Widening trade deficit

According to Pakistan Bureau of Statistics data, the country's trade deficit has increased by 15.97 percent in the first four months of the current year compared to the same period last year. This trend suggests that the boom-bust cycle continues to impact Pakistan's economy and that significant structural reforms are needed to address the issue.

The International Monetary Fund (IMF) highlighted this concern in their October 2024 Article IV Consultation and Request for an Extended Fund Arrangement. The IMF explained that repeated attempts to stimulate economic activity through fiscal and monetary measures have failed to generate sustainable growth, as domestic demand has outpaced Pakistan's capacity, leading to inflation and reserve depletion.

The incumbent government is currently considering incentives to boost exports, which would likely increase imports further, exacerbating the trade deficit. The IMF's Discretionary Policy Indicator (DI) analysis shows that discretionary monetary policy can lead to higher inflation, while low-frequency movements in M2 are not directly associated with growth.

The IMF concluded that strengthening the role of rules in the monetary policy framework is essential. The IMF's analysis did not highlight the fiscal policy's role in the boom-bust cycle, likely due to the ongoing program's focus on meeting ambitious revenue targets. Surveys conducted by Business Recorder revealed that domestic industries face higher input prices due to IMF conditions requiring full-cost recovery, which is often passed on to consumers.

The Fund acknowledged that revenue gains from these interventions may appear in FY27 but continue to target existing taxpayers, primarily affecting the poor through indirect taxes, which account for 70 to 75 percent of total revenue. To generate additional GST revenue, raising C-efficiency to 35 percent is suggested, but the C-efficiency ratio has declined from 27.4 percent to 22.8 percent over the past decade.

Despite having a relatively low standard GST rate of 18 percent, only a quarter of the theoretical base is taxed. The vast majority of basic goods remain exempt or taxed at concessionally low rates, and the post-devolution fragmentation of GST on services has added administrative complexity. High poverty levels in Pakistan, at 44.7%, are comparable to Sub-Saharan Africa, largely due to the indirect nature of taxes like GST, which negatively impacts poverty levels.