Economic Scenario Of Unpredictability

ByAsrar Raouf

Former Civil Servent


February 26, 2023

economic scenario

Asrar Raouf looks at the topsy-turvy economic scenario

It is just not the economic crisis that has hit the country but it is accompanied by the political uncertainty and this appears to be potentially fatal combination. There is hardly any doubt that the political instability gave birth to the current economic crisis as both governments since the last five years were very unsure of themselves and took adhoc economic scenario policy decisions that badly damaged the economic fabric of the country.

Despite all the setbacks experienced, the policy makers are still are at loggerheads about the course that is required to be adopted and are committing mistakes in the process. Their last hope is the IMF but to the chagrin of policy makers this international financial institution is dragging its feet over procedural issues and is unwilling to accord any concession to the Pakistani government. The end result is lingering unpredictability seriously hampering even normal economic activity in the country.

Amidst dark clouds on the economic scenario horizon, the prime minister is trying to keep the morale up when he expressed gratitude to a very friendly nation for providing assistance to Pakistan even before the finalisation of negotiations with the International Monetary Fund (IMF) to resume a lifeline needed to avert default. He added that there is an allied country of Pakistan that conveyed to Pakistan that it is giving financial aid straight away.

However, he did not name the country, the extent of the assistance that was provided or when the said assistance would materialise. Apart from anxiously waiting for the IMF programme to be finalised the government has also announced stringent austerity measures to ensure that the unproductive expenditure is curbed as demanded by the IMF.

IMF-dictated Finance Bill

The austerity measures announced by the government are aimed at cutting expenditures and the PM has asked his ministers and advisers to forego their salaries and benefits, give up their luxury vehicles, pay their utility bills out of their pockets, stop staying in five-star hotels while abroad and fly economy as part of a set of measures intended to save Rs.200 billion a year. Other measures include a ban on the import of luxury items and cars for over a year and entitlement to only one official plot per government employee.

In the meanwhile, the government got the IMF-dictated Finance (Supplementary) Bill 2023, passed through the NA after a lackluster debate seeking to impose additional Rs.170 billion taxes with minor amendments. The finance bill dubbed widely as the mini budget still fell short of the IMTR’s demand of raising more than Rs.800 billion from tax and non-tax measures.

However before getting this mini budget approved the government earlier had already implemented Rs.115 billion worth of tax. There were many amendments suggested by the opposition members mentioning reduction in the general sales tax from 18 per cent to 16 per cent, besides withdrawal of proposed taxes on wedding ceremonies at the marriage halls and sugary drinks.

In response the government pointed out that one of the reasons the government is constrained to increase taxation is that the country’s power sector is bleeding. It was mentioned that cost of producing electricity is Rs.3,000 billion whereas the total collections are only Rs.1,550 billion. Power theft, line losses and non-payment of bills are mainly responsible for non-recovery of Rs.1,450 billion registering a huge shortfall.

Federal Board Of Revenue Tax Collection

The official financial manager disagreed with the notion that refuted that the new tax measures were being taken because of the failure of the Federal Board of Revenue to meet its tax-collection target adding that they had completely satisfied the IMF that the tax-collection speed was correct and on track. However, they conceded that the price-hike in the country was becoming unbearable for the people but pointed out that the results of such stringent policies would bear results in few months.

The government circles claimed that the new revenue measures would not affect the poor segments of society and qualified this point by mentioning that the government had proposed a Rs.40 billion increase in the budget of the Benazir Income Support Programme. It was also mentioned that the government had agreed to amend the proposal of imposing 20 per cent Federal Excise Duty.

On the air tickets for the business, club or first class or Rs.50,000 whatever higher and now a fixed amount would be collected from those travelling to various world destinations in three different categories as per the International Air Travel Agency (IATA). It was also stated that a fixed amount of Rs.250,000 will be collected from the passengers travelling to Canada, South America and North America, Rs.75,000 from those travelling to Middle East and Africa and Rs.150,000 for the passengers going to Europe, Australia, New Zealand, Pacific Islands and Far East.

In this respect another amendment was made in the provision regarding imposition of duty on cigarettes to prevent tax avoidance as now every cigarette brand would pay the duty as per category which it had been paying before the introduction of the supplementary bill. Similarly, the government was making some technical changes for imposition of tax on the shares which were not traded through stock exchanges.

Raise Interset Of SBP In Economic Scenario

It was proposed by some MNAs that the need was to collect tax from the cigarette manufacturers as most of the factories were operating in the tax-free zones. It was also mentioned that government should collect taxes from big private hospitals and brands of clothes and cosmetics. The official financial managers stated in response that the brands, cosmetics and luxury items would become costlier after signing of the bill by the president.

In the meanwhile it is reported that the State Bank of Pakistan (SBP) is set to raise interest rates in an off-cycle review as the country faces pressure to mend its finances amid a $1 billion loan it is seeking from the International Monetary Fund.  IMF is insisting on taking tough measures including raising taxes, removing blanket subsidies and artificial curbs on the exchange rate and the anticipated increase in interest rate is related to this demand and it has given a target to at least keep rates higher than core inflation.

Pakistan has two core inflation readings and that Urban: 15.4 per cent for January and Rural 19.4 per cent and no national core number is released and if the SBP tries to bring rates above rural core inflation it requires a rate hike of 200-300 bps. In this context it is also pointed out that recent economic scenario and data on government finances suggest that it was running low on its cash balances held with the central bank and that it is the reason that the government went ahead with picking up their desired targets despite a significant effect it would have on the markets. The Weekender


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