Editorial
Pakistan’s economy is in a critical state, urgently requiring reforms that extend beyond reliance on the IMF programme. The country’s persistent dependence on bailout packages has fostered a misguided belief that adherence to IMF conditions and their successful reviews equate to structural reforms. This is a serious misconception, and it is imperative for the government and its economic managers to clarify that the IMF’s role is solely to ensure the country’s financial commitments are met, not to drive economic reform or growth.
To achieve sustainable economic growth, Pakistan has the potential to develop its own solutions. One such proposal, advocated by the Pakistan Institute of Development Economics (PIDE), urges the government to transition from bureaucratic permission to rule-based market liberalization. The core argument of PIDE’s thesis, articulated by its Vice Chancellor, Nadeemul Haque, is to streamline the system, including taxation and approvals, and to unlock the value of assets currently tied up in various sectors, particularly real estate. Haque and his institution champion deregulation as a means to unleash the country’s potential and stress the need to eliminate excessive regulation.
The current regulatory environment in Pakistan is stifling business innovation and growth. The government’s policymakers have the power to alleviate this burden by reducing regulatory requirements. Currently, small and medium-sized enterprise (SME) owners are devoting a significant portion of their energy and resources to meeting regulatory compliances. The complex tax compliance procedures and high tax rates are driving businesses to keep a portion of their sales off the books and operate informally. Simplifying processes and implementing uniform taxation across all sectors could help curb this practice.
However, the perception of economic reforms being built by political parties lately is largely confined to the urgency of taking so-called “tough decisions” such as curbing the energy circular debt growth by increasing gas and electricity prices. This is a full-cost recovery and certainly not a reform. The IMF’s push to do these is to stem the cost to the exchequer. Since the state organs have failed to reduce the inefficiencies in the energy value chain, the only way they have is to increase the prices.
Another example is the imposition of higher tax rates on existing pool of taxpayers (imposition of super tax on corporate and higher rate of general sales tax (GST) at 18 percent) while completely ignoring those who are outside the net. This is not a correct approach and will not let the economy break free from the IMF.
According to the Washington-based Institute of International Finance (IIF), adjustments in exchange rates, interest rates, energy subsidies, and progress on SOE reforms are sufficient for Pakistan to secure an IMF programme. However, the country is grappling with more pressing challenges, with fiscal consolidation topping the list. The lack of fiscal consolidation has led to a debt trap, and the most significant hurdle is political instability. The ongoing power struggle between the country’s ‘most popular’ leader, Imran Khan, and the influential military is fostering political instability that could impede the much-needed fiscal consolidation. Pakistan finds itself in a predicament where an IMF programme has become an absolute necessity to stay afloat.
The prospect of genuine reforms, such as fiscal consolidation through lowering regulations and implementing uniform taxation on all types of incomes, could remain a distant dream. The economy might continue to be ensnared in a low growth trap unless political stability is achieved in a substantial manner. This underscores the urgent need for a more extensive dialogue among all stakeholders, including the country’s establishment, without any delay.
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