Economy rescued

Business Recorder

3 days ago

EDITORIAL: Prime Minister Shehbaz Sharif, yet again, credited his government with undertaking effective measures to achieve economic stabilization. This claim is fully supported, given that he single-handedly restored the International Monetary Fund (IMF) confidence in his administration's pledge to implement the reform agenda agreed under the 2019 Extended Fund Facility (EFF) programme, reflected by the nine-month 3 billion-dollar Standby Arrangement (SBA) with the Fund in June 2023, that removed all obstacles towards securing the current 36-month-long EFF agreed last year.
Attaining stabilisation was of paramount importance, given that the country was facing the looming threat of default attributable to the boom-bust cycle that has periodically characterized Pakistan's economy with imports rising to fuel growth that in turn widens the current account deficit, thereby requiring IMF and donor (bilaterals and multilaterals) injections.
It is therefore a singular achievement of his government that from a low of under 3 billion-dollar foreign exchange reserves in February 2023 the country has achieved 14.5 billion dollars as of 4 July 2025. What, however, remains a source of concern is that in spite of a massive rise in remittance inflows (up to 38 billion dollars last fiscal year) the country owes 16 billion-dollar rollovers to friendly countries.
It is important to note that Prime Minister also referred to low inflation (from 38 percent Sensitive Price Index to the current 3,81 percent in 2024-25) and a 10 percent decline in the discount rate (from 21 percent in June 2024 to 11 percent in June this year) as positive developments that would impact positively on the general public.
Sadly, these two positive developments have yet to filter down to the general public by raising their quality of life or indirectly through raising large-scale manufacturing (LSM) output, which would have a beneficial impact on employment opportunities given that LSM growth was negative 1.52 percent (July-April 2025) against 0.26 percent in the comparable period the year before. The reason for this is the fact that Pakistan's poverty level is on the rise – to 44.2 percent as per the World Bank with unemployment at a high of 22 percent.
It is necessary to determine why the feel-good factor is not being widely felt in spite of these two positive developments. Low inflation has not impacted more positively on the general public because the private sector which employs around 93 percent of the country's total labour force has been unable to give a pay raise commensurate to inflation for the past five to six years.
This, however, does not apply to the 7 percent who receive their salaries at the taxpayers' expense who have been given an annual raise higher than inflation. And in spite of the reduction in the discount rate it is double that of our regional competitors, which makes local industry uncompetitive. If one adds the input costs of electricity, gas and transport – items whose prices are administered under a rigid upfront IMF programme loan – the negativity in the LSM sector is explained.
The Prime Minister further claimed major reforms in the Federal Board of Revenue (FBR); notably, digitization and faceless processing which he stated enabled an additional collection of 500-billion rupees. This too must be appreciated; however, success of the enforcement measures was in relation to existing taxes that are mostly in the indirect mode whose incidence on the poor is greater than on the rich.
The Chairman FBR publicly noted the increase in collections in the sugar sector with his critics arguing that the recent rise in sugar prices is partly due to these enforcement measures that were passed onto the consumers and partly due to the flawed government decision to allow exports that led to domestic shortages.
That the country is embarked on a reform agenda, which is backed by a reaffirmation by the IMF Resident Representative in Pakistan, is a fact. However, a lot more is required to ensure that the effects of these reforms filter down to the poor and for that the government must slash its current expenditure (to narrow the deficit and reduce reliance on debt) as well as increase the pace of structural reforms, including raising reliance on direct taxes, and improving management while reducing inefficiencies and corruption.
Copyright Business Recorder, 2025