During the current fiscal year, Pakistan has made some noticeable economic gains partly — if not entirely — due to the low-base effect of the last fiscal year when the economy shrank 0.4 per cent.

Home remittances have surged, exports have started growing, the rupee has gained some of its lost value, forex reserves are up, the large-scale manufacturing output has risen, banks have made larger loans to the private sector and tax revenue has also gone up.

These are welcome developments. But sustaining their momentum and achieving sustainable high economic growth require greater fiscal-monetary coordination and tougher fiscal discipline. The next fiscal year is the fourth year of the PTI’s maiden government. And, it wants to increase development spending for public good as well as for amassing some political capital ahead of general elections in 2023. Finding fiscal space for doing that also requires improvements in some aspects of the fiscal policy and better fiscal-monetary coordination. To achieve broader mid-term goals like posting durable economic growth, increasing employment rate and keeping inflation at the level enough to support growth but not beyond that will also require a more harmonious relationship between the federal and provincial governments.

Covid-19 was one key factor behind last year’s economic slump. And, if the economic growth this year also remains lower than expected, the pandemic could be partly blamed for it. The post-pandemic dynamics of the economy are different from what they were before Covid-19. Pakistan cannot stick to old ways of running the economy anymore without risking both the pace of growth as well as its sustainability.

The exceeding burden of domestic and external debt servicing has squeezed so much fiscal space that financing even a modest development programme will be too difficult in the next fiscal year

Our new finance minister, Shaukat Tarin, is apparently aware of the key challenges facing the economy at the moment and has assured the nation he will handle them. The IMF’s stalled lending programme has been reactivated and the Fund is pushing Pakistan to keep its fiscal house in order to seek economic stability. But many in the government’s policymaking circle, including Mr Tarin, believe Pakistan should renegotiate some of the loan conditions that they think would squeeze room for economic growth.

But even if the Fund agrees to relax these or other fiscal discipline conditions — the most important being a high tax revenue target and gradual but fast-paced withdrawal of energy subsidies — Pakistan will have to come out of what has become its fiscal comfort zone.

This comfort zone is characterised by the policies of “borrow more to fix fiscal gaps,” “continue to offer subsidies for the ultimate benefit of the elitist business interests,” “keep mum on defence spending” and “don’t rationalise the government’s current expenditures”. But now the country will have to come out of this comfort zone — the sooner the better. Otherwise, sustaining even a modest growth rate of 3-5pc will become too difficult.

In defence spending, concerns of those economists are discounted who demand a cut in non-combat defence budget or spending that is not directly related to the defence capability. In case of subsidies, calls for linking them with their desired outcome on productivity are ignored conveniently.

And, with regard to the day-to-day government expenses, all claims to rationalise them turn out to be promises made only to be broken.

Heavy subsidies are offered to some manufacturing and export sectors that contribute to the enhanced budget deficit

All this has to change now. Because the post-pandemic economic world is harsher in its characteristics and demands stricter implementation of what needs to be done. The planned withdrawal of the US forces from Afghanistan by Sept 11 and the ever-deepening political-military crisis in the Middle East pose a serious threat to regional peace and stability. The continuation of fiscal imprudence at such a crucial time can be fatal for a country like Pakistan that has to play a key role in promoting peace and stability on its own and on the insistence of some international powers, including the United States and China.

Subsidies worth hundreds of billions of rupees to wheat and sugar cane sectors notwithstanding, the nation has to brave wheat flour and sugar crises year after year. Such policy failures play a role in expanding the budget deficit. Hundreds of billions of rupees’ subsidies are offered to some manufacturing and export sectors that also contribute to the enhanced budget deficit. Whenever the IMF wants a gradual withdrawal of such subsidies, the government of the day defends them and seeks relaxation from the Fund claiming that the withdrawal of subsidies would choke economic growth at least in the short run. But no government ever bothers to conduct a cost-benefit analysis of such subsidies and their actual pro-growth impact as their beneficiaries exercise huge influence in policymaking circles.

The continuation of these and similar practices have taken Pakistan to where it is now: budget deficits have become a norm. When the deficits reach too high a level, some cosmetic measures are taken in the name of fiscal belt-tightening and larger domestic and external borrowing is used to finance them, complicating the very basic problem further and making corrective measures too painful and politically challenging for the government.

But the exceeding burden of domestic and external debt servicing has now squeezed fiscal space so much that financing even a modest annual development programme and meeting increased national defence requirements would be too difficult in the next fiscal year.

Mr Tarin has come up with the idea of linking taxation to where growth occurs and reducing sales tax rates to promote documentation and expansion in the tax base and to save tax-burdened troubled industries and small and medium enterprises from dying.

He is right in his assessment that two roadblocks to documentation and expansion in the tax base are high rates of sales tax and tax exemptions being enjoyed by powerful lobbies. But can he really put Pakistan’s fiscal house in order? Let’s hope for the better.

Published in Dawn, The Business and Finance Weekly, May 24th, 2021