Need for all-out reforms – Opinion
Economic growth is closely linked to good governance and the political stability of a country. Unfortunately, in the last 75 years of our existence, these two elements have been largely absent. The four military rules have not only weakened democracy in Pakistan but also undermined the functioning of state institutions including but not limited to the executive and the judiciary.
Besides the direct military rule, the continuous intervention of powerful institutions in the affairs of the executive, on the one hand, created unrest in the political arena and, on the other hand, severely crippled the economy.
It has become common practice in the country that law enforcement agencies are relentlessly manipulated to settle political scores by registering bogus cases against opponents and putting them in jail. One way or another, the courts also ignored these actions, mainly by delaying decisions in the cases before them.
As a result, our ranking on the Global Corruption Perceptions Index has deteriorated by around 23 points in three years (2018-2021), and we were ranked 140 out of 180 countries in 2021.
Moreover, due to compromised and selective justice, people have lost faith in the justice system. The World Justice Project (WPJ) ranked our legal system among the worst performing countries in the world, 130th out of 139 jurisdictions.
All of these factors have hampered the goal of establishing a stable and sustainable economic environment. Pakistan, which said goodbye to the International Monetary Fund (IMF) in 2016, after completing its program and due to positive indicators, was an emerging economy.
However, the political engineering process negated all the hard-earned economic dividends. Over the past four years, the country has experienced low growth rates, a significant 80% increase in the national debt burden, the perils continue to spread and aggressive corrective measures have been adopted to avoid economic fallout. .
The last fiscal year, namely fiscal year 2022, ended on a difficult note, with the budget deficit widening by 55%. It reached Rs 5,260 billion in fiscal year 2022, or 7.9% of GDP, compared to Rs 3,403 billion in fiscal year 2021, or 6.1% of GDP.
Similarly, the primary deficit was 3.1% of GDP or 2077 billion rupees compared to 1.2% of GDP or 654 billion rupees for the financial year 2021. The circular debt of the energy sector peaked at 2.253 billion rupees, or 3.4% of GDP. The GDP towards the end of June 2022, and in parallel, on the basis of the figures communicated until March 2022, amounted to Rs 720 billion.
In order to manage the aforementioned unsustainable trend, the government has taken aggressive corrective measures in a bid to “chill” which is bound to have a negative impact on GDP growth and the optimal level of economic activity in the country.
According to the recent IMF staff report, GDP growth is expected to slow to 3.5% in fiscal year 2023. The revocation of subsidies and the impact of other pass-through decisions are major contributing factors to this slowdown. In addition, abnormally heavy monsoon rains and flash floods have wreaked havoc, especially in the agricultural sector. The economic landscape is still plagued by global and local uncertainties. Inflation is soaring as interest rates have reached historically high levels.
On the external front, the position is still difficult in the first month of fiscal 2023, i.e. July 2022 exports were US$2.25 billion, down 3 .7% compared to the 2.34 billion US dollars in July last year, when on a monthly basis they were observed. a significant drop of around 23% in July 2022.
Foreign direct investment amounted to US$58.9 million in July 2022 from US$103.8 million in July 2021, down 43%. The restrictive measures succeeded in reducing total imports in July 2022 to US$5 billion from US$5.6 billion in July last year.
However, in terms of tax collection, the 2023 fiscal year has started on a positive note as the Federal Board of Revenue (FBR) has collected 15 billion rupees more than the assigned target of 443 billion rupees, compared to the corresponding month of last year. Provisional net inflow showed a growth of 10.2% – although the growth rate required to reach the annual target set at Rs 7.470 trillion is 21%.
The major tax measures introduced in the 2022-23 budget aimed at taxing high income earners can be described as a welcome step, but at the same time the government has again extracted the burden from existing taxpayers by imposing a super tax and reducing the number of slabs on salaried taxpayers, for example.
He needs to devise a comprehensive strategy to get more people into the tax net, and that should be based on their income and wealth rather than taking end-to-end measures that affect people at all levels. For example, in a recent engagement with the IMF, the government agreed that as soon as monthly data showed signs of underperformance against revenue targets, it would activate emergency measures such as the general sales tax ( GST) on fuel, rationalization of GST exemptions such as those benefiting exporters; and/or increasing the federal excise duty on Level I and Level II cigarettes to close any gaps.
In addition to this commitment, IMF Country Report 22/288 showed concern over the previous government’s 4-month untargeted relief plan which increased the fiscal deficit due to lower oil prices and fuel tariffs. electricity, offering tax exemptions, introducing tax amnesty schemes. , and raising pensions and minimum wages.
However, the actions of the previous government forced the current government to take aggressive action to fill the void by imposing new taxes. Although the government has imposed a new property tax, which is seen as a welcome step, many other taxes have been imposed, including a super tax on existing taxpayers. Additionally, an increase in the oil tax, along with a reduction in tax brackets, has added misery to the lives of struggling families.
The government further pledged to extend the scope of personal income tax to a further 300,000 people using data from corporate, third party withholding and physical surveys.
While broadening the tax base is an important step in generating revenue, the government should keep in mind that in a paperless economy, withholding tax data will not help achieve the required goals. The government should focus on streamlining its labor laws and extending its regulatory reporting framework to every individual involved in business activity.
The resumption of the IMF’s Extended Financing Facility program has gone some way to helping Pakistan meet its immediate financing needs. However, at the same time, it obliges the government to undertake exceptional structural reforms as a priority to transform the economy to achieve the goal of self-sufficiency.
The federal finance minister should realize that the oft-repeated slogan of sacrificing political capital in the name of saving the country from default will not work anymore or forever. It must take corrective action — comprehensive fundamental structural reforms in all areas of economic governance.
(Huzaima Bukhari & Dr. Ikramul Haq, lawyers and partners of Huzaima, Ikram & Ijaz, are Adjunct Professors at Lahore University of Management Sciences (LUMS), Advisory Board Members and Visiting Principal Scholars of Pakistan Institute of Management Development Economics (PIDE). Abdul Rauf Shakoori is a US-based corporate lawyer and expert in ‘White Collar Crimes and Sanctions Compliance’)
Copyright Business Recorder, 2022