The general elections are over. The process of forming an elected government is ongoing.
Two important things to watch are how well the new government tackles back-breaking inflation and how judiciously it goes about collecting taxes from people and businesses.
If the establishment desists from post-election intervention, there are chances for a relatively strong parliament and a relatively more representative government. But if it does not, then a weak parliament and a less inclusive government will find it challenging to contain inflation effectively or tax people and businesses judiciously.
Taxing the nation recklessly is the easiest way to raise revenues. But this approach may not work any more. The election results have established that people want to be treated fairly and not according to the whims of whoever is in power.
Any undue intervention may prove counterproductive to restoring economic stability
With national average consumer inflation still at 28.3 per cent in January 2024, Pakistani people and businesses are growing frustrated with the rising cost of living and the rising cost of doing business. The increase in gas tariffs for households and industries effective from January 1 and the increase in fuel oil prices from February 1 may keep inflation elevated even during February and March.
Furthermore, the pass-through of ongoing management of the energy sector’s circular debt on households and industries will make it continuously difficult to contain inflation. National average consumer inflation between January 2023 and January 2024 ranged between 38pc in May 2023 and 26.8pc in October 2023.
That is why the State Bank of Pakistan left its key policy rate unchanged at 22pc at its last monetary policy review. Monetary easing cannot be expected even in March, when the SBP will once again review its monetary stance.
This means the cost of living will remain high for all households, pushing more people below the poverty line and creating immense financial hardships for the low-wage earners. This also means that the cost of production and cost of doing business will remain too high for all industries and enterprises, forcing the weaker and the smaller among them to shut down operations or book massive financial losses.
Will the new government be able to pursue policies that don’t fuel inflation any further? Will it be possible for it to go for the required fiscal tightening to ensure that inflation doesn’t rise further? Well, that doesn’t take a genius to speculate.
The initial, unofficial results of the February 8 elections point towards the possibility of the formation of a coalition government at the centre, composed of one or two mainstream political parties and ‘the independents’.
In matters of taxation, the elected government will have to be careful not only about class sensitivities but also geographical sensitivities
Pursuing true austerity at all levels of government operations will be too difficult for such a coalition government. The ever-increasing cost of domestic debt servicing will continue to devour revenue resources even otherwise. So, forget about any real fiscal tightening.
Addressing the issue of inflation through the supply side with effective collaboration of provincial governments will also be problematic. The unofficial results of the elections indicate that forming strong provincial governments will also be very difficult. They may not necessarily be friendly towards the future federal coalition government. Hence, the coordination required to fight inflation effectively will be challenging. We have experienced this in the past.
The caretaker government approved a restructuring plan for the Federal Board of Revenue (FBR) to broaden the tax base and raise more revenue through a more transparent system. It had proposed the bifurcation of FBR, with one arm tasked with tax collection and the other for tax policy formation. But that plan ignores the much-desired element of separating fiscal policy formulation from tax collection. It has proposed that the tax policy board remain effectively under the Ministry of Finance.
These plans duly backed by the civil military-run Special Investment Facilitation Council may come under fire on political grounds when federal and provincial governments are formed and when diverging federal and provincial interests clash. But even before that, it has been challenged —and rightly so — by the Pakistan Business Council (PBC), which represents the interests of the private sector.
The PBC says that the proposed tax policy board be placed under the Ministry of Planning and Development so that it can pursue tax policy goals in line with the long-term economic plans of the country instead of doing so just to meet the short-term goal of tax collection.
The PBC also demands — again rightly so — that the policy board must have representation of the taxpayers so that the tax policies made thereafter can be implemented effectively.
Over the past year, the business community has become more vocal in their demand for fair treatment in matters of taxation and business facilitation. People, particularly the small traders and the salaried classes, have also become more demanding on this account. Pen-down strikes of low-grade government employees and paramedics and shutter-down strikes of retailers in Karachi and Lahore that we witnessed in the past year were pointers of this phenomenon.
In matters of taxation, the elected government will have to be careful not only about class sensitivities but also geographical sensitivities. For decades, industries and businesses operating in Karachi, Pakistan’s industrial and commercial hub, have been demanding fair treatment in taxation and business facilitation but to no avail.
Only a relatively strong parliament and relatively strong and inclusive federal and provincial governments can handle such thorny issues effectively. Any undue intervention of the establishment may prove counterproductive.
Published in Dawn, The Business and Finance Weekly, February 12th, 2024