19th Feb, 2023. 09:05 am
Dar’s ruinous decisions
After dragging his feet for five long months, Pakistan Muslim League-Nawaz’s (PML-N) so-called financial guru Ishaq Dar has finally succumbed to the International Monetary Fund’s (IMF) justified demands of doing away with the disastrous decision of artificially propping up the rupee, cutting the energy sector’s losses and mobilizing some additional resources. But the route taken by Dar to achieve these goals remains highly controversial as well as harmful for the country’s battered economy and the people.
Let’s review Dar’s so-called corrective measures one by one, beginning with the mini-budget aimed at mobilizing Rs170 billion through indirect taxation, including by increasing the General Sales Tax (GST) to 18 from 17 per cent, and jacking up the excise duty on already hard-squeezed sectors such as cement and tobacco. There has been no attempt, not even a symbolic one, to broaden the tax-base, or force those sectors and individuals, which despite their high revenues and wealth, contribute peanuts to the national exchequer. High-end shopping malls, traders, professionals like lawyers and doctors, and many more fall under this category. So is the agricultural sector, which unfortunately, comes under the provinces where there is no political will to generate more revenues because of the presence of vested interests in assemblies, and also due to the fact that following the 10th NFC they receive loads of funds from the federal government, leaving the later without adequate financial resources.
The same goes with the hike in energy prices – electricity and gas. Rather than going for energy sector reforms to get rid of the circular debt by stopping electricity theft and transmission and distribution losses, the government has opted for the easy way out; burden those who are honest bill payers. As far as the increase or the rationalization of gas tariff is concerned, it has been pending for a long time. But here again, the government should be focusing more on reforms and instead of providing piped gas to households, where electricity should be introduced for cooking, start using the natural resource for cheap and environment-friendly power generation.
Dar’s decision of artificially keeping the rupee-value high against the dollar has already done enough damage to the economy. It created a thriving currency black market, resulted in the fall of remittances and exports and shook the confidence of the businesspeople and investors in Pakistan. The reversing of Dar’s ruinous currency policy has come too late. The IMF negotiators appear in a “take it, or leave it” mood, underlining the changed dynamics of Pakistan’s relations with the fund. The IMF now requires prior actions from Pakistan before the release of any new tranche. This shows that it lacks trust in the government. Dar thought that he would be able to browbeat the IMF and somehow wiggle out of the front-loaded programme. But he failed and, in the end, had to agree to all the conditions that his predecessor, Miftah Ismail, had been saying all along as the country remained short of options.
The impact of Dar’s poor economic management would be devastating for Pakistan. The raise in GST, and the increase in the petroleum and energy prices will increase the inflationary pressure, all set to hit at least 30 per cent by March, according to some leading economists. This will force the State Bank of Pakistan to raise the interest rate further. The market fears that the interest rate, already at 17 per cent, could be raised further. This would further stifle Pakistan’s already struggling economy because of the lack of both foreign and domestic investment, pushing economic growth into the negative.
An increase in the interest rate would also add to the burden of Pakistan’s debt as one per cent hike means an additional burden of Rs250 billion in the country’s debt. This would further complicate the budget making. As a result, the budget deficit is all set to widen, the debt and inflation to shoot up and growth to slide into negative trajectory. The flag bearers of ‘Old Pakistan’ are taking the country towards a long painful era of stagflation.