Matters economic

The PPP government has found itself stuck between a rock and a hard place when it comes to economic policy. Several important decisions need to be made which will make the party unpopular with ordinary Pakistanis but are crucial for Pakistan’s financial well-being. What complicates the situation is that these measures are also being advocated by multilateral donors, so those who are against them — several political parties (including some of the PPP’s allies), the traders and business community and large sections of the media — are able to politicise them and taint them in a way that makes it difficult for the government to press ahead.

The State Bank’s second quarterly report for fiscal year 2010-11, unveiled on April 8, is critical of the government’s inability to raise revenues and recommends reducing the petroleum subsidy as well as implementing the reformed general sales tax. The latter was completely mishandled when time came for it to be implemented. However, it is never too late, and the government needs to bring back this issue and clear some of the confusion that was propounded by some sections of the media. It should also educate Pakistanis on the benefits of having a documented economy and a wider tax net. The issue of the subsidy on petrol has been debated in this space before as well and it is worth reiterating that continuing the subsidy will further balloon the fiscal deficit by placing inflationary pressures on the economy because the government will be forced to borrow from the central bank (a euphemism for printing more money). The fact of the matter is that the fiscal deficit is bound to widen until and unless the government is able to generate more revenue — and a sustainable solution will be found only in a rational widening of the tax net so that those who do not pay any tax now are made to fulfil this legal obligation.

The SBP report’s estimate on GDP growth is in line with the current pessimistic outlook for the economy and it remains to be seen whether the two to three rate predicted by the central bank will, in fact, be achieved.



Published in The Express Tribune, April 10^th, 2011.