FEARS that the tax-heavy budget for the ongoing fiscal year would further burden the inflation-weary urban middle classes are coming true. The month-on-month inflation rate surged to an eight-month high of 2.1pc in July, as compared to June; it was the highest since November, and mostly due to the imposition of heavy indirect taxes on food items. As reports suggest, the maximum burden of the tax-induced increase in prices is more pronounced in the cities. Monthly food inflation in July came in at 4.5pc in the urban centres — the highest since March 2023, according to data published by the Pakistan Bureau of Statistics. The inflationary surge was inevitable after the government imposed additional taxes of Rs1.8tr to meet its budgeted revenue target to secure the new IMF deal in order to stay solvent.

The July inflation reading is likely to be a one-off development and prices are expected to rise at a slower pace going forward than during the last fiscal year. The optimistic inflationary outlook has led the central bank to cut its policy rate by 250bps to 19.5pc since June. While inflation is receding, it is not much of a consolation for the middle class that finds it hard to cope with the significant rise in the cost of living over the last couple of years because of the government’s failure to equitably distribute the tax burden across all segments of the economy. The increase in indirect taxation is also driven by the same reason. Most of our macroeconomic problems — fiscal deficit, inflation, balance-of-payments, etc — stem from inequitable taxation policies. Unless Pakistan’s policymakers fix the tax administration and bring undertaxed and untaxed sectors into the direct tax regime, it would be foolish to expect the stabilisation of the economy in a sustainable manner. And until it is stabilised, the recovery achieved in the last one year will remain fragile and people will continue to suffer.

Published in Dawn, August 4th, 2024