Pakistan faces a long road ahead

Despite positive developments, several challenges threaten fiscal stability, growth

KARACHI:

There is some more good news on the economic front. For the first two months of the current financial year, tax col-lection has exceeded the Rs1,183 billion target, reaching Rs1,207 billion.

Particularly noteworthy is the 41% growth in income tax, which has increased from Rs347 billion to Rs488 billion.

Another encouraging piece of news is a significant increase in the expected production of Pakistan’s major crops.

Cotton production is estimated to exceed 12 million bales, compared to 5.6 million bales last year.

Wheat output is also anticipated to cross 28 million tons, surpassing the previous record of 27.46 million tons in 2020-21.

Rice exports may reach the highest-ever level of $3 billion during the current financial year.

Several challenges to the economy still threaten long-term fiscal stability and growth. First, Pakistan desperately needs to bolster its foreign exchange reserves, but the factors that can help are showing negative trends.

Exports continue to underperform, declining from $4.7 billion to $4.3 billion in the first two months of the current financial year, representing a fall of over 6%.

The second central area that demands immediate attention is the problems related to the gas sector, including shortages, circular debt, and increasing losses.

The third primary concern is the unchecked rising government expenditure, which may push the budget deficit beyond 7.5%. Regarding exports, for the last 15 years, we have not undertaken any significant trade policy reforms.

During this time, the main focus has been on getting unilateral tariff concessions through GSP Plus-type schemes.

Since the EU recently extended its GSP Plus scheme for another four years, it seems that the private sector and the government would be content not to push for any other serious market access initiative or reform its own import policy in the near future.

However, we should learn from the past experiences. When the European Union granted duty-free access in 2014 for 10 years, there was great expectation that exports would grow significantly.

While there was a significant growth in exports to the EU, our global exports remained stagnant during this period.

We continued to lose our global export market share by 1.45% annually.

Our peer countries, Malaysia, Mexico, and Thailand doubled their market share. The difference between our trade policy and the one they followed was that while we relied on GSP Plus, they opted for greater regional and global
integration.

The second major issue to address is the emerging crisis in the gas sector.

Over 40% of our energy requirements are met through domestic and imported gas (LNG).

Since our domestic gas reserves are depleting rapidly, our reliance on imported gas is increasing. In the next five years, almost 80% of our needs will have to be met through imported gas.

As consumer gas prices have not been adequately revised in line with international prices for the last 10 years, the gas sector faces a daily loss of Rs1 billion, and its circular debt has reached Rs2,900 billion.

The government needs to take several urgent measures to mitigate these losses.

These measures include halting cheap gas supplies to captive power plants, as they have a low efficiency of 30-35%, much lower than efficient liquefied natural gas (LNG) plants with an efficiency of over 60%.

Similarly, instead of subsidising the fertiliser industry, which consumes approximately 20% of the country’s natural gas, targeted subsidies should be given to small farmers with low landholdings.

Furthermore, except for some protected users, such as those receiving Benazir income support and roti-tandoors, other households should not be subsidised.

It is high time the government pushes for a transition from less efficient cooking practices to more efficient alternatives. There is also an immediate need to adopt a weighted average cost of gas (Wacog) to sell local and im-
ported LNG.

Lastly, there is an urgent need to sign one more longterm contract for the supply of gas and to allow the private sector to build more LNG processing terminals.

Finally, there is an urgent need to check the ballooning expenditure. The latest IMF estimates show that the budget deficit may surpass the official target of 6.5% to 7.6%, or from Rs6.9 trillion to Rs7.2 trillion.

This implies that Pakistan will have to borrow an additional Rs1.3 trillion than what was estimated in the budget in June 2023.

The government’s greater focus on privatisation may enable it to reduce some subsidies, but more needs to be done to ensure that we stay within the stipulated budget.

THE WRITER SERVES ON THE TASK FORCE ON TAX AND FBR REFORMS. PREVIOUSLY, HE HAS SERVED AS PAKISTAN’S AMBASSADOR TO WTO AND FAO’S REPRESENTATIVE TO THE UNITED NATIONS AT GENEV.