Will Pakistan’s crisis-hit economy finally recover? | Business & Economics

Islamabad, Pakistan – Pakistan’s government will present its annual budget on Wednesday, aiming to balance domestic obligations to the country’s 240 million people with demands for fiscal consolidation from its main lender, the International Monetary Fund (IMF).

The country is aiming to boost gross domestic product (GDP) growth to more than 3.5 percent from 2.38 percent in the previous fiscal year as it seeks to revive its economy after nearly two years of stagnation due to political instability.

Pakistani officials have held several meetings with the IMF recently, and Prime Minister Shehbaz Sharif, who came to power as head of a patchwork coalition government after February elections, has been at the forefront of those efforts.

Sharif recently visited Saudi Arabia, the United Arab Emirates and China – Pakistan’s closest allies and considered key players in the country’s economy – to discuss opportunities to boost foreign direct investment in Pakistan.

But is Pakistan’s economy showing signs of recovery? Are the government’s measures helping ordinary people? What do analysts think should be the priorities for the upcoming budget?

Is Pakistan’s economy really showing signs of recovery?

The latest figures released by the country’s central bank and international organisations such as the IMF paint a cautiously optimistic economic picture.

Pakistan’s inflation rate, which soared to 38% a year ago in May 2023, has slowed to 11.8% over the past 12 months, according to a report by the Pakistan Bureau of Statistics. The price of a kilogram (2.2 pounds) of wheat, which cost more than 130 rupees ($0.47) in May last year, has fallen to 102 rupees ($0.37) this year.

Fuel prices have also shown a downward trend, from 288 rupees ($1.03) per liter (0.26 gallons) in May 2023 to currently 268 rupees ($0.96) per liter.

The country’s foreign exchange reserves, held at the central bank, fell to $2.9 billion in February 2023, enough to cover three weeks of imports, but have now risen to more than $9 billion, roughly the same as the average for the past six years.

Similarly, the Pakistani rupee, which has lost over 60% of its value against the US dollar in the past two years, is currently somewhat stable at 280 rupees to the dollar.

The stock market has also been showing a bullish trend, hitting a record high of 75,000 points last month, but has since slowed.

The IMF completed a nine-month $3 billion standby arrangement program with Pakistan in May and has also noted the country’s improving macroeconomic situation.

“Moderate growth is returning, external pressures are easing and inflation, while still elevated, is starting to fall,” the bank said last month.

Economists agree there are signs of stabilization but urge caution, noting that the improvement is due to restrictive policy decisions, including export restrictions, and electricity prices remain high.

“There is stability but no real growth. It is likely to show up in the form of slower growth as industry is highly dependent on imports,” Islamabad-based economist Safiya Aftab told Al Jazeera. “Jobs are not growing and bills are becoming unpayable.”

Karachi-based economist Amar Habib Khan is more optimistic about the chances of an economic recovery.

“The economy is in a process of adjustment. As this continues and reforms proceed, a trickle-down effect will start to take hold. If this continues, inflation will gradually subside and companies will start reinvesting to create more jobs,” he told Al Jazeera.

Do improving economic indicators reflect the interests of the people?

Sajid Amin Javed, a senior economist at the Sustainable Development Policy Institute (SDPI) in Islamabad, said this “ad hoc stabilization” had been achieved in the past but was never sustained. “As soon as the economy moves towards higher growth, it disappears,” Javed told Al Jazeera.

Javed said Pakistan’s IMF-led stabilization measures have always come at a cost to the people. He said stabilization measures such as import restrictions and raising energy prices to meet revenue targets have slowed economic activity. Media reports ahead of the budget indicated the government may increase taxes and remove some subsidies on items such as fertilizer, which could lead to higher prices.

“People continue to suffer from energy inflation, house rents and rising prices of goods and services. The next Budget may bring in a fresh wave of inflation making life even more difficult for the common man,” Javed warned.

Hina Shaikh, an economist at the UK-based International Growth Centre, was also skeptical that the stabilisation could continue, noting that it was vulnerable to fluctuations in global oil prices.

“The exchange rate is also very sensitive to inflation,” said the Lahore-based economist, and a weaker currency could increase Pakistan’s debt-servicing costs.

Pakistan’s public debt remains a major burden on the country’s finances, with external debt and liabilities exceeding $130 billion this year, up 27 percent from last year.

According to data released by the State Bank of Pakistan earlier this year, Pakistan needs to repay about $29 billion in foreign debt over the next 12 months.

What should Pakistan do?

Experts stress the importance of broadening the tax base rather than simply imposing additional taxes on those who are already subject to taxation, such as salaried workers.

Pakistan’s tax-to-GDP ratio currently hovers around 10 percent, one of the lowest in the world, due to undertaxation of various sectors including agriculture, retail and real estate.

For example, agriculture, which accounts for about a fifth of Pakistan’s GDP, contributes less than 1% of the country’s tax revenues, a trend that is mirrored in the real estate sector.

A report published last year by the International Growth Center, a global research institute, highlighted that Pakistan’s most prosperous province of Punjab, with a population of more than 100 million, collects less urban property tax than the Indian city of Chennai, which has a population of about 10 million.

“The tax net needs to be widened and those in the formal sector need relief so they can reinvest in the economy,” Khan said. “Tightening the tax net will not help as the formal sector is already overtaxed and has no incentive to reinvest in the economy.”

SDPI’s Javed suggested that the government should present a budget that supports economic activity instead of just focusing on meeting revenue targets by taxing those who are already subject to tax. Recent reports have suggested that solar panels and other clean energy infrastructure may be taxed, but the government has denied that there are any such plans.

“Taxing solar panels and other green energy solutions to meet revenue targets will have a negative impact on the economy in the medium to long term,” he said.