Bailouts or deathblows  

Dr. Ikramul Haq

In less than a month, Pakistan’s currency has lost more than a quarter of its value against the U.S. dollar, and fuel prices have risen by almost a fifth as the government implemented fiscal measures that are prerequisite to unlocking funds from an International Monetary Fund bailout—Coffee trumps economic crisis as Tim Hortons opens in Pakistan, Reuters

International Monetary Fund (IMF) mission on completion of its visit (January 31 to February 9, 2023) for discussions under the ninth review, observed, “Considerable progress was made…on policy measures to address domestic and external imbalances”. The “End-of-Mission” Press release, welcomed “Prime Minister’s commitment to implement policies needed to safeguard macroeconomic stability…”

The Press release mentions progress in key priority areas that “include strengthening the fiscal position with permanent revenue measures and reduction in untargeted subsidies, while scaling up social protection to help the most vulnerable and those affected by the floods”. The steps required and appreciated by IMF have been “allowing the exchange rate to be market determined to gradually eliminate the foreign exchange shortage and enhancing energy provision by preventing further accumulation of circular debt and ensuring the viability of the energy sector”.

The IMF mission stressed that “timely and decisive implementation” of above policies were “critical for Pakistan to successfully regain macroeconomic stability”. Responding to it, the alliance government of Pakistan Democratic (PDM) on February 14, 2023 imposed through a notification, issued by Federal Board of Revenue (FBR), taxes of Rs. 115 billion, after refusal by President to sign Presidential Ordinance containing fiscal proposals of about Rs. 500 billion (annual impact). It forced the government to convene a joint session of Parliament on February 15, 2023 for approval of all tax proposals.

According to a report, the PDM government on February 13, 2023 informed IMF that it was going “to lay down different tax proposals before the federal cabinet” on February 14, 2023 “to get its final nod in order to fetch additional taxation of Rs170 billion through a presidential ordinance”. The report adds, “…the IMF wants permanent taxation measures, so the government will have to slap massive taxation having annualised impact of Rs500 billion…..”

On February 13, 2023, Economic Coordination Committee (ECC) of the Cabinet approved “hiking of gas tariff for domestic, bulk, commercial, export-oriented industries and CNG sector in the range of 17 to 112 percent for different categories”. The increases in prices of electricity, diesel etc are on card pushing inflation and cost of production.

Our rulers since 1960s have developed addiction for intake of foreign loans, especially IMF bailouts—many call these death-blows. With every loan comes conditions—ostensibly meant for economic revival/reforms but every time leaving us in deeper economic quagmire and miseries for the common citizens. This undesirable trend has continued unabated with repeated vigour during the regimes of Pakistan Peoples Party (PPP) from 2008-13, Pakistan Muslim League Nawaz (PMLN) from 2013-18 and Pakistan Tehreek-e-Insaf (PTI) from 18 August 2018 to 9 April 2023 and by PDM since April 10, 2023 till today.

PPP signed $11.3 billion Stand-by Arrangement with IMF in 2008 and got disbursements of about $7.6 billion—failed to get 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 was that of Dr. Abdul Hafeez Shaikh, then PPP Finance Minister, who later got the same portfolio under PTI government in 2019.

The PMLN government set new records of borrowing, internal and external, though before coming to power contrary claims were made. On September 4, 2013, the PMLN through then Finance Minister, Ishaq Dar, now holding this portfolio for the fourth time, signed fresh loan agreement of $6.7 billion with IMF. Jubilation on further indebtedness by the PMLN 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 accepted then as was done on February 9, 2023.

After availing two programmes of IMF by both PPP and PMLN, our economic woes continued, rather accentuated. However, the situation worsened under PTI government as IMF’s Staff Report indicted it for failure to implement programme shortly after completion of the Sixth Review. The government of PDM completed combined Seventh and Eighth Reviews and secured disbursement of US$1.1 billion, with more stringent conditions.

Independent critics rightly say that our inept rulers fail to undertake fundamental structural reforms and implement prescriptions of IMF, World Bank and other donors, who 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. While the rich remain outside the tax net enjoying unprecedented exemptions, the poor are now subjected to exorbitant 18% sales tax, even on items of daily use.

We need to overhaul theinefficient tax machinery. Our untaxed income/wealth is over Rs.16 trillion. If we manage to collect even extra Rs. 8 trillion in the coming three years, country will not require fresh loans. The collection of taxes to this level can eliminate budget deficits and enabling us to retire debts. For this, FBR should be insulated from all kinds of political, financial and administrative pressures. At the same time, it should not assume the role of legislator and policymaker—under   the Constitution it is the sole prerogative of the people of Pakistan through their elected representatives.

The appointment of Chairman and members of FBR should be through public hearing by joint Select Committee of National Assembly and Senate and not on the wishes and dictates of the ruling political party headquarters.

The federal government must reduce its monstrous size and earmark revenues for debt retirement, creation of employment zones and provision of social services. This will inspire the people to contribute to the national exchequer. This is the only way to mobilise revenues through voluntary compliance, making taxes simple and low-rate and at the lowest possible cost. Simultaneously, the provincial governments must slash their administrative expenses at least by 30%. All perquisites given to civil-military bureaucracy and judiciary must be monetized.

State lands, lying unproductive or occupied by elites, should be leased out for industrial, business and commercial ventures. It will generate substantial revenues and help in rapid economic growth. On the contrary, imposition of more oppressive taxes are detrimental for inclusive development. The root cause of our major problems is inefficient and corrupt governments and huge spending on luxuries of the elites. The solution is dismantling of elitist structures and State capture by vested interests through empowerment of masses at grass root level by implementing Article 140A of the Constitution in letter and spirit—it will be the beginning of true democratization of and economic prosperity for all.

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The writer, Advocate Supreme Court, is an Adjunct Faculty at Lahore University of Management Sciences (LUMS), a member Advisory Board and Visiting Senior Fellow of the Pakistan Institute of Development Economics (PIDE)