By Asif Shahzad

ISLAMABAD, (Reuters) – When Pakistan’s annual inflation rate reached 11.5% in November 2011, the statistics office put a stop to a phenomena that was painfully obvious to both the middle-class and poor voters who elected Prime Minister Imran Khan three years ago.

Now, the government plans to intensify the pain by imposing a tight budget that includes tax hikes as well as spending cuts to pay for a $1-billion tranche of International Monetary Fund bailout money.

Sibte Hasan is a 43 year-old construction supervisor hailing from Lahore, Pakistan’s second biggest city.

With inflation in the consumer prices of staples such as flour, sugar and oil increasing to double-digits over recent months, Pakistan’s rupee has dropped around 14% from May to a new record low.

When the Government presents a special Supplemental Budget to Cabinet, officials from government are expected to publish official numbers this week.

Already, it’s clear that many sales tax exemptions are being canceled and new fuel levies as well as import duties will increase.

Last month, the IMF approved a revived $6 billion financing program that was launched in 2019. However, it demanded additional fiscal measures to be part of a larger structural reforms package. This included areas such as corporate governance and climate change policy.

The central bank tightened its screws last month, increasing its key interest rate 150 basis points, to 8.75%, to combat rising inflation and a fall in the Pakistani rupee. This was to reduce a trade deficit of $20.59 million (July–Nov), as well as a current account deficit of $5.2 billion.

Officials from the government have tried to put a brave face on it, claiming that welfare cushions will reduce the effects on the most vulnerable and that progress has been made in solving Pakistan’s tax problem.

Shaukat Tarin (Finance Adviser) said that prudent fiscal reforms had helped improve the ratio of tax to GDP and revenue generation.

A $3 billion loan by Saudi Arabia arrived in the month of March to provide some relief for government finances.

FALLING PRODUCTION

But, it is unclear if fiscal measures will suffice to stabilize the public finances in sufficient numbers to permit the government address Pakistan’s fundamental economic issues.

Consumers are paying more for their household expenses, but business owners have also seen higher energy costs and increased raw material prices. This has led to a sharp increase in interest rates.

According to Sheikh Muhammad Akbar, owner of a textile mill, “Our production is rapidly falling.” He said that “my unit isn’t generating the target production due to expensive raw materials, high production costs, and other factors.” Reuters was also informed by him.

Pakistan’s debt-bound economic system has been hampered for a long time by problems that include a weak tax collection, low productivity, and little value added exports.

However, loose monetary policies and an overvalued exchange rate covered some of the issues, helping to recover from the coronavirus slowdown and grow 3.9% lastyear, while fiscal and current accounts deficits increased, which threatened the stability of the public finances.