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Saturday July 20, 2024

Will Pakistan get a bailout?

By I Hussain
June 29, 2023

In the aftermath of the Shehbaz Sharif government’s widely criticized budget, which was met with disdain by independent economists and also drew veiled criticism from the IMF, a last-minute attempt has been made to salvage the situation. The government has made adjustments to the budget in a bid to comply with the IMF’s demands.

These adjustments include increased taxes on the salaried class and real-estate transactions, withdrawal of certain exemptions, and the imposition of additional indirect taxes on specific products such as fertilizer, sugary drinks, and luxury vehicles.

However, the effectiveness of this last-minute maneuver remains uncertain. Given the limited time before the fiscal year’s end and the bureaucratic nature of the IMF, it is doubtful whether these measures will be sufficient to seal the deal, despite the prime minister’s optimism.

This, however, raises two crucial questions: Why were these adjustments delayed when it was crystal clear that the IMF would not submit to the finance minister’s bluster and back down from its demand for the government to reduce the fiscal deficit through subsidy reductions and tax expenditure cuts? And will these last-minute measures be enough to satisfy the IMF?

Instead of addressing these questions, the country’s finance minister, Ishaq Dar, resorted to distractions, talking about a Plan B, blaming geopolitical machinations and the like – but evading the core issue: Pakistan’s excessive spending and inadequate taxation. As a result of this denialism, the country is grappling with an unprecedented inflation rate and is on the verge of defaulting on its external debt.

Even so, the IMF’s demand for an increase in the tax-to-GDP ratio and expenditure cuts to demonstrate the government’s commitment to fiscal consolidation has only been partially met. Thus the government has failed to widen the tax net to include retailers and traders, nor has it abolished the glaring loophole of exempting agricultural income from direct taxation.

The exemption of agricultural income from tax serves as a means of tax evasion for those who derive incomes from non-agricultural pursuits, exacerbating wealth and income inequality while depriving the state of much needed tax revenues. These are crucial demands from the IMF that cannot be ignored.

Considering that 80 per cent of Pakistan population’s assets are tied up in land and property, it is only logical for a fiscally responsible government to tap into agricultural incomes for additional revenues. Failure to do so only perpetuates the existing power and political structure, leading to continued economic stagnation and a probable return to the IMF for future funding.

Another critical factor to consider is whether the IMF will strike a deal with the current government when the future political landscape of the country is shrouded in uncertainty. Elections are scheduled for October this year, but it remains to be seen whether they will result in a stable government with the mandate to push through necessary reforms. Therefore, it is expected that the IMF will proceed cautiously, scrutinizing the government’s pledges and its willingness and capacity to implement essential structural changes in the economy.

Pakistan faces significant challenges in transitioning to a stage of sustained development. One of these challenges is the ‘soft state’ label given to the country by the Nobel laureate economist, Gunnar Myrdal, in his influential work on the economies of South Asia, ‘Asian Drama’.

A ‘soft state’ lacks the political will to implement policies that challenge the status quo or disrupt the influence of powerful oligarchs, such as implementation of land reforms that face opposition from large landowners who constitute a formidable political impediment. Another example is the influence exercised by sugar mill owners to block the elimination of subsidies on sugar production even though these add largely to mill owners’ profits instead of benefiting consumers.

Comparing Pakistan to India, which Myrdal also labeled a ‘soft state’, we witness divergent trajectories. India has emerged as one of the world’s fastest-growing economies and a significant player in the world’s geopolitics despite Prime Minister Modi’s divisive rhetoric and acts of political malice targeting religious minorities, especially Muslims.

What explains this change? The nature of political institutions and the broader distribution of economic opportunities play crucial roles. India has maintained political stability as a democracy since its independence, with a brief exception during the mid-1970s Emergency imposed by Indira Gandhi.

Unfortunately, Pakistan was caught in a whirlwind of the Soviet invasion of Afghanistan and the subsequent US-led war in that country, spanning almost two decades. The country has been enmeshed, not entirely blamelessly, in a protracted conflict on its borders, which has spilled over and fueled internal strife.

In contrast, India has positioned itself as the world’s largest democracy boasting a middle class of over 250 million consumers with significant purchasing power. This has attracted multinational corporations eager to tap into this vast market, especially as China is now deemed by the US and its allies to be an adversary that poses a threat to the West’s strategic interests.

India also benefited from having a highly skilled and computer-literate population of college graduates, propelling its information technology (IT) sector to rapid growth in the 1990s through outsourcing by Western companies. The IT sector earned India billions of dollars thereby contributing to its burgeoning foreign exchange reserves.

The disparity in performance between Pakistan and other South Asian countries is evident when we examine the data. In 2000, Pakistan’s GDP per capita ($531) surpassed that of India ($442) and Bangladesh ($405). However, over the past two decades the tables have turned. In 2021, Pakistan’s GDP per person stood at $1,505, lower than India’s ($2,257) and Bangladesh ($2,458).

Furthermore, the UNDP’s Human Development Report (HDR) reveals Pakistan’s decline in rankings on the important metric of human development. In 2000, Pakistan was ranked 135th out of 174 countries, lower than India (128th) but higher than Bangladesh (146th). By 2022, Pakistan had declined to 161st out of 191 countries, while Bangladesh made significant strides in climbing up the HDR table, reaching the 129th position. India’s ranking remained relatively stable at 132nd, similar to its 2000 position.

This is not to deny that all three countries have a terrible record in improving the lives of the majority of its population compared to other developing countries at similar levels of per capita income but, that notwithstanding, Pakistan is at rock bottom. Only two Asian countries rank below it in the latest HDR: Afghanistan and Yemen.

These statistics underscore the irony that focusing on GDP alone as a measure of economic progress has not resulted in either substantial per capita GDP growth or improved social conditions for Pakistan’s population. We find ourselves trapped in the worst of both worlds. Consequently, it comes as no surprise that people are emigrating in record numbers, both legally and illegally, with tragic consequences for the latter as exemplified by the recent loss of over 200 Pakistani lives off the Greek coast.

It is crucial to recognize the importance of institutions and the quality of governance. Democracy extends beyond mere “free and unfair elections” as CNN’s Fareed Zakaria wryly noted recently when discussing “illiberal democracies”. True democracy entails robust institutions, transparent governance, and a commitment to implementing policies that promote equitable growth and human development.

The IMF’s involvement can provide crucial financial support and guidance, but it will require a genuine and sustained commitment from successive Pakistani governments to enact meaningful reforms. Only through determined action and a departure from the status quo can Pakistan chart a path towards inclusive and sustainable development.

The writer is a group director at the Jang Group. He can be reached at: iqbal.hussain@janggroup.com.pk