The writer is former head of Citigroup’s emerging markets investments and author of ‘The Gathering Storm’
Pakistan is in political and economic chaos. Its most populous province, Punjab, was without a government for almost a month because the governor, who was appointed by former prime minister Imran Khan, had refused to administer an oath to the newly elected chief minister of the province. The president, Arif Alvi, a member of Khan’s party, is backing the Punjab governor’s actions.
Meanwhile, Pakistan’s foreign exchange reserves have fallen sharply in the past two months. The new government hopes to stop the bleeding with an enhanced IMF package and more short-term loans from China and Saudi Arabia. Supplies of electricity to households and industry have been cut as the cash-strapped country can no longer afford to buy coal or natural gas from overseas to fuel its power plants.
Newly elected prime minister Shehbaz Sharif was in Saudi Arabia last week to seek more financial assistance from the oil-rich kingdom, in addition to the existing bilateral credit of $4.2bn. Pakistan owes China $4.3bn in short-term loans in addition to the expensive loans to finance the power plants built under the China-Pakistan Economic Corridor programme.
Pakistan’s finance minister Miftah Ismail met the IMF in Washington last month and requested an increase in the size and duration of its current $6bn fund programme, initiated in 2019.
International commercial debt markets are practically shut for Pakistan. Its five-year sovereign bonds are trading near 13 per cent, which is among the highest in the emerging markets.
Pakistan’s official liquid foreign exchange reserves (excluding gold reserves of about $4bn) have dropped to just $6.6bn, or by $6bn, since the end of February. The level of reserves provides cover for just one month of imports.
According to Ismail, the fiscal deficit could hit Rs5.6tn ($30bn), or about 8.8 per cent of gross domestic product, versus a target of about Rs4tn, by the end of June. Pakistan’s volatile political situation makes it difficult for the new government to take any tough steps.
The federal budget deficit in the first nine months of the current fiscal year jumped to a staggering Rs3.2tn, 53 per cent higher than compared with the same period of the previous year. A significant reason for this was Khan’s populist measures, including his decision to not pass the impact of rising oil prices to the consumer. It is costing about $1.1bn a quarter to subsidise petroleum products. However, this is not the only reason for the parlous state of the public finances.
Pakistan’s rent-seeking political economy, dominated by the military establishment and special interests, provides Rs1.3tn in tax subsidies to the big businesses and the industries, according to Pakistan’s Federal Bureau of Revenue, its tax collection authority.
However, Pakistan collects very little in taxes from the urban property market, which has been booming for some time, for example. Large houses or plots of land can cost anywhere between $500,000 and $2mn, but the owners pay little tax. According to Shahrukh Wani, an economist at Oxford university, all of Punjab, home to a population of more than 100mn, collects less in urban property taxes than the city of Chennai in India, with a population of about 10mn people.
It is time for Pakistan’s rich to start paying their proper share of taxes. The IMF should not allow itself to be seen as bailing out the wealthy, which it seems to be doing by ignoring Pakistan’s repeated slippages in meeting the programme targets.
The rich should also pay higher taxes on property and pay more for electricity and luxury cars than the low income or middle-class citizens who are already reeling from double-digit inflation (currently 13.4 per cent), which is the third-highest among major global economies. Steve Hanke, a professor of applied economics at Johns Hopkins University, has calculated Pakistan’s realised inflation rate to be a whopping 30 per cent per year, more than double the official rate.
Further delay in carrying out meaningful economic reforms could lead to more economic hardship and social unrest.
Source: Economy - ft.com
