The quest for higher economic growth

05 April 2024

Published in: Business Recorder

Pakistan’s economy badly needs reforms beyond just securing the IMF (International Monetary Fund) programme. As a habitual bailout package-seeking economy, the general perception in the country is that compliance with IMF conditions and their successful reviews constitute, in essence, the much-needed structural reforms.

This is a gross misconception and fallacy, to say the least. Therefore, the government and its economic managers in particular need to explain in unequivocal terms that the IMF is only here to ensure the country remains current on its external financial commitments, while reforming the economy and generating growth are not the IMF’s mandate per se.

Pakistan needs a homegrown solution to come out of the perpetual economic crisis. One such reform is proposed by the Pakistan Institute of Development Economics (PIDE), which is urging the government to shift gear from bureaucratic permission to rule-based market liberalisation. This is the central argument of the PIDE thesis as enunciated by its Vice Chancellor, Nadeemul Haque.

The idea is to simplify the system including taxation and approvals, and to unlock the assets valuation which are stuck in various sectors, mainly in real estate. Haque and his institution are strong proponents of deregulation to unleash the potential. They underscore the need for doing away with the regulatory guillotine.

By lowering regulatory requirements for businesses, the government or its policymakers can enable businesspeople to think freely about innovation and growth as currently a good chunk of energy and the resources of SME owners are being spent on meeting regulatory compliances.

There are too many tax compliance procedures and too high tax rates, which incentivize businesses to keep a certain portion of sales out of their books and operate informally. This practice can be reduced by simplified processes and uniform taxation across all the sectors.

However, the issue is that lately the perception of economic reforms being built by political parties 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 reforms. The IMF 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. That is not a correct approach and will not let the economy break free from the IMF.

A similar assertion is being made by the Washington-based Institute of International Finance (IIF). According to it, adjustments in exchange rate, interest rate, energy subsidies and progress on SOEs reforms are enough for Pakistan to secure an IMF programme, but it has other bigger challenges to face.

On top of the list is fiscal consolidation, as the absence of it has resulted in creating a debt trap. And the biggest challenge to bring fiscal consolidation is political instability. The report has claimed that the tussle between the country’s ‘most popular’ leader Imran Khan and the powerful military is creating political instability and that may hinder achieving much-needed fiscal consolidation. The country has therefore found itself in a situation where an IMF programme has become an absolute necessity in order to remain afloat.

However, the chances of genuine reforms by having fiscal consolidation through lowering regulations and uniform across the board taxation of all kinds of incomes would remain a pipedream and the economy may continue to remain in low growth trap unless political stability is achieved in a meaningful manner. Hence the need for a greater dialogue among all stakeholders, including the country’s establishment, without any loss of time.