What economic hurdles lie ahead?
Published on: March 2, 2024.
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As Pakistan prepares to transition to a new government, there is a keen focus on the nation’s economy. The key question is whether the change in leadership can successfully navigate Pakistan’s economic challenges or if the problems will persist despite positive macroeconomic indicators seen in recent months.
There have been positive developments in terms of fiscal consolidation, improved foreign exchange buffers, and a narrowing current account deficit, indicating a strong economic foundation. However, a closer examination reveals underlying complexities and uncertainties.
One example is headline inflation, which has decreased from 38% to around 30% between May 2023 and January 2024. However, significant energy price adjustments, including a recent increase in electricity tariffs, pose a challenge to controlling inflation. The global energy market also presents a risk, with disruptions in the Red Sea supply route potentially leading to higher fuel prices and increased inflation in Pakistan.
The government’s efforts to reduce food prices depend on weather conditions and the ability of provincial governments to regulate hoarding and profiteering. Initiatives such as establishing a dedicated department for price control in Punjab show a proactive approach, but the success of these measures will determine the relief from food inflation.
While there has been progress in exports compared to the previous fiscal year, there are concerns about the contributing factors. While export volumes, particularly in rice, have increased, the decrease in export unit value raises questions. High-value-added textile exports continue to struggle, highlighting the nuanced nature of the export landscape. Imports have declined, improving the trade balance, but the manufacturing sector is still facing challenges from high energy tariffs and interest rates.
The manufacturing sector in Pakistan continues to be affected by high energy tariffs, which also impact residential customers. Addressing the issue of energy circular debt, currently at Rs5.7 trillion, is important, but increasing tariffs is not the sole solution. A report by the National Electric Power Regulatory Authority highlights the significant losses incurred by electricity distribution companies due to transmission and distribution losses and non-collection of bills. Reducing these losses can help contain the energy circular debt and create fiscal space for other initiatives.
The growth in workers’ remittances in the past quarter is encouraging, but there are concerns about its sustainability. Visa restrictions for Pakistani workers in Gulf countries, limited mobility due to the ‘Azad visa’ restrictions, and deportations pose challenges. The new government will need to negotiate with Gulf rulers to secure a favorable visa regime for Pakistani workers.
The commendable revenue growth of the Federal Board of Revenue (FBR) is overshadowed by inflation. While there has been a twenty-nine percent growth from July 2023 to January 2024, accounting for thirty percent inflation during the same period diminishes the growth. Broadening the tax net and shifting from indirect to direct taxes are essential for real revenue growth. Previous governments have not fully tapped into sectors such as real estate, retail, and agriculture income for tax potential. The new government’s approach to this issue will be crucial.
While the State Bank of Pakistan’s foreign currency reserves have improved, the upcoming Euro Bonds payment and the need for additional funds for external liabilities highlight the fragility of Pakistan’s economic position. Securing the next International Monetary Fund (IMF) deal in a timely manner is important to ensure forex reserves and creditworthiness. The IMF may link the release of the first tranche with the upcoming federal budget, and the new government will need to balance IMF commitments with its electoral promises.
Debt management is another significant challenge for the incoming government, particularly in terms of economic policies and foreign relations. Examining the debt composition, domestic debt accounts for 57.7% while external debt comprises 42.3%. Chinese loans and loans from Chinese commercial creditors surpass loans from the IMF and the World Bank. In an increasingly polarized world, maintaining good relations with both the Western world and China is essential for debt sustainability.
Alongside debt management, the new government faces numerous other challenges, such as revitalizing or privatizing state-owned enterprises, enhancing productivity in sectors contributing to GDP, addressing trade imbalances, stabilizing exchange rates, reducing non-development expenditures, and building trust with the people of Pakistan and the international community.
However, it’s crucial to note that there are challenges beyond economic issues that need to be addressed for a livable society regardless of economic recovery. Recent incidents, such as the threat of mob lynching based on false blasphemy accusations in Lahore, highlight the presence of religious fanaticism. While the victim was rescued, the incident underscores the need to address religious extremism. Achieving economic goals requires more than financial assistance; adopting a zero-tolerance policy towards hatemongers is essential. All stakeholders must recognize that unaddressed extremism poses a threat to everyone. Balancing economic prosperity with societal security is the true challenge for the new government.
Source: https://www.thenews.com.pk
