The writer is a former adviser to the World Bank.
For decades our leaders and elite have chosen to beg and borrow overseas, even to deliver the very basic functions of state. No wonder we are known as a begging bowl country, which doesn’t tax its wealthy but has no qualms about begging.
Every time we have a crisis, our leaders go begging around the world. It's humiliating to see leaders living the lives of the global super wealthy, and then reaching out to the world and to hardworking overseas Pakistanis with a bowl.
Despite Imran Khan’s electoral promise that his government would not beg, his government’s approach to raising funds for the crisis is no different from that of PM Nawaz Sharif or presidents Musharraf and Zardari. Like all previous leaders, the prime minister has asked overseas Pakistanis to help, without asking the rich political and business elite to part with their wealth. If the Pakistani elite publically forego their summer vacations in the Swiss Alps or spending at Harrods, maybe the wealthy and ordinary overseas Pakistanis might also decide to sacrifice monetarily.
It was disappointing that in his speech on March 30, the prime minister did not announce any personal donation to the Corona Fund. As a minimum, being the PM, and a rich one, he should donate 5-10 percent of his wealth. He would then be on a high moral ground to ask expatriates and local Pakistanis to help out or request foreign governments to provide grants or write off debt. The point is that as long as our leaders and elite do not sacrifice, our pleas for help will fall on deaf ears. And if foreign governments give grants or convert loans to grants, we should keep in mind that there are no free lunches. As we have learnt from our 70-year history, generosity from the US or the Gulf countries has come at a heavy price.
Before Pakistan goes out begging and borrowing, the prime minister must explore all the avenues to tax the wealthy. How he manages the economic crisis will be the test of his leadership and his resolve to make Pakistan a respectable nation. Below are a few actions to raise money from the rich to enable Pakistan to weather out the crisis.
Using emergency powers, enacted through an ordinance, the prime minister must impose a ‘one-time’ wealth tax on several sources of wealth. But before that, he should require all national and provincial legislators, except for the few who are middle income, to symbolically contribute as follows: (i) foregoing their salary and perks for the next 12 months; (ii) paying an amount, equal to the most expensive car they drive, into the PM’s special fund. Symbolically he should personally contribute at least Rs100 million, given his enormous wealth. These actions would send a powerful signal that those who govern also contribute in times of crisis.
First, the government should consider a one-time wealth tax on the following two classes of assets: (i) wealth tax on real estate – homes and commercial real estate above a value of, say, Rs20 million. There are close to one million expensive homes/plots in cities. The value of these homes/plots, and commercial buildings, would easily run into several trillion rupees; (ii) wealth tax on owners of three million cars registered in Pakistan – especially cars above 1000 cc. There could be a small wealth tax on cars between 1000 and 1500 cc, and hefty tax on luxury cars and SUVs which are less than five years old. The aim should be to raise, from these two sources, at least Rs100-150 billion, passing the entire tax to the provinces (as tax on property and vehicles is in their domain) for them to fund their crisis response programmes.
Second, taxing the 30-40,000 holders of listed shares, Pakistan’s super wealthy who have benefitted for over two decades from the tax haven called the PSX. The current wealth of their holdings (ie market capitalization) is around Rs7 trillion, on which they have hardly paid any tax. The government should consider a one-time 10 percent wealth tax. These people will, most likely, have to sell their share holdings which will further depress the market. But so be it. Besides, it will have absolutely no adverse impact on the economy or the 200 million citizens who are not invested in the market. Pakistan should raise at least Rs500-600 billion from these super wealthy.
Third, imposing wealth tax on the rich holding around 40 percent of bank deposits – deposits over Rs5 million add up to around Rs6 trillion. One could consider a one-time 2-5 percent wealth tax, lower rate for those with Rs5 million deposits and higher for those having deposits of over Rs20 million. The government could raise about Rs 75-100 billion.
Fourth, raise taxes on petroleum products and rescind the recent reduction in prices. The price of petrol and diesel in Pakistan is among the lowest in Asia and Africa. It is lower than Nepal, Bangladesh, India, Uganda, Kenya, Vietnam, etc. At present, the tax on petroleum products is around 25 percent of the retail price. Last year, petroleum product sales amounted to about Rs3 trillion, which included around Rs750 billion of taxes. The aim should be to raise taxes to at least 50 percent. While one can devise an easy mechanism to directly subsidize (through EasyPaisa or MobiCash) owners of 2 and 3 wheelers and tractors, all other users must pay a higher price so that an additional at least Rs500-600 billion is raised.
Finally, getting relief from high cost domestic debt. The call for debt relief from external creditors is not justifiable, especially when in the past we have squandered debt relief. The PM should also not try to be a world statesman asking for debt relief for poor countries, majority of which are run by corrupt political and business elite like ours. Pakistan got a huge Paris Club relief, when we joined the ‘war on terror’, but none of that has led to any improvement in the lives of ordinary people or better health and education for the poor. Moreover, if we need to free up resources from debt relief, then we should first seek relief on domestic debt – 65 percent of public debt is domestic and 90 percent of debt service is on account of domestic debt. Our problem is domestic debt, not foreign debt.
Hence, we should extract debt relief from wealthy Pakistanis, banks and corporates who hold the bulk of domestic debt. One way is to dramatically drop all interest rates to a low single digit, for the next 12-18 months. Another way is to tax interest income at, say 50-60 percent, on the current stock of domestic debt, and not allow any withdrawals. This would bring the effective cost of domestic debt to a low single digit. If we get wealthy holders of domestic debt to give relief to Pakistan at the time of our current crisis, PM Khan would be on strong moral ground to seek debt relief on foreign debt. This action could yield Rs500-600 billion, and would send a clear message that the wealthy elite are sacrificing to help with the corona crisis. All together, the above actions could yield around Rs1.5-2 trillion of additional resources for funding the corona crisis. This may be a stretch target, but Prime Minister Khan must display the courage to tax the wealthy and set a personal example. It is the only way Pakistan can get rid of its begging bowl DNA, and subsidize tens of millions of poor to avoid a social meltdown.
Finally to avoid begging the IMF again, Pakistan should impose temporary restrictions to shore its foreign reserves. These could include high cash margins on non-essential imports, and restrictions on foreign outflow of FDI dividends and IPP contracts, withdrawal of ‘hot money’ etc. Dozens of countries in crisis have imposed foreign exchange restrictions, even defaulting on foreign loans several times over, without any long-term reputational risk.
So Pakistan need not worry about any reputation risk arising from imposing temporary restrictions. Moreover, the PM should not be carried away by the sweet talk by the IMF or their praise of the IMF staff managing the SBP. The IMF Board is only interested in lending targets, but no one in the IMF will get fired if poverty in Pakistan increases because of the IMF programme.