Making our way to sustainable growth
I provide some analysis on Pakistan’s present economic situation and upcoming obstacles in this piece. This evaluation offers a thorough perspective of the country’s economic health by highlighting important aspects like growth, stability, inflation, tax policy, and fiscal discipline.
Pakistan’s economy has demonstrated resiliency over the last three years, transitioning from a period of high inflation and slow development to one of low inflation and recovery. The economy has avoided a crisis, but growth projections are still modest. Although this shift is a positive step, it also shows that consistent work is needed to create strong and long-lasting progress.
For more hopeful expectations, the muted forecasts point to underlying structural problems that must be resolved. The nation’s transition from near-collapse to recovery mode serves as both a reminder of its enduring vulnerabilities and a monument to its resilience.
C/A dynamics and stability
Stability in Pakistan’s current account is an important step in preserving economic balance. However, timely rollovers and fulfilling export and remittance goals are necessary for this stability. Reliance on outside forces to preserve stability draws attention to possible dangers and unknowns. The economy could become unstable if there are any interruptions in these areas.
Uncertainties around the Trump Tariff continue to be one potential source in the near term, but they might also present possibilities. Following the India-EU free trade agreement (FTA), maintaining access to the EU market should continue to be a top priority in the medium run. To maintain long-term stability and lessen dependency on foreign aid and remittances, it is essential to diversify revenue streams and boost local output.
Monetary policy in relation to inflation
The headline inflation has declined significantly, but overall price levels have not followed suit. Core inflation, which is almost 9%, continues to be the linchpin of monetary policy, indicating the challenge of managing inflationary pressures.
The reduction in headline inflation is encouraging, but the persistence of high price levels suggests underlying structural issues in the economy. Managing core inflation requires a multifaceted approach that addresses demand-side and supply-side constraints.
Furthermore, transparent and data-driven monetary policies are crucial for maintaining public confidence and ensuring economic stability. A reduction in interest rate from 22% to 12% is a significant positive development and private sector credit has started to increase.
Tax policies and tariffs reform
Pakistan’s tax policy is undergoing positive changes with the expansion of the tax net to more sectors. However, tax rates remain “punitively high.” The government’s intention to abolish the non-filers category is a step in the right direction, however, half of the current tax filers do not contribute anything. This structural problem of tax collection needs to be addressed to maximise revenue.
Customs tariff reforms have also been initiated, indicating a broader effort to overhaul the tax system. Reducing tax rates while broadening the base could stimulate economic activity and increase overall tax revenue. The tax structure has significant implications for businesses, investments and overall economic activity.
Fiscal discipline, public expenses
Historically, the actual current expenditures have surpassed budgeted levels, while development spending has fallen short. Currently, the fiscal trajectory aligns with the budget, which is a positive development. Public expenditures on subsidies have declined from 16.2% in 2022 to 7.2% in 2024, indicating a more focused approach to resource allocation.
Defence expenditures have also seen a reduction, falling from 22% to 12.4% of total expenditures, though a substantial increase is imminent. However, the increasing gap between budgeted and actual expenditures on the Public Sector Development Programme (PSDP) is concerning. Efficient allocation of funds can significantly boost economic growth.
Revenue losses, tax evasion
On the upside, almost Rs9 trillion is stuck in the system and even a partial recovery can bring dividends without burdening the existing taxpayers.
The Tax Expenditure Report 2024 indicates a revenue loss of Rs3,879 billion due to tax concessions and exemptions. Income tax, sales tax and customs duty losses are substantial, highlighting significant gaps in tax collection. Additionally, the annual tax revenue loss due to illicit trade is estimated at Rs750 billion. Furthermore, Rs4,457 billion in tax revenue is stuck in over 100,000 court cases. Addressing these issues is critical for increasing government revenue and improving the fiscal health. The government needs to strengthen tax enforcement, streamline legal processes and formalise the undocumented economy.
Conclusion
The budget 2025-26 presents an opening. While progress has been made in certain areas, significant challenges remain. The government must focus on maintaining stability, controlling inflation, reforming the tax system and ensuring fiscal discipline. Addressing tax evasion and the undocumented economy is also crucial for enhancing revenue collection. These efforts will pave the way for sustainable economic growth and prosperity. The nation’s ability to navigate these economic challenges effectively will determine its future trajectory.
The writer is the founder and executive director of PRIME, an independent economic policy think tank
