Given its responsibility not to waste the taxpayers’ money and the prevailing economic conditions, the federal cabinet, at its maiden meeting, decided to reduce the caretaker government’s spending.

Caretaker Prime Minister Anwaarul Haq Kakar says the interim setup will try to ensure financial discipline as the people pay taxes to enable the government to provide a secure environment. Later, he clarified that the interim government was supposed to carry on with the policies already set in motion, not re-design the government’s model or structure. Accordingly, a plan is being evolved, with the prime mandate being to assist and monitor the electoral process.

If and when the idea of the sanctity of taxpayers’ money is implemented, it can make taxpayers feel comfortable that their money is being well spent and not wasted in duplicating institutional functions or misused. A congenial environment may eventually be created for tax revenues to go up.

But to further encourage voluntary tax compliance, removing inequities and unfairness in the system is necessary. For example, a salaried person pays up to 35 per cent of his earnings to income tax, while a rich exporter may pay just 1pc in income tax.

SIFC may lead to the duplication of institutions as the role of the Board of Investment has become blurred

The reliance on indirect taxes makes up 60pc of the total revenue if the collection from withholding tax (WHT), an indirect tax collected in sales tax mode, is excluded. WHT accounts for 70pc of the direct tax revenue.

The WHT taxation mode continues despite reported objections by the Auditor General of Pakistan. And even if the Federal Board of Revenue achieves this year’s target of Rs9.415 trillion, the tax-to-GDP ratio will only reach the low level of 9pc.

Finance Minister Shamshad Akhtar wants the ratio to be raised to 13pc, which is very difficult to achieve given past experiences. In Pakistan, the ratio has ranged around annual 7-8pc.

Looking at the surging expenditure side, senior political economist Pervez Tahir, in an article titled ‘A cabinet fit for purpose’ recently wrote that 10 ministries and 14 divisions (instead of the existing 33 and 40 respectively) are all that it takes to run the federal government smoothly, economically and consistent with the 18th Amendment. This, he adds, also provides the strongest entry point for cutting expenditure and civil service reform.

Despite its recognised merit, creating the Special Investment Facilitation Council (SIFC) to ensure the ‘fast track’ promotion of foreign investment with a focus on Gulf Cooperation Council countries is seen primarily as an alternative approach to long-term governance and administrative reforms. With SIFC in action, the role of the Board of Investment is blurred.

The best of policies can not be effectively implemented without efficient and sound governance

The best of policies can not be effectively implemented without efficient and sound governance. Such exercises as the creation of SIFC lead to the duplication of institutions, which is common in Pakistan and has always been a cause of disturbance among institutional working, according to a critical analysis of SIFC’s positives and negatives.

Strict financial discipline requires the government’s excessive borrowing from banks, which contributes to the price spiral, to be cut on a priority basis with synchronised cuts in current expenditure.

As the inflation rate in Pakistan is much higher than in neighbouring countries, analysts say endogenous factors have played a much more significant role in domestic inflation than exogenous factors. That also explains the volatility in the monetary policy outlook.

In July 2023, Pakistan’s Consumer Price index was recorded at 28.3pc against Sri Lanka’s 6.3pc, Bangladesh’s 9.69pc, India’s 7.44pc and China’s 6.4pc.

Overall, real wages have fallen by upto 29pc from December 2018 to July 2023, according to an independent economist. And the unemployment rate, he says, is expected to go up to 10pc during FY24.

High inflation is a key problem that needs to be controlled, says Dr Omar Javaid. Falling inflation will not only enhance the fiscal envelope but also provide greater room for reducing policy rates. The fiscal space so acquired will provide greater impetus to economic growth and reduce local debt repayment needs.

He observes that the policy rate is over-emphasised as the main tool for curbing inflation, while it is quite evident that supply-side–related governance measures are also significant in this regard.

The International Monetary Fund needs to be sensitised to this need to shift away from the overboard austerity emphasis, Dr Javaid suggests, to supply-related reforms/administrative efforts.

Structural reforms, to quote the European Central Bank (ECB), work on the supply side of the economy. By tackling obstacles preventing efficient and fair production of goods and services, they help increase productivity, investment and employment.

These reforms, ECB notes, make it easier for companies to conduct business and plan for the future. Households, in turn, may benefit from cheaper (and better) products, which also means more money to spend on other goods.

In Pakistan, financial bailouts are necessary for the economy to remain solvent for a short period. This brief reprieve may be anchored in a comprehensive home-grown economic strategy of structural reforms that can revive economic growth.

This task awaits the next elected government, which needs to be in place sooner than later.

Published in Dawn, The Business and Finance Weekly, August 28th, 2023