Impending Economic Challenges By Dr Qaisar Rashid
The year 2024 is approaching fast – to be replete with economic challenges of indomitable nature. The immediate challenge would be to secure funding from the International Monetary Fund (IMF) to reach the cross-roads of July 2024.
The IMF has so far released $1.2 billion, in its first tranche, out of total $3billion bailout as part of the reform program. Under a staff level agreement reached last month, the IMF is yet to release $700 million, the second tranche, in January next year, subject to the approval by the board meeting.
In relation to the IMF, there will be no chances of debt restructuring. There will, however, be all chances of economic restructuring. This would be a tricky area. Economic restructuring is always agonising, especially when it is forced from outside.
In March 2024, expectedly, a newly elected coalition government would sit in the parliament to deal with economic crisis amassed over the years. The newly elected government would be tasked to reignite economic growth, given the total size of Pakistan’s economy worth $350 billion. The government would be availing itself of the third and last tranche of the IMF. This would be the testing times: from March to June – whether or not to be eligible for the next round of the IMF loan package for the financial year 2024-25.
The first challenge would be how to tax the retail sector of the economy. The government would have to confront the retailers to bring them to the tax net. Similarly, professionals such as doctors and lawyers who do business in cash would have to keep ledgers (physical or digital) for recorded transactions for tax purposes. These would be a step towards the documentation of the economy.
The second challenge would be how to tax the real estate and property. The IMF thinks that the economy should be revitalised by reinvestment – to circulate the wealth. The IMF wants the Pakistanis to shun the laidback approach of parking money in certain areas such as real estate and property as investment and wait for its doubling to earn profit. By parking money, reinvestment, which is prone to profit and loss, is not possible, and this is why the manufacturing sector has been shrunken and the export potential has been minimised.
The third challenge would be how to run a subsidy-less economy. The Pakistanis have not tasted the life without subsidies. Nullifying subsidies to electricity, oil, and natural gas sectors would affect inflation, which has presently exceeded 30 percent, especially after the recent hike in the price of natural gas. High taxes and high tariffs would be the hall mark of the economy running without subsidies. The economy would be on its own, so would be the people.
The fourth challenge would be how to introduce reforms in the government sector. It is not only to reform the Federal Board of Revenue to make it efficient, but it is also to reduce the size of the government sector. At the Center, several federal ministries would go redundant and several would be devolved to provinces, which would bear their expenses. The constellation of bureaucrats at the Center would be discouraged.
The fifth challenge would be how to meet certain targets of economic growth. Presently, the economy is experiencing stagnation, but it is projected by various financial institutions that the economic growth would be between 2 percent and 3 percent in the next year. The new government would face the constraints of taking unpopular decisions to tax people and bearing the brunt of slow economic growth.
The delivery of the next bailout from the IMF is expected after July 2024. The budget for the financial year (2024-25) would be under the terms and conditions of the IMF negotiated earlier, such as imposing taxes on certain sectors which were exempted in the past, privatising state-owned enterprises to reduce expenditures, and making policies to invite foreign direct investment. One thing is certain, the year 2024 will witness a change in the economic model of Pakistan, at least under the IMF watch. The economic model would be a growth oriented model in which money would be invested to stimulate the economy with equal chances of profit and loss.
The budget for the financial year 2024-25 would be a budget promoting information technology. This may not be the direct demand of the IMF, but the conditions it is imposing to stimulate the economy and promote export and earn foreign exchange cannot be fulfilled by ignoring this sector. Other than that, the manufacturing sector would be the mainstay, though revival of the agriculture sector may also get priority.
The Pakistanis may take some time to get adapted to this economic model because they have not learnt to do indigenous manufacturing except in certain small scale industries such as cutlery, leather goods, sports and power looms (weaving industry). For any kind of manufacturing, the restraining factors are energy deficiency and high energy bills. Further, no restrictions on import of manufactured products, as per the demand of the IMF, would keep the manufacturing sector inhibited. Nevertheless, the sector of information technology would take time to flourish. There is no swift switching. Pakistan needs investment information technology in terms of opening vocational institutes.
From March to June 2024, the government in Pakistan will have an option to open talks with the IMF on two points: first, Pakistan be permitted to restrict import to let flourish the local manufacturing industry; and second, Pakistan be offered some provision to include the otherwise prevalent black economy into the mainstream. In the past, the IMF rejected the Tax Amnesty Scheme. This time, a way round the same objection has to be found.