Pakistan & IMF bailouts  

Dr. Ikramul Haq

Since Ayub’s era our rulers have developed addiction for intakes of foreign loans, especially International Monetary Fund (IMF) bailouts—many call it death-blows. With every loan comes a host of conditions—ostensibly meant for economic revival and reforms by every time leaving us in deeper economic quagmire. Musharraf-Shaukat duo hoodwinked the nation by claiming that they were severing all ties with IMF, whereas in reality huge loans were secured for reforming (sic) the tax, banking and justice systems—just to mention a few. Fresh loans were negotiated with renewed enthusiasm by all the successive governments. This undesirable trend continued unabated with repeated vigour during the Decade of Democracy [2008-18] under the regimes of Pakistan People Party [PPP] and Pakistan Muslim League-Nawaz [PML-N].

Pakistan signed $11.3 billion Stand-by Arrangement (SBA) with IMF in 2008 and got disbursements of about $7.6 billion. It failed to get the remaining $3.7 billion due to lapses in performance criteria, leading to suspension of the programme in May 2010, culminating in an unsuccessful ending on September 30, 2011. The main responsibility of failure lay with then Economic Minister of PPP, Dr. Abdul Hafeez Shaikh, who is now selected by the government of Pakistan Tehreek-i-Insaf (PTI) for economic revival and seek another bailout from IMF. Will he turn his past failures into a success this time? Only time will tell—there is optimism in the eyes of PTI’s leader, Imran Khan, but majority of the experts have serious reservations and doubts.

It is a fact that after two programmes of IMF, availed by PPP and PMLN, our economic woes have continued. In fact, the situation on fiscal front deteriorated despite taking US$ 100 million loan from World Bank for six-year-long Tax Administration Reforms Programme (TARP). At the end of TARP in 2012, our tax system was more dysfunctional than before. The critics of IMF blame Pakistani tax administrators and foreign experts for this fiasco. Their main objection is that the IMF and World Bank suggest prescriptions without understanding the mundane realities of Pakistan. The IMF, World Bank and others donors are least pushed about the inequitable character of our tax system, under which the burden of taxes is less on the rich and more on the poor. In the face of this stark reality, the IMF has once again suggested more regressive taxation to the PTI government that is close to signing yet another bailout.

The third time government of Nawaz Sharif set new records of borrowing at home and abroad though before coming to power contrary claims were made. On September 4, 2013, PML-N signed fresh loan agreement of $6.7 billion with IMF and Nawaz’s economic wizard, Ishaq Dar said: “It will put the country on the path of sustainable growth and was going to open lending avenues with other international lenders”. Jubilation on further indebtedness by the PML-N received a jolt when IMF decided to disburse only $547 million as first tranche, much lower than what Ishaq Dar was expecting. For the release of the remaining amount, tough conditions were imposed and accepted. These were never debated in Parliament as was the case in 2008 under PPP. Now strangely, both PPP and PMLN are criticising PTI Government for availing IMF’s bailout without any debate in Parliament, though State Minister for Revenue, Hammad Azhar said that details would be shared in Parliament! No doubt, as in the past, new IMF’s bailout package will entail tough conditions, for which decisions, not only politically unpopular but detrimental to the economic growth of the country, would have to be taken in the coming days.

Instead of abusing IMF, World Bank etc, it is time for introspection. We have failed to reform our rotten, oppressive, unjust and target-oriented tax system that is anti-growth. Had we concentrated on sustainable growth of above 6%, tax could have been increased automatically. There is a dire need for simple, low-rate and broad-base taxation; not mere achieving of targets set out by the foreign lenders. Meeting budgetary targets through oppressive taxes and blurring out the ultra-rich is our real dilemma.

While the rich remain outside the tax net, the poor are paying exorbitant GST on items of daily use. We need to overhaul theincompetent, inefficient and corrupt tax machinery. The real tax potential of undeclared/untaxed income/wealth in Pakistan is about Rs.3 trillion. If we manage to collect extra tax of Rs. 3-4 trillion in the coming three years, the government will not require fresh domestic and foreign loans. The collection of taxes to these levels can eliminate budget deficits and Pakistan will be in a position to retire debts.

The government must reduce its humungous size and earmark revenues for specific purposes placing the same in funds created for debt retirement, creation of employment zones and provision of social services, such as education, health, housing, etc. This will inspire the people to contribute to the national exchequer. This is the only way that revenues can be generated through voluntary compliance and at the lowest possible cost. We should liberate ourselves from the so-called ‘reform’ programmes of the IMF/World Bank. Tax policies implemented by successive governments in the past on the dictates of foreign lenders led to inequitable low growth and poverty—more revenue meant more luxuries for the bureaucrats and rulers. When will our predatory elites stop enjoying tax-free perks and perquisites, unprecedented benefits like posh offices, palatial residences, army of servants, foreign medical treatments/trips, subsidised facilities at clubs, rest houses etc?

The iniquitous prescription of IMF of more taxes or enhancement of rates will never solve our economic problems. The only solution is to reduce the monstrous size of the government, monetize all the perquisites of bureaucracy and make taxes simple and low-rate. State lands, lying unproductive, should be leased out for industrial, business and commercial ventures. It will generate substantial revenues along with facilitating rapid economic growth. It alone can make the government self-reliant. On the contrary, the prescriptions by IMF/World Bank for further taxation are detrimental for economic progress in the long term. If we manage to drastically cut the size of government and formulate a rational tax policy through public debate and parliamentary process, and implement it through consensus and not coercive measures, there is every possibility to ward off the IMF and World Bank in the shortest span of time. However, if we continue following their prescriptions, we will neither tap our real tax potential, nor achieve the cherished goals of self-reliance, rapid industrial and economic growth, and justice for all.

The root cause of our many problems is inefficient and corrupt government apparatus and huge spending on luxuries enjoyed by the elites. The elitist control over State apparatus needs to be dismantled through empowerment of masses at grass root level by implementing Article 140A in letter and spirit. Once this is done, the process of true democratization of society and economic prosperity for all will begin.

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The writer, Advocate Supreme Court, is Adjunct Faculty at Lahore University of Management Sciences (LUMS).