Huzaima Bukhari, Dr. Ikramul Haq & Abdul Rauf Shakoori
Pakistan, one of the major victims of climate change, is fighting alone to manage the damages caused due to catastrophic flooding and unprecedented rains that have affected almost one-third of the country. Though international community came forward to help Pakistan, yet the funds and aid in kind offered were insufficient for complete rehabilitation of flood victims.
The Pakistan Floods 2022, Post Disasters Needs Assessment report (the “report”) highlights Pakistan’s economic losses of over US$ 30 billion dollars. The country needs at least US$ 16.3 billion for modest rehabilitation and reconstruction. In efforts to generate funds, Pakistan sought international help and received commitments of around US$10 billion in a fund raising event hosted in Geneva. However, these commitments will mature with the passage of time but right now the country desperately requires financial support to meet its fiscal needs.
The report was prepared with the support of Asian Development Bank, the European Union, and United Nations Agencies with technical facilitation by the United Nations Development Programme, and the World Bank. However, despite knowing Pakistan’s real time suffering the contribution of these institutions is not enough to support our rehabilitation efforts or make up for damage to our infrastructure, agriculture, livestock, communication and transport. Losses caused to housing sector are around US$ 5.6 billion, agriculture US$3.7 billion and livestock US$3.3 billion. While this disaster has badly affected our economic conditions it has also created shortage of food items such as vegetables and wheat triggering inflation in the country.
Amendments made in the State Bank of Pakistan Act, 1956 give powers to State Bank of Pakistan (SBP) to control inflation, though this function rests with the federal and provincial governments. They should determine prices of the products depending on demand and supply and fluctuation in the international prices. However, delegating powers to SBP is causing trouble for the common man. Unfortunately, inflation occurring due to natural disaster is being managed by tightening monetary policy. This action is on one hand leading to increase in cost of doing business and on the other, adding to the miseries of the common man.
Another setback for the government is that despite suffering from a natural calamity, we were unable to convince the international community for immediate support. Our friends in the Middle Eastern states and China is reluctant to stand up with us therefore, at this crucial juncture when our foreign exchange reserves are under three billion dollars, despite commitments, nobody is ready to release the payments.
The International Monetary Fund (IMF) is also showing apathy by its unwillingness to place trust in us due to our past record insisting on compliance of its conditions. Federal Finance Minister Muhammad Ishaq Dar, who claimed to be most experienced in dealing with the global lenders, also seems helpless. He could not even convince them to relax conditions due to deteriorating condition of economy as a result of floods.
Despite many rounds of talks with IMF in the first week of February 2023, Ishaq Dar and his team failed to convince IMF team for staff level agreement. The team left the country without any break-through and making public the Memorandum of Economic and Financial Policies (MEFP) containing the conditions, steps, and policy measures required to be addressed for reaching staff level agreement.
Resultantly, the government is forced to impose additional taxes of Rs. 170 billion through Finance (Supplementary) Bill, 2023 (mini-budget). Raised prices including that of gas up to 124% for domestic users for generating around Rs. 310 billion to curtail circular debt. The Finance Minister had to present the mini-budget on February 15, 2023 in the form of Money Bill after refusal by the President to promulgate an ordinance under Article 89 of the Constitution for meeting additional taxes of Rs. 170 billion to comply with IMF conditions.
While presenting the mini-budget, the Finance Minister demanded that formation of a committee to investigate failures that have caused unsurpassed damaged to economy. He highlighted various amendments in the Income Tax Ordinance, 2001, Sales Tax Act, 1990 and Federal Excise Act, 2005. He proposed raising general sales tax (GST) on luxury items from 17% to 25%. The standard GST rate of 17% is proposed at 18% which was earlier done on February 14, 2023 in respect of general goods through a statutory regulatory order in violation of Article 77 of the Constitution. However, rise in the sales tax will not be applicable on daily use items such as wheat, rice, milk, pulses, meat etc.
The Finance Minister also proposed federal excise duty (FED) on the first and business class travel up to 20% or Rs. 50,000, whichever is higher, 10% adjustable withholding tax on marriage halls etc. He also proposed increase of FED on cigarettes and sugary drinks in the light of conditions agreed with IMF during Seventh and Eighth Reviews back in 2022. Additionally, proposal has been made to raise FED on cement from Rs. 1.5 per kg to Rs. 2 per kg and increase of Rs. 40 billion in Benazir Income Support Programme (BISP), taking total allocation to Rs. 400 billion.
The government is implementing previously agreed conditions with IMF to revive the Extended Finance Facility (EFF) programme to meet its fiscal needs. The government is also expecting to reduce the budget deficit by enforcing these taxation measures. This approach might help in short term, but will create difficulties for businesses especially small and medium enterprises (SMEs), which are considered the backbone of our economy.
Above-mentioned measures will also increase financial difficulties for the public, that is already facing hardships due to imprudent policies of successive governments. It is strange that the government is still reluctant to initiate policy measures to stop wastage of resources. Gas related circular debt is being managed by raising gas prices but no action is being taken to crack down on those who are responsible for gigantic losses including defaulters.
The same approach is being adopted to address electricity related circular debt but no policy related steps are being taken since last many years including improvement of transmission lines, controlling theft, and stringent actions against defaulters. The smart meter option was agreed at the start of the EFF programme to address electricity theft, but so far remains unimplemented.
Losses to the tune of billions are in relation to state-owned entities (SOEs) are another factor causing fiscal imbalances. Privatization of these entities can generate billions for the national kitty, while also creating jobs to reduce unemployment.
It is time for the government and other stakeholders to devise the framework for implementation of policy reforms. Compliance with action items of IMF has already exhausted buying power of the common people and created survival issues for businesses as well as rising unemployment. The sooner we start the process of fiscal reforms, the better it would be otherwise, difficulties for the people and businesses will keep on increasing causing serious threat to national security.
Huzaima Bukhari & Dr. Ikram Haq, lawyers, and partners of Huzaima, Ikram & Ijaz, are Adjunct Faculty at the Lahore University of Management Sciences (LUMS), members of the Advisory Board and Visiting Senior Fellows of the Pakistan Institute of Development Economics (PIDE) and Abdul Rauf Shakoori is a corporate lawyer based in the USA and an expert in ‘White Collar Crimes and Sanctions Compliance’. They have recently co-authored a book, Pakistan Tackling FATF: Challenges and Solutions.