In a recent in-depth discussion, World Bank economist Nauraiz Rana and Dr. Miftah Ismail, a former Finance Minister of Pakistan, engaged in an exploration of Pakistan's economic landscape. They explored critical issues, potential solutions, and the essential role of leadership in guiding the nation toward stability and prosperity. Various topics were examined, including the financial struggles of state-owned enterprises (SOEs), challenges in privatization efforts, the influence of the IMF, long-term strategies, and most importantly, the moral authority of the current government.
Pakistan is grappling with urgent economic challenges that demand immediate attention. Despite protracted discussions regarding the privatization of key sectors such as power and steel, progress remains elusive. The country's fiscal situation is precarious, marked by a widening deficit at approximately 8% of the GDP.
The persistent losses incurred by state-owned enterprises exacerbate the predicament, necessitating decisive action. Consequently, Pakistan has been confronted with escalating inflation, heightened unemployment levels, sluggish GDP growth, and a depreciating currency in recent years.
In addition to privatization efforts, maintaining fiscal discipline is of paramount importance. A significant portion of government revenue is currently allocated towards servicing debts, leaving scant resources for vital sectors such as education and healthcare. Dr. Miftah underscored the importance of understanding the underlying fiscal dynamics to grasp the enduring nature of Pakistan's economic challenges.
Since the 2010 NFC award, a substantial portion of the Federation's revenue, approximately 57.5%, has been allocated to the provinces, perpetually pushing the Federation towards insolvency and necessitating borrowing even for debt servicing—a classic debt entrapment scenario.
Moreover, despite increased revenue generation, the provinces have underutilized their taxation authority, particularly in sectors such as property and agriculture. This places an unequal burden on the Federation, primarily relying on manufacturing for taxation, thereby undermining export competitiveness. Additionally, while government subsidies are essential, they often distort market dynamics, discouraging productivity.
Dr. Miftah also highlighted the inherent resistance to taxation among individuals, with only a fraction of businesses contributing despite benefiting from public infrastructure financed by taxes. He emphasized the need to reshape mindsets to view taxation as a civic responsibility. Unfortunately, vested interests frequently impede reforms, leading governments to adopt expedient, albeit less effective, measures such as increasing sales taxes.
Furthermore, Dr. Miftah examined the repercussions of regressive taxation, evident in Pakistan's economic landscape, exacerbating poverty rates and pushing an additional 20 million people below the poverty line. This perpetuates a cycle of poverty, compounded by the birth of 8 million babies annually, straining educational resources. Consequently, 40% of children remain out of school, jeopardizing their ability to compete globally and adapt to technological advancements, raising concerns about Pakistan's trajectory, which once surpassed countries like Bangladesh and India but now lags.
In the short term, prioritizing poverty alleviation and education is imperative. Direct financial assistance to the most vulnerable segments of society and a temporary halt on non-essential infrastructure projects are prudent steps. Addressing population control is also a pressing challenge, with Pakistan's unsustainable population growth rate straining resources and exacerbating socioeconomic issues. Promoting family planning initiatives and investing in education are critical steps toward tackling this demographic challenge.