PHOTO: FILE
Similarly, the performance of the services sector will remain subdued. Based on these statistics, the real gross domestic product (GDP) growth for FY19 will remain in the range of 2.4% to 2.7%.
Under this background, the government has negotiated another programme with the International Monetary Fund (IMF). The content of the Extended Fund Facility (EFF) is dictated by the IMF. The focus of the programme is on economic stabilisation by achieving fiscal consolidation, bolstering foreign exchange reserves and improving energy efficiencies.
Growth rate slumps to lowest in 9 years
Again the programme is front-loaded with prior actions. There is a lot of talk in the media that the government has agreed to a market determined exchange rate ie free float of the rupee. The rupee float could be very dangerous for Pakistan’s economy.
Considering the low level of foreign exchange reserves, this would trigger a speculative attack on the currency. Both local and foreign speculators may become active under these circumstances. The current slide of the rupee provides evidence in this regard.
Another commitment of the programme would be to reduce the fiscal deficit to 3.5% over a three-year period. Keeping ground realities in view, the fiscal deficit of 6% is indispensable for Pakistan’s economy.
Going further below this number would be painful for the masses and create political difficulties for the government.
The IMF recommended to the government that it should increase tax revenues since the expenditure side can’t be curtailed. It is being hoped that tax reform efforts would give results after three years and now the government has started to move in this direction.
Another recommendation is to increase the tax base, which is not achievable under the current circumstances. When a developing economy shrinks, the tax base is further eroded since businesses either perform poorly or go bankrupt.
Policy shifts likely after change in Imran Khan's economic team
Under these conditions, the government has to resort to indirect taxes. It is very likely that taxes on petroleum products will further increase. The international oil prices are slowly going up and the government has to either increase or maintain indirect taxes on petroleum products. To achieve the ambitious revenue target under the agreed EFF, the government has to increase petroleum prices going forward. When the government would revise up the oil prices in coming months, this will have a rippl effect in the economy.
There is a loud talk in the media that the government has agreed to impose Rs600-700 billion worth of new taxes. This also implies that certain exemptions will be withdrawn and tax rates will go up.
The third most important issue agreed between both parties is the supply of electricity and its tariff. The IMF recommended that electricity subsidies should be withdrawn for the wealthiest population. However, the prices will remain fixed for the poorest chunk.
Per capita income shrinks 8.2% in PTI’s first year
Electricity prices are already very high in Pakistan. Any upward revision will create further problems of recovery since higher electricity prices will lead to theft in Pakistan, which is one of the unintended consequences of these prices. Similarly, the government would increase the gas tariffs.
In short, the IMF programme has prescribed technocratic remedies and has even supported technocrats in the helm of affairs. They have proposed conventional remedies but their implementation entails huge political costs. The masses should anticipate a harsh fiscal adjustment. Going forward, the test for the government is whether it can sustain the political backlash or not.
The writer is the Assistant Professor of Economics at SDSB, Lahore University of Management Sciences (LUMS)
Published in The Express Tribune, May 20th, 2019.
Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation.
COMMENTS
Comments are moderated and generally will be posted if they are on-topic and not abusive.
For more information, please see our Comments FAQ