Saturday January 28, 2023

Pandora economy?

October 05, 2021

This week’s exposure of Pakistan’s rich harbouring massive wealth in offshore tax havens is neither surprising nor ultimately groundbreaking.

Similar exposures, notably the ‘Panama papers’ which eventually cost former prime minister Nawaz Sharif his job, have surfaced in the past. But beyond this high-profile political casualty, it is hard to be optimistic over the fate of the latest revelations as most of those named previously were neither sufficiently shamed nor forced to come entirely clean.

The details of offshore assets under the name of some of the country’s political figures and powerful people revealed in the ‘Pandora papers’ have yet again raised questions over the ultimate source of their wealth. These revelations follow an almost three-decade-long ill-fated journey which was based on the poorly advised policy of ‘no questions asked’, first championed by Nawaz Sharif as prime minister during his maiden rule. But successive governments must be held equally culpable for conveniently ignoring this major cover that only facilitated money laundering in the extreme.

In the long term, the immunity given to depositors of onshore foreign currency accounts from revealing their sources of funds has brought recurring misery for Pakistan. The repeated failure of Pakistani authorities to improve tax collections has been caused by a variety of factors notably including the ‘no questions asked’ policy.

Notwithstanding the closure of the ‘no questions asked’ convenience granted to onshore depositors, existing loopholes today may inadvertently grant a convenient cover to individuals with illegal wealth. While the government in Islamabad and the central bank in Karachi have tightened the space surrounding instruments like prize bonds, these bearer instruments are still being illegally traded in the open market as a convenient tool for money laundering. Besides, the amnesty scheme that was announced for the construction industry (relating to the national housing policy) and that let investors to jump in under a ‘no questions asked’ mechanism remains perhaps the most controversial step during PM Imran Khan’s tenure.

For years, every government, including the present one, has repeatedly touted its commitment to reforming one of the world’s poorest performing tax collection systems. But such promises have eventually come to naught.

Prime Minister Imran Khan now faces one of the most formidable challenges of his political career. His failure to act, just like his predecessors who ruled after the evidence of graft surfaced – surrounding members of the ruling coterie, will be devastating for his future. The credibility of Khan’s promise to create a ‘naya’ or new Pakistan based on justice and transparency is already in tatters. The failure to act in the wake of the Pandora papers will only push the government’s credentials further south.

The Pandora papers have also triggered fresh questions over Pakistan’s economic direction at a time when the country’s population suffers the most in its history. While the ruling class optimistically welcomes a coming economic upturn, the reality is qualitatively different.

Pakistan’s low to low-medium income households continue to suffer excessively as prices of utilities keep rising. On the other hand, food items are increasingly subjected to unreasonable price hikes. In stark contrast, the current account deficit fuelled by growing imports was driven in part by the inflow of luxury items keeps escalating.

While some of the more expensive items like exclusive automobiles have arrived to serve the taste of the rich, undernourished children with stunted growth patterns roam across poor neighbourhoods. These two opposite images strike at the heart of Pakistan’s biggest economic challenge – the failing ability of the state to force the rich to pay their dues.

This deep dilemma in today’s Pakistan mimics similar journeys undertaken in other countries and regions with devastating consequences. The radicalism in parts of south and central America in the 1980s emerged from what could best be characterised as the proliferation of the hacienda economies of the 1970s.

These ‘haciendas’ were large and semi high-tech farming estates in that part of the world; rampant poverty surrounding them became temporarily invisible. But eventually, discord with bloodshed follows in situations of such extremes. For Pakistan’s policymakers and the ruling class who appear to be poor students of history, there are many precious lessons to be learnt from history.

The writer is an Islamabad-based journalist who writes on political and economic affairs.