At 75, Pakistan — in the words of the International Monetary Fund (IMF) — is at a ‘challenging economic juncture’. No wonder most Pakistanis today are poor, hungry and angry. The nation of 220 million people is ranked 154th among 189 countries and territories by the United Nations Development Programme Human Development Index. It is at the bottom of the list of South Asian countries, including Iran, and just above war-ravaged Afghanistan. Iran, facing decades of international sanctions, has invested much more in its people to rank at 70th position on the index.
The index is a summary measure of average achievements in key dimensions of human development: a long and healthy life, being knowledgeable and having a decent standard of living. Pakistan’s ranking on it is a reflection of the national policy choices its ruling classes have made over the last three-quarters of a century. It also shows that the country’s economic performance has been underwhelming compared to most other regional nations. Even in years of growth when the economy expanded by an average of 6 per cent between 1960 and 1990, governments did not invest in human development.
That it has not invested enough in human development explains why Pakistan has failed to grow and remains a low-income consumer economy in spite of having received enormous external financing in loans, grants and aid by selling to the world its strategic location in the region. The flow of free money fueling consumption-based growth meant that the ruling classes would never feel the need to fix the questionable economic and security policies that have held down growth, sustained poverty, inequality and underdevelopment, and fueled religious extremism and ethnic militancy.
The gross underinvestment in human development meant that successive civil and military governments would look for consumption-driven shortcuts to growth to protect their political capital despite repeated ‘boom-and-bust cycles’ that always lead the country to the IMF for its bailout money to stabilise its balance-of-payment imbalance.
The flow of free money fueling consumption-based growth meant that the ruling classes never felt the need to fix the questionable economic and security policies that have held down growth, sustained poverty, inequality and underdevelopment and fueled religious extremism and ethnic militancy
Recently, the IMF said that Pakistan has a difficult external environment combined with procyclical domestic policies that have fueled domestic demand to unsustainable levels. It goes without saying that each new IMF programme has caused more pain to the people as none of the governments has shown an inclination to implement structural reforms for sustainable and inclusive growth.
When the new government led by Prime Minister Shehbaz Sharif came into power a little over four months back, it was expected to undertake critical reforms. With almost every political party backing the coalition government and the ‘tough’ decisions it needed to take, finance minister Miftah Ismail also promised the same. However, it appears to have baulked at the idea of sacrificing more political capital for difficult reforms — at least until the next elections, and chose to just fight the current liquidity crisis by securing the IMF dollars.
The budget shows the political choices made by the Shehbaz Sharif-led coalition government. No doubt it had little space to make difficult decisions in the face of a swirling political crisis, growing power shortages and inflation. Yet, the fact that it chose to not tax the untaxed and undertaxed segments of the economy, and put the entire burden of additional taxes on existing individual and corporate taxpayers underscores its lack of commitment to undertake tough structural reforms to steer the economy on a sustainable growth path.
The additional taxes imposed on the corporations do not help the broader narrative of increasing the tax base or documenting the informal economy for boosting the existing tax-to-GDP ratio of 9pc, one of the lowest ratios in the world. It has conveniently spared the PML-N’s core constituency, traders, and stops far short of netting agriculture, professionals, etc. Likewise, it also frees the PML-N and its coalition partners from the need to reduce wasteful expenditure on the state-owned enterprises (SOEs) that have been haemorrhaging taxpayers’ money for years now.
In his recent TV interviews, Mr Miftah has repeatedly stated that the government has taken steps that will put the country on the right track. But has it? The policies and actions implemented so far will indeed bring the country out of its present liquidity crisis with the help of the IMF bailout money expected to start flowing in from the end of this month. The question is how sustainable is it to depend on foreign largesse and ignore critical governance and fiscal reforms for a country that is fighting for its survival as the recent spike in the global commodity and energy prices has exacerbated its debt problems.
The main issue facing Pakistan’s economy pertains to its inability to earn sufficient dollars to pay for its import bill and retire debt. This cannot be tackled without implementing meaningful reforms aimed to boost competitiveness, business environment and industrial and agricultural productivity, attract direct investment in productive sectors that promote exports and a sustained effort to end the regulatory mess and protectionist policies that encourage rent-seeking, holding down growth, and sustaining poverty and inequality. But structural economic reforms are not enough for achieving sustainable growth. The government must invest in human capital, execute land reforms and improve rule of law.
Last but not least, Pakistan needs to reset its foreign policy priorities and use its geostrategic advantage to integrate itself deeper with the regional economies for rapid and sustainable growth and development. Political and territorial disputes with neighbours, especially India, should not be allowed to trump the country’s economic interests. As Mian Mohammad Mansha, chairman of the Nishat Group, one of the country’s largest business conglomerates, recently said in an interview: “Disputes between countries should not impact bilateral trade; resumption of trade between Pakistan and India will throw fresh possibilities.”
Published in Dawn, The Business and Finance Weekly, August 15th, 2022