Pakistan stands at a critical juncture, transitioning from economic turmoil to renewed optimism. While this sentiment is encouraging, it alone is insufficient to uplift the purchasing power and reduce poverty for millions.
Even with the ongoing three-year International Monetary Fund (IMF) programme, which aims to stabilise economy, achieving a sustainable 5-6% growth will require bold structural reforms and resolute policy enforcement.
Under the IMF programme, progress has been made in external trade, remittances, foreign reserves, monetary policy, and aligning fuel prices. However, immediate challenges remain, particularly in optimising energy utilisation by disconnecting captive power plants and addressing shortfalls in tax collection.
The latter stems from flawed economic assumptions about imports and inflation, but the real challenge lies in taxing untapped sectors.
Pakistan's economic and strategic aspirations cannot be realised until fair taxation is enforced across all sectors. The nearly 40% corporate tax rate, compounded by multiple indirect taxes, discourages industrialisation and job creation. Therefore, expanding the tax net to include traders, wholesalers, landlords, real estate, gold holdings, and service providers is imperative.
A key deterrent to formalisation is the prevalent use of cash. High currency circulation enables tax evasion and undermines documentation. Demonetisation of Rs5,000 notes offers a pragmatic solution to reduce cash dependency and promote digital transactions.
With increased digital activity, tax revenues will rise through improved wealth turnover, enhanced data accessibility, and automated tax deductions. This transition will also curtail illicit trade, smuggling, and corruption, while fostering growth in IT and exports.
Though demonetisation might cause short-term economic disruptions, mitigation measures like interest rate cuts can ease the impact. Long-term benefits include a more formalised economy and alignment with global trends in digitisation and compliance.
India's experience is instructive: after demonetisation and adoption of the Universal Payment Interface (UPI), the informal economy's share dropped from 50% in 2017 to less than 20%. Pakistan's Raast system provides a robust foundation for a similar transformation, with its ID-linked framework enabling secure digital transactions for all.
Despite recent reductions in cash circulation from 13% to 8% of gross domestic product (GDP), further progress is possible. Reducing this to 4-6%, coupled with enhanced financial inclusion, can significantly improve tax compliance and economic efficiency.
While some short-term pain is inevitable, this reform will be much lesser evil than systemic inefficiencies like Rs1 trillion worth of annual state-owned enterprise losses and recurrent economic cycles. Curtailing use of cash in the black economy is essential for sustainable and equitable growth.
This bold step will signal Pakistan's readiness for a new era of fiscal discipline, digitisation, and inclusive growth. It is time to lay the foundation for a prosperous future, underpinned by fair taxation and structural reforms.
For demonetisation to be successful, real estate transactions should be done at market values and gold/commodity trading needs to be documented. Start with removing Rs5,000 notes and then Rs1,000, if we really wish to change the system.
The writer is an independent economic analyst
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