“Shehbaz Sharif’s Government is not Taking Pakistan in the right direction.”

Dr. Miftah Ismail holds a PhD in Public Finance and Political Economy from the Wharton School of Business, University of Pennsylvania. He is a professional economist, worked at the International Monetary Fund (IMF), and has served in leading positions with various public and private companies, such as Sui Northern Gas Company Pakistan, Pakistan International Airlines Corporation, Punjab Board of Investment and Trade, Ismail Industries Ltd, Candyland Confectionery, and Astroplastics (Pvt) Limited. He is the president of Karachi American School, a member of the Advisory Committee of the Institute of Business Administration (IBA), Karachi, and its visiting faculty member.

SouthAsia: How would you assess Pakistan’s current economic situation, and what are the key challenges the government must tackle?
Dr. Miftah Ismail: The biggest issue with the current economic situation is that the average Pakistani has become poorer over the last three years, and per capita GDP has also declined yearly. This means that the purchasing power of Pakistanis has gone down, which is the biggest challenge this government must address. It has to try to reduce unemployment and increase the average income.

Q: Do you think Prime Minister Shehbaz Sharif’s economic policies are taking Pakistan in the right direction? Where do you see room for improvement?
A: Shehbaz Sharif’s government is not taking Pakistan in the right direction. Yes, we do have economic stability that we did not have three years ago but that’s mainly because firstly the international oil prices have come down and thus the pressure on our current account is reduced and secondly because the high interest rates maintained by the State Bank over the last two years have reduced aggregate demand and also diminished the demand for imports. In this curtailed demand scenario, therefore, macroeconomic stability has been achieved. Still, the country’s people are getting poorer every year, and a lot needs to be done in terms of structural reforms before we can again embark on a growth strategy. The growth strategy, along with much-needed reforms to bring about growth, is where Shehbaz Sharif’s government has completely failed this country.

Q: Pakistan’s debt continues to rise. What steps should the government take to manage and reduce this burden effectively?
A: Pakistan’s debt has been going up for the last few years under various governments, including the PPP, the PML-N and the PTI and now under the PDM-led government and unless and until we make structural changes including for instance reducing the share of money that goes to the provinces through the NFC award and unless we decrease the size of all governments, we will not be able to reduce our expenses and hence we will not be able to reduce the overall deficit, which contributes to our debt every year. The fact that we’re already taxing our corporations at 61%, the fact that we’re already taxing our individuals at 38.15% and our business individuals at 49.5% suggests that there is not much room to increase tax rates, and so the only thing left now to do is to try and reduce government expenditures. Still, the government is unwilling to do this.

Q: Inflation is a major concern for Pakistanis. What are the primary causes, and how should the government address them?
A: There are two causes for the recent inflation in Pakistan. One is the rapid devaluation of the Pakistani rupee against the dollar, which made imports more expensive, and the second is an increase in international commodity prices, especially oil prices. Then, of course, between September 2022 and February 2023, we kept the rupee artificially inflated at 229 or 230, and then, when we had to let go. The rupee went to 270 a dollar, and the government could not manage it properly. The dollar went to Rs 310, bringing in a lot of inflation as high as 38% in some months. But now the rupee is stabilised, so commodity prices have decreased, which has helped. So, the question remains: why was the rupee devalued against the dollar so rapidly? To find the answer, you have to go back to the fact that we have had deficits over so many years, and we’ve been printing money to fund those deficits, and if you print money, of course, the value of your rupee will go down, and this then reflects in the exchange rate. Also, we tried to stop exchange rates from naturally devaluing, but once you stop it for a little while, you can only hold it for so long, and then when you have to let it go, the rupee value plunges.

Q: What key economic reforms are necessary for long-term stability in Pakistan?
A: The key economic reforms that we need for long term stability and growth in Pakistan are reducing the structural reasons for our budget deficits, which is to say reducing the NFC award and doing away with exemptions for agriculture income and bringing agriculture income into the tax net which also allows people to evade taxes who have nothing to do with agriculture. Also, we need to bring retailers into the tax net. We need to reduce government expenditures, privatize, and create more provinces because we don’t actually devolve power to the local governments to educate our children. The honest answer is that the only way we can grow economically is if our population is literate, and with 40% of your children out of school, no economic policy will make you grow.

Q: How should Pakistan address the energy sector’s inefficiencies to reduce costs and improve sustainability?
A: Pakistan has one of the most expensive energies in the world and in all comparable countries, from Indonesia, Malaysia, Thailand, to South Africa, Vietnam, Cambodia, and Kenya, and indeed India and Bangladesh have cheaper gas and electricity than Pakistan. This just harms our productivity and competitiveness. The way to address these inefficiencies is first to privatise everything and then make the government stay away from these things. Don’t over-regulate them; let them compete to the extent we can. We need regulators who are smart enough and keep consumer interest paramount.

Q: How essential is the IMF’s support for Pakistan’s recovery? Can the country stabilize without relying on external loans?
A: IMF is the lender of last resort. You go to the IMF when nobody else is willing to lend you the money because you are not running the country in a financially prudent manner. We continue to run huge deficits, try for growth when there are no underlying reasons for growth, have a bloated public sector along with inefficient energy utilities, etc. So, if you want to get rid of the IMF, then run the country well. Once you do, just like most other countries, you won’t have to go to the IMF.

Q: What role should the private sector play in Pakistan’s economic revival? How can the government support entrepreneurship?
A: Supporting the private sector is the only way that Pakistan can grow. Since the private sector is the engine of growth, the government should try to stay away from private businesses as much as possible. However, the government has never been able to help ordinary businesses and companies grow in the country. Yes, the government supports cronies, who are already very rich, whether they are in the sugar industry or other preferred industries and sectors. However, the young Pakistani entrepreneur has never been helped by the Pakistani government. I don’t expect the scenario to change, but it would be best if the government stayed out of the private sector.

Q: How does political stability impact economic growth in Pakistan, and what steps can be taken to improve it?
A: Before you can pursue economic growth, you need to have economic stability, and for that, you need to have political stability. So, political stability is essential. We know functioning courts are important for economic growth, and predictable outcomes in courts are necessary for economic growth. You don’t necessarily need democracy, but you still need the rule of law. We don’t have the rule of law, to be very honest. Until we have the rule of law, political stability, and economic growth are hard to achieve.

Q: If you were advising the Prime Minister, what three policy actions would you recommend to help Pakistan emerge from its economic crisis?
A: Far be it for me to advise the Prime Minister of Pakistan. I think he doesn’t need my advice. But I would change the NFC award, make local governments effective, or create smaller provinces. I would absolutely make sure that no Pakistani child is out of school. Those are the things that are important for long-term economic growth. We also need to reduce taxes and the government’s size and privatise everything.