Minister Shahbaz Sharif, during his two-day visit (August 23-24) to Qatar, met with senior leaders of the brotherly country. As a result, Pakistan has successfully secured a $2 billion bilateral support package that will help it weather the financial crisis and avert an impending default.
A press release issued by the Foreign Ministry earlier said that during the visit, the prime minister would hold in-depth consultations with Qatari leaders to review the overall bilateral relationship. The focus, he added, would be on promoting energy cooperation, deepening trade and investment ties and exploring job opportunities for Pakistanis in the country. Qatar.
The large current account (CAD) deficit has forced the Pakistani government to take aggressive measures such as mandating pre-approval of imports, including machinery, automobiles and fully knock-down (CKD) mobile phones. This enabled the government to limit the depletion of foreign exchange reserves. The trade deficit in July ($2.7 billion) was significantly lower than in June. However, the import contraction policy forced a slowdown in the economy. Indeed, such ad hoc measurements cannot be maintained. Sooner or later, the restrictions must be relaxed and/or removed.
Therefore, over the next few months, the Rupee will face market momentum on its organic strength. Despite the recent improvement in the current account and the value of the rupee, foreign exchange reserves fell to around $7.8 billion in August 2022 from nearly $10 billion in April 2022.
The government must focus on creating an environment where exports can thrive and businesses can grow. This requires a comprehensive plan and clear direction from the government. Rising input costs, primarily fuel and energy, complicate business operations, especially with a 15% policy rate. After adding commercial bank margins, the cost of funds rises to 17-18%.
With such excessive rates, working capital and business growth needs cannot be met. This can lead to a situation where businesses may face closure, leading to the risk of unemployment and having a direct impact on government revenue.
Previously, on the instructions of the International Monetary Fund (IMF), the mark-up rate for the Export Financing Scheme (EFS) was increased from 7.5% per annum to 10% per annum and for the Long-Term Financing Facility (LTFF) by 7% per year. at 10% per year. It is now indexed to the policy rate, which ensures that the spread between the policy rate and the rates under the EFS and LTFF is maintained at 5%.
It is time for the government to step in to protect low-income groups and struggling businesses. Unfortunately, the current government has failed to show clarity and take concrete action in this regard. He took an orthodox approach, shifting the blame back to the public in the form of price hikes.
The high cost of electricity, which reflects inefficient decision-making and reliance on expensive energy sources, is blamed on domestic and commercial consumers. This means that the public must pay for the government’s poor decision-making. Furthermore, despite a decline in international oil prices and a recent appreciation of the rupee against the US dollar, the government has raised gasoline prices.
For revenue collection, the government relies on conventional methods and does not explore new avenues. In the budget for fiscal year 2022-23, the government imposed a 10% super tax on ten sectors that were already tax-compliant. As in the past, the tax imposed to bring powerful retailers onto the net has been removed under pressure.
It seems that the government does not really want to bring the untaxed into the tax net. Thus, it will continue to extract revenue from easy targets and industries. It also points to overall structural weaknesses in the economy that pose risks to a sustainable recovery.
Such a recovery is not possible without providing an enabling environment for existing businesses and new investors. With short-sighted policies and political instability, the economy will remain trapped in a vicious circle. Pakistan cannot present itself as an attractive destination for local investors, let alone attract foreign funds.
The gap between revenues and expenditures widened as successive governments posted increasingly large internal and external deficits, filled by reckless borrowing. It is mainly because our exports have not been sufficient. We need to support our export-oriented businesses. At the same time, we need to put in place policies that encourage emerging sectors.
The global economy is changing rapidly and the technology landscape offers new opportunities for growth. We need to increase our share of the global information technology and computer services export market. This can help generate a sustainable, long-term source of foreign exchange for Pakistan and reduce its reliance on leveraged funds.
The way forward for sustainable economic growth and inclusive development is the introduction of tax reforms and export-led growth initiatives. After the government, on the instructions of the IMF, removed subsidies on oil and electricity, the price hikes triggered hyperinflation.
Historically, leaders have done nothing substantial to stop the waste of resources by public enterprises. Effective measures to control such waste can significantly improve the share of the social sector and improve the standard of living of ordinary citizens.
In addition to the above, the government should improve overall governance to prevent interference by powerful institutions in executive matters. The July 13 IMF press release regarding the announcement of a service-level agreement on the combined seventh and eighth reviews of Pakistan’s Extended Financing Facility (EFF) requires Pakistan to maintain an exchange rate determined by the market and implement appropriate policy measures, including a proactive and prudent monetary policy.
The current policy rate of 15% has increased the cost of doing business in Pakistan. This played a major role in the downturn in the economy. The government needs to rethink its economic approach and rethink its strategy, bearing in mind that the current level of economic growth will create a huge problem for 230 million people. It is imperative that the government respond to public concerns, as the IMF press release points out, by expanding the social safety net to protect the most vulnerable.
Supreme Court Advocate and Writer Dr. Ikramul Haq is Adjunct Professor at Lahore University of Management Sciences (LUMS)
Abdul Rauf Shakoori is a US-based corporate lawyer