Chronic debt dependence

Fiscal decentralisation and municipal self-governance can end dependence on the federal government

Chronic debt dependence


he executive board of the International Monetary Fund approved a fresh bailout package for Pakistan on July 12 — a nine-month $3 billion standby arrangement reached between Pakistani authorities and the IMF staff on June 29. It is the 23rd time that Pakistan has borrowed funding from the IMF since 1958; it is the fourteenth bailout since 1988.

Since 1958, Pakistan has required an SBA 12 times, underscoring its persistent balance of payment challenges. With the fresh approval, Pakistan has become the fourth-largest borrower from the IMF. Given such a history of approaching the IMF for bailouts, the question is: how will our rulers utilise the bailout funds?

A day before the approval of the SBA by the IMF’s executive board, Saudi Arabia made a $2 billion deposit. The SBA was negotiated after the Extended Fund Facility, originally negotiated by Pakistan Tehreek-i-Insaf government in 2019, and later by the Pakistan Democratic Movement (PDM) government, expired unsuccessfully.

It is claimed that the new short-term financing will “help Pakistan in addressing its external financing requirements and streamlining adjustment policies.”

The staff level agreement signed between Pakistan and the IMF states that “the new SBA will support the authorities’ immediate efforts to stabilise the economy following recent external shocks, preserve macroeconomic stability and provide a framework for financing from multilateral and bilateral partners.”

The staff level agreement highlights that steadfast policy implementation is key to Pakistan overcoming its current challenges. This includes greater fiscal discipline, a market determined exchange rate to absorb external pressures and progress on reforms, particularly in the energy sector, to promote climate resilience and to help improve business climate. As a result of this agreement, Pakistan will get SDR 2,250 million (about $3 billion or 111 percent of Pakistan’s IMF quota).

The issue of chronic debt dependence and the callous attitude of Pakistan’s ruling elites was highlighted in Trapped and enslaved, Political Economy, TNS, June 5, 2016. In 2023, the situation is worse. All budgets since then – four presented by the Pakistan Tehreek-i-Insaf government and two by the PDM – have pushed the country towards further debt enslavement.

The finance minister, heading the economic team of the PDM coalition, finally agreed to all IMF conditions in the revised budget for 2023-24 as he had done when the PML-N obtained a $6.6 billion bailout package in 2013. Pakistan had made a request for a fresh bailout package on September 4, 2013, after fulfilling all prior requirements. The IMF finally agreed to provide $6.6 billion under the Extended Fund Facility (EFF) though Ishaq Dar had requested for $7.3 billion.

The lingering and deepening economic crisis, especially the bourgeoning fiscal deficit, has been eroding Pakistan’s capacity to repay external loans of over $125 billion with fast diminishing foreign reserves. As of March 31, the total external debt and liabilities of Pakistan stood at $125.72 billion. The total liquid foreign exchange reserves as of the weekend ending June 30, stood at $9.745 billion, according to the State Bank of Pakistan.

The staff level agreement highlighted that a steadfast policy implementation was key to Pakistan overcoming its current challenges. This included greater fiscal discipline, a market-determined exchange rate to absorb external pressures and further progress on reforms. 

Before agreeing to a fresh bailout, the IMF expressed anguish and dissatisfaction with the performance of the Federal Board of Revenue (FBR) — in particular what it calls fixing ‘ambitious’ targets and missing those by a wide margin.

The dismal performance of the FBR — provisional collection of Rs 7,180 billion for fiscal year 2022-23 against the original target of Rs 7,470 billion (the revised target was Rs 7,640 billion) has pushed the fiscal deficit to nearly 8 percent of the GDP. The IMF is therefore worried about repayment of its outstanding debt of over $6 billion. The fresh bailout is, thus, nothing but a measure to thwart the obvious default.

For the current fiscal year, the FBR has been assigned a target of Rs 9,415 billion. Like the previous years, the FBR has voiced optimism. Independent experts, however, doubt its claims in view of the recession and its weak enforcement capabilities. The FBR has missed targets for several years. The FBR’s performance has been a mystery for the IMF and other donors. The World Bank provided more than $100 million for a six-year Tax Reforms Administration Programme (TARP). After its conclusion, however, the tax-to-GDP ratio declined from 11 percent to 8.2 percent.

As per Pakistan Telecommunication Authority (PTA), there were 192 million cellular phone subscribers on May 31, (81.03 percent mobile tele-density). 124 million of those were broadband subscribers (54.43 percent mobile broadband penetration) and 3 million fixed telephony subscribers (1.09 percent fixed tele-density). There were no less than 120 million unique mobile phone users (many having multiple SIMs) paying 15 percent advance/ adjustable income tax from July 1. If 30 million of those are taxed on their real incomes, the total tax collection would not be less than Rs 9,000 billion.

The real tax potential of Pakistan is not less than Rs 16 trillion — direct taxes Rs 9 trillion and indirect Rs 7 trillion. However, the government is begging for money both at home and abroad. Nobody questions the enormous tax benefits available to the state oligarchy—Public parasites, The News, July 21, 2013.

There is a need for a public campaign to demand that absentee landlords, many of them members of the parliament, should reveal the amount of agricultural income tax paid by them.

The judges, high-ranking public servants, including serving and retired generals, should also be required under the law to make public the number of plots they received during service, the total assets owned by them and their family members and the tax paid annually. All tax delinquents and beneficiaries of loan write-offs should be debarred from contesting elections. All kinds of exemptions and concessions provided under various tax codes should be withdrawn.

The tendency to squeeze the existing taxpayers and giving a free hand to non-filers has eroded the tax system to an extent where voluntary compliance and tax enforcement have lost their relevance. The present tax system imposes undue incidence on the poor and middle-class people (e.g. 18 percent GST takes larger portion of low-income groups compared to high income groups).

The rich and mighty are not paying income tax. They will continue to do so unless people of Pakistan pressure the provincial governments to devolve fiscal and administrative powers to the grassroots level (local governments). Fiscal decentralisation and municipal self-governance can end dependence on federal government.

Dr Ikramul Haq, an advocate of the Supreme Court and writer, is adjunct faculty at Lahore University of Management Sciences (LUMS)

Abdul Rauf Shakoori is a corporate lawyer based in the USA

Chronic debt dependence