proposal to tax salary incomes under the exemption threshold of Rs 600,000 per annum has had to be withdrawn following strong backlash. The government has notified a task force to propose an implementation plan for separating revenue collection and tax policy. The Breton Woods Institutions do not want another country to default. Instead, they want local incomes to shoulder the fiscal burden for remaining current on payments.

The issue is being looked at from the fiscal and productivity lens. However, it is also a social and political matter.

Pakistan has been battered by thirteen economic crises since 1988. The current one surfaced on account of the Covid 19 pandemic; the disruption of foreign exchange inflows primarily as a result of policy rate spike above five percent by the US Federal Reserve to keep inflation under check; and the kneejerk response of the federal government in trying to curb imports, including that of raw materials. It has caused a massive loss of productivity and exports, thus aggravating the balance of payments crisis, resulting in stagflation, which means reduction in future export proceeds. This has already resulted in a contraction in large-scale manufacturing to the tune of 10.3 percent in the fiscal year 2023. Jobs, exports and revenue are being lost.

For Pakistan to do without debt restructuring or re-profiling, it needs to perform better on at least three fronts:

The first is the fiscal front. The government needs enough revenue for servicing the debt liability; current expense, including defence; and financing development for social cohesion, and providing a base for economic development. This needs sustainable fiscal progression based on a prudent tax policy and a practical, transparent tax administration.

The second front is external liabilities. A failure to meet deadlines is considered default. This needs maintaining balance of payments and a good future outlook at least in the medium term, i.e. up to fiscal year 2025, under the IMF cover to reach the next programme, under which a sustainable growth of 4 to 6 percent in real terms may be maintained.

Third, we have to shoulder the public debt burden, both internal and external. Debt servicing is currently the largest item in the annual budget on the expenditure side. Government debt is projected to reach Rs 60,839.90 billion in June. It was Rs 9,266.90 billion in January of 2011. Public debt servicing now takes up 63 percent of the gross federal revenue.

Rationalisation of the public sector wage bill, pension reforms, restructuring and privatisation of state-owned enterprises, energy sector reform are all needed at once.

If anyone of these pillars of economic solvency buckles on acute or progressive basis, a banking crisis will ensue. External account may hurt the assets market and real sector, forcing consolidation and mergers and failure of banks, if the trend not reined in by other means. As large-scale manufacturing has regressed by more than10 percent in one year, percentage of non-performing loans may rise. That could force the banks to tinker with capital adequacy requirements risking a run on deposits.

This is the reason the Central Bank has insisted that an insurance cover be available to the depositors. If there is a banking crisis, it has the potential to gridlock the whole economy. The economic crisis in the country is already showing the potential to trigger social unrest.

The World Bank says, “Recovery will require an ambitious medium-term reform agenda focused on fiscal consolidation and enhancing competitiveness, supported by strong political ownership and commitment. The reforms would include measures to increase revenues by broadening the tax base, including from closing exemptions and tapping increased revenue from agriculture, retail and property. It would also entail measures to rationalise fiscal expenditures, such as by reducing wasteful and regressive subsidy spending; and to restore private sector confidence through business regulatory reform and reforms to state-owned enterprises; and to address inefficiencies and high costs in the energy sector. More than 10 million people are currently just above the poverty line and at risk of becoming classified as poor if the situation deteriorates. Without further reforms, risks will remain exceptionally high, economic activity will remain constrained by import controls and weak confidence, while low investment and exports will undermine medium-term growth potential. A more robust recovery will require an ambitious medium-term reform agenda focused on fiscal consolidation and enhancing competitiveness, supported by strong political ownership and commitment.”

Now, the government can tax the rich, tax retailers, traders, big land holders and properties. Else, it can tax everyone, including salaries as low as Rs 600,000 per annum. The burden of reform should not fall disproportionately on current taxpayers. Under pressure from external account, the rupee has lost 35 percent of its value against dollar over the last 18 months. This has made all imports expensive, putting the burden of dearer fuel and fuel-related items on the poor. The rich are potential voters and political supporters.

On the other side, the treasury bucket is hemorrhaging. So, rationalisation of the public sector wage bill, pension reforms, restructuring and privatisation of state-owned enterprises and energy sector reform are all needed at the same time.

There is a quick political solution to the problem. The provinces may be asked to contribute more to the federal revenue. They currently contribute only about half a percent. Else, they may be asked to partner in debt servicing and the defence budget.

The writer is a director at the Sustainable Development Policy Institute. He tweets @tahirdhindsa