The general elections have concluded, and the process of establishing an elected government is in progress.
Two crucial aspects to monitor are how effectively the new government addresses soaring inflation and how prudently it manages the collection of taxes from individuals and businesses.
Should the establishment refrain from intervening post-election, there is a possibility of a robust parliament and a more inclusive government. However, if intervention occurs, a weakened parliament and a less representative government may struggle to handle inflation and tax matters judiciously.
Implementing excessive taxation has traditionally been an expedient method to generate revenue. However, this approach may no longer be viable. The election outcomes have underscored the public’s desire for equitable treatment, rather than being subjected to the whims of those in power.
Any undue intervention may prove counterproductive to restoring economic stability
With the national average consumer inflation persisting at 28.3 per cent in January 2024, Pakistani citizens and businesses are expressing dissatisfaction with the escalating cost of living and the mounting expenses associated with conducting business. The recent hike in gas tariffs for households and industries from January 1, coupled with the surge in fuel oil prices starting February 1, is poised to sustain inflationary pressures throughout February and March.
Moreover, the ongoing burden of managing the circular debt in the energy sector is expected to exacerbate challenges in containing inflation. The national average consumer inflation, ranging between 38pc in May 2023 and 26.8pc in October 2023 from January 2023 to January 2024, highlights the persistent struggle.
The State Bank of Pakistan, in response, opted to maintain its key policy rate at 22pc during its latest monetary policy review, indicating no immediate monetary easing, even in the upcoming March review.
This situation portends that the cost of living will remain elevated, pushing more individuals below the poverty line and imposing considerable financial hardships on low-wage earners. Additionally, the high cost of production and business operations will continue to burden industries and enterprises, potentially leading weaker and smaller entities to shut down or incur substantial financial losses.
The pressing question is whether the new government can implement policies that mitigate further inflation. Achieving necessary fiscal tightening to curb inflation appears challenging, especially considering the likelihood of a coalition government formation at the center based on preliminary, unofficial results from the February 8 elections.
The elected government will face challenges in pursuing true austerity, given the complexities of coalition dynamics and the persistent burden of domestic debt servicing. Addressing inflation through supply-side measures, especially with the collaboration of provincial governments, might prove problematic, considering potential difficulties in forming strong provincial governments based on unofficial election results.
Furthermore, proposed reforms, such as restructuring the Federal Board of Revenue (FBR) and separating fiscal policy formulation from tax collection, face scrutiny. The Pakistan Business Council (PBC) rightly questions the proposed placement of the tax policy board under the Ministry of Planning and Development, advocating for alignment with long-term economic plans and taxpayer representation in policy decisions.
The business community’s growing demand for fair treatment in taxation and business facilitation, along with increasing expectations from small traders and salaried classes, signifies a shifting landscape. The elected government must navigate not only class sensitivities but also geographical considerations, addressing long-standing grievances of industries in Karachi.
Effective handling of such complex issues necessitates a relatively strong parliament and inclusive federal and provincial governments. Undue intervention from external establishments may prove counterproductive to addressing these challenges.
