Pakistan inked a $6.7 billion bailout deal with the International Monetary Fund (IMF), just hours before the crucial June 30 deadline. This is subject to IMF board approval, and without it, its economy could go into free-fall. its chronic deficiency foreign currency Recently it has reached the emergency level. The Pakistani central bank’s reserves will cover only one month’s imports.
When India faced a similar crisis more than 30 years ago, he pushed through sweeping reforms that devalued the rupee, reduced the size of the public sector, and increased government revenues. Now the time has come for Pakistan to do the same.
The IMF’s bailout package – the 23rd for Pakistan since its independence in 1947 – was suspended in November 2022 as the government did not act on the IMF’s terms for the loan. These included a list of reforms familiar to Pakistani economists: reduction of energy subsidies, privatization of state-owned companies, reduction of the fiscal deficit, and so on.
More recently, the government of Prime Minister Shehbaz Sharif has taken more decisive steps to meet those demands. Sharif, who ousted the disorganized administration led by Imran Khan in early 2022, had initially presented a budget for this fiscal year that included a big hike in public sector salaries as well as development spending and various tax incentives. included an increase in
The impulse was understandable: With elections approaching later this year, Sharif’s government was understandably fearful of cutting subsidies and raising taxes, just as ordinary Pakistanis grappled with stagnant growth and record inflation. Consumer prices rose by a record 38% in May, forcing Pakistan’s central bank to raise rates by up to 22% in a recent meeting.
However, the budget would have left Pakistan with a fiscal deficit of 6.5% of its GDP, which is too high for the IMF. After the fund complained that the budget did not do enough to fix Pakistan’s debt sustainability, its National Assembly approved a revised resolution, which increased taxes on fertilizers, property transactions and petroleum. Went. The IMF is now beginning to believe that Pakistan may be entitled to access its funds.
Even if a standby agreement was reached just before the deadline, it would not be enough to lift Pakistan out of the cycle of excessive spending and crisis. The IMF cannot and should not impose tougher conditions than before. But Pakistani politicians themselves must understand that their development model has failed and should have been replaced decades ago.
Pakistan has three big problems. It doesn’t export enough; It spends heavily on its public sector; And the tax revenue cannot meet the many obligations of his government. Historically, this gap has been filled by things like money, bailouts and generous aid from ‘friends’ like China and Saudi Arabia.
Exports can be revived by allowing the Pakistani rupee to devalue and through business-friendly reforms. The size of the public sector can be reduced through privatization (and, of course, by cutting the defense budget).
But expanding the tax base is just as important, if not more so. Most of the new taxes in the revised budget will fall on Pakistan’s existing taxpayers, including distressed salaried professionals. This is because many loopholes in the tax system have not yet been closed.
For example, agriculture is barely taxed, although (or perhaps because) some of the richest and most powerful people in Pakistan are large landowners. real estate Taxation in the country’s cities has also become difficult, although the revised budget makes a start in that direction. Properly enforcing the property transaction tax would require the authorities to make a reliable list of who owns what.
To make matters worse, the tax code is riddled with exemptions that are easy to avoid. And unlike India, for example, Pakistan has not standardized value-added tax across the country and has many different taxing jurisdictions, so it is likely that a large portion of legitimate revenue is lost to chancers who claim refunds. loses, to which they are not entitled, on taxes they allegedly paid in another part of the country.
Making a real start on fixing these three problems will help put Pakistan on a path of sustainable development and rid it of a humiliating dependence on foreign aid. Changes aimed at accomplishing this will not be popular in the short term. And it is difficult for any politician to be courageous when faced with rising populism and an impending election.
But, if none of Sharif’s options are good for his re-election chances, he should at least choose the option that will be best for Pakistan.
Mihir Sharma is Senior Fellow, Observer Research Foundation and author of ‘Restart: The Last Chance for the Indian Economy’.
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UPDATE: July 02, 2023, 11:45 PM IST