring its own imperatives.

With a more volatile currency, the private sector will need access to better instruments to hedge foreign exchange risk. The government would be well advised to develop future options that financial institutions and traders can access at a reasonable cost.

Read more: No Free Lunch: Pakistan’s rocky relation with IMF

Can you shed light on the economic progress or decline to be expected in the upcoming months? Will the government be able to deliver its promises of housing, jobs etc.?

To make a significant impact on the current account deficit, Pakistan needs to ensure an investment-friendly environment that attracts more foreign direct investment (FDI), instead of relying heavily on foreign aid.

Promoting manufacturing by creating a more investment-friendly environment, broadening its tax base, and encouraging innovation and modernization in export-led industries are just some of the most urgent measures the government can take to address the growing fiscal and current account deficit.

Pakistan must take advantage of this moment of hard-won reprieve by building a truly stable and sustainable economy before it once again finds itself digging its own economic grave – and that of its people.

Structural reforms are measures targeted to remove inefficiencies in the economic structure to optimize resource allocation and increase productivity and employment.

Such reforms can include widening the tax net, reducing wasteful government expenditures on inefficient state-owned enterprises or administrative set-ups, protecting domestic industries, devaluing the currency to boost exports, etc. However, for these reforms to be successful, the political economy has to support and create an environment geared towards their success.