Today, on 9th of Jun 2022; Pakistan is well set on the path of being a failed state, if no concrete corrective actions are taken. Pakistan’s total external debt stands at PKR 53.3 trillion circa. As per Monthly Economic Update & Outlook May 2022 by Government of Pakistan Finance Division Economic Adviser’s Wing, current account deficit stands at US$13.8 Billion with Total Forex reserve being US$16.1. and Inflation touching 13.4%. In same report following has been concluded under the heading of way forward.
“Pakistan is
currently facing several severe challenges: accelerating inflation, high
external deficits, exchange rate depreciation, declining foreign exchange
reserves and mounting uncertainty. On the other hand, economic growth remains
relatively high, but in the presence of macroeconomic imbalances may not be
sustainable.
The primary
contributors of increasing inflation are the surge in international commodity
prices and the massive exchange rate depreciation. In fact, the depreciation of
the rupee both against the USD and on a trade weighted basis against the
currencies of Pakistan’s main trading partners is primarily reflection of
inflation differential between Pakistan and its main trading partners. Further
relatively high domestic inflation is compensated by Rupee depreciation.
However, currency depreciation itself feeds into higher domestic inflation.
In this sense, Pakistan is caught into a vicious inflation/currency
depreciation spiral. In the short run a predicament to stop this cycle is
to pursue restrictive fiscal and monetary policies, coupled with policies and
announcements that restore market agent’s confidence.
In the longer
run, Pakistan’s main problems can be solved by designing a credible sustainable
future economic trajectory that inspires consumers and investors’ confidence.
Economic decisions are based on expectations about the future economic path as
well as on the degree of certainty/confidence of development prospects. An
important component of such process is supply oriented policies. Pakistan’s
propensity to invest is much lower compared to high growing emerging market and
developing countries. Accelerating the share of Gross Fixed Capital Formation
in GDP would create additional production capacity to meet the increasing
demand of consumers and producers. Such supply-oriented framework designed
to reallocate the use of national income from consumption to investment
expenditures, may be accompanied by suitable demand management policies.”
It is
disappointing to see this conclusion or way forward, from government experts
and economic gurus. First para starts with a paradoxical statement. In solution
it is just jugglery of jargons and rhetoric.
In current situation experts are
expected to give specific line of action which would translate into positive
economic growth.
All the wizards
of subject and media are criticizing governments act but are not proposing
anything subtle solution to get this country out of this financial
whirlpool. Government is adamant to take
political millage through budget expense, ahead of upcoming elections.
Therefore, no good is expected from them.
In such conditions what is the solution?
On one hand
economy is not crumbling but melting. On
the other hand, government has proposed a deficit budget of more than PKR 4 trillion.
It plans hundreds of official free Hajj, upgrade of camp offices and list goes
on. In such frail economic conditions,
it is planning to allocate a large sum towards free laptop schemes and
likes. They appear to be in no mood of
reducing expenses.
Mere reading of financial
summary indicates that the country is virtually in a deficit of 100%. Total reliance is on borrowing which 14% more
then the amount allocated for interest repayment.
There is no
simple solution to this. It is essential
that both government and public work, in unison to pull the country out of such
dire situation; before people are on the streets and total lawlessness engulfs
the country. Where LEAs loses their
worth and 220 million are pitched against a few hundred thousand, out of which
most are guarding the elite. Most
important of all is avoiding bank run, which can only be avoided through sensible
and patient approach by all the citizens.
It has already been observed that people are withdrawing cash and
converting it into USD and Gold. This
practice is devaluing PKR by the day.
Focus of government in this “Operation Resurrection
of Economy” should be on reducing budget deficit and increasing tax net. To
start with they should look into the aspect of pay and perks cuts for
President, Prime Minister, Ministers, Senators, MNAs, MPAs, Judges, Star
officers of Armed Forces and Grade 20 & above civil officers. Reduction of 10% in all heads of expenditure. Stop all unnecessary international travels
and where necessary bare minimum participants should travel and that too in an
economy manner. No HiFi hotels and
motorcades at destinations, enjoy local cheaper food.
Referring to
taxing high salaried individuals mentioned in monthly report; it is quite
deceptive as against the actual budget. Irrespective of high salary threshold,
increased fuel and utility charges and devaluation of PKR has effected each
salaried individual adversely. They have
lost buying power by almost 30-35%.
Further taxation will be a killer effect whereby their take away home
will reduce, while inflation still stands at 13%+ or above. Contrary to monthly report by Finance
division, which proposes budget also, a reduction in taxes for individuals can
be observed. This change of mind appears
to be politically motivated in anticipation of any forthcoming elections.
Solution to
gather more tax is not taxing those who are willingly or unwillingly paying
full tax on their income. Idea is to
increase the tax net. Let’s take example
of “Chai Khanas”. Most of those are
owned and operated by people from a neighbouring country which has been very
ungrateful to Pakistan. They are using
infrastructure of this country without contributing a single penny in terms of
income tax. Yes, our police and local
civil administration does get a subsistence on regular basis. Clad in rags and torn shoes operating these
chai khanas 24/7; these individuals are paying rents as high as 200,000 per
month and almost same or more amount as gratification; yet encroaching
footpaths and roads. Many won’t believe but their income is estimated 250,000
to 300,000 per day per establishment, much higher then any of so called high
salaried individuals. Such
establishments need to be taxed, which in common terms known as grey economy.
To increase tax
net, all transactions above PKR5000 (limit can be set at lower level) be made
through banking channel, compulsorily.
In order to make physical transaction more difficult, currency notes
worth PKR 500, 1000 and 5000 be removed from circulation. Bank accounts of all citizens above 18 years
should be opened, National Bank can play a vital role, if private banks face
difficulty in doing that. Heavy turnover
tax for non-filers be imposed.
Controlling
inflation by increasing interest rates has never been able to deliver desired
results. It only ends up pushing up
inflationary pressures. At the end,
effect of interest is always passed on to the end consumer. Instead, interest
rates should be reduced and criterion for offering loans for industrial setup should
be made more stringent and followed strictly.
Controls should be placed in to negate any advantage taken by people in
power corridors, thus ensuring no write off takes place.
The concept of
supply and demand is one of the main driving factors in price hike. Measures to
curtail price hike due to this particular reason is extremely necessary to keep
inflation low. Likewise, capitalistic approach of maximizing margins is another
factor in price hike. Both these factors
play vital role in increasing Gini coefficient.
Glaring example is of banks which declare
Currently,
government price control mechanism is very primitive and imprudent. It is restricted to basic food commodity
items and subsidy through utility stores at retail level or imposing government
defined rates for daily commodity. This
methodology is unsustainable and irrational.
It is a burden for the government in shape of subsidy and loss for the
retailer, provided they follow government rate list. Price control should be done at source to
ensure inflation remains under control. This control is not possible unless industrialist/producers
are made to comply with bookkeeping laws and restricting profit margins When
prices are controlled at source level inflationary pressure can be reduced. Concrete
efforts can even take the country into negative inflation. This in no way indicates a communist or
socialist approach, but Islamic approach of fair profit and payments. Capitalistic
approach is to hoard money, by few, as the system allows investors to earn unrestricted
profits. Failure of capitalist system
started since 2008 and has been fluctuating since then. World economy will not gain sustainability
unless capitalist approach is rationalized and channelized. As far as Pakistan is concerned everyone has
to develop content and adopt austerity. Each
business must lower their profit margins in order to counter inflation. It is matter of survival which takes priority
on saving for future. Inflation is a vicious circle, increase in price of one commodity
increases dependent products prices multifold.
Fuel is the ideal example increase in fuel prices increases price of
everything and with higher ratio. It is
because product or service provider increases the margin to ensure higher
profits and cater for increased expenses in associated area. This cycle can only be reversed if ALL
involved restrict their margin. They
have to convince themselves to adopt survival mode. A prudent approach indicates increase in
crime and lawlessness when have nots are pushed against the wall. One should not forget French and Russian
revolutions. Peeping back in history reveals
that an Estates Generals and Monarchy exists in our political system which is
the reason for economic disaster of this
country too. Seed of
antidisestablismentarianism has already been sown, in no time crop will be
ready to harvest.
These are some
measures which can be taken in short term.
In long term government should look into the aspects of delinking PKR
from USD and linking it to Gold. SBP has to build a gold reserve and declare
PKR value against Gold. Excess currency
note printing has to be halted and PKR – Gold parity to be maintained at all cost
when issuing additional currency notes.
Incentives should be offered for people who bring in Gold for selling to
SBP without making international remittances. Share from Reko Diq should be
taken in terms of Gold rather then PKR. This
will help increase State Bank gold reserves making PKR stronger progressively. In not more than two years’ PKR will compete
with any of the strong currencies of the world. This improvement will always be resisted by
exporters, but in long run their production cost will reduce and their market
competitiveness will be maintained.
Facilitation of
taxpayers by offering them incentive like post-retirement medical facilities in
commensuration of their past status held and tax amount contributed. Systems in place at Canada, Germany, Norway,
etc can be explored to develop a viable solution for Pakistan. Reducing human
interaction while filing and assessing tax returns. Government has invested heavily in IRIS and
yet tax officials want people to personally visit rather than taking advantage
of technology to save time and money.
This generation must
suffer either way. It is our choice
between IMF or self-reliance. IMF slavery will be for all future generations
too, other option will give our future generations a free and prosperous
country. Cost is sacrifice of our never-ending race for the seven sins.
