Restructuring Pakistan the IMF way
While politicians and political pundits might disagree on everything, they do agree on one thing- that Pakistan’s economy is in shambles. Revenue collection is down with one of the lowest tax to GDP ratios in the developing world; only 9 percent of gross national product is taxed and mainly through indirect consumption taxes, shifting the tax burden to the poor and middle classes. In contrast, privileged sections of society, the ruling landowning class, most business families, influential professional groups in law, architecture, and medicine are hardly paying any taxes at all. As a result, the tax base remains narrow and over-stressed.
In March 2018, an IMF report found that public entities like Pakistan Steel Mills, Pakistan International Airlines, power distribution companies and national railways had accumulated a loss of Rs. 1.2 trillion in a single year. That amounts to 4 percent of GDP.
There has also emerged a huge gap between the export and import sectors, putting enormous pressure on Pakistan’s balance of payment situation. By the end of December 2018, the PMLN government recorded a gap of $18.2 billion in current account deficit (about 5.8 percent of GDP). Through favors from close regional allies like Saudi Arabia and the UAE, with each depositing $3 billion, and Saudi Arabia further offering delayed payments on oil to the tune of another $3 billion, Pakistan was able to escape economic free-fall.
It is encouraging that the government has taken important, painful decisions before going to the IMF for Pakistan’s 13th bailout package.
Rasul Bakhsh Rais
But these are temporary financial relief packages; they are not a solution for Pakistan’s structural problems. The question is: why did the last two regimes— the Pakistan Peoples Party (2008-2013), and PML-N (2013-18) refuse to reform the economy, even going back on commitments that they made to the IMF? The answer lies in the natures of the Pakistani political class and their strategies of populism.
It is true that electoral politics even in most developed democracies shape the policy priorities of parties in power, but they do not compromise on primary national interests. If they try, there are opposition parties, public opinion, civil society and media that holds them accountable.
Threatened by a rising new political star, Imran Khan and his political party, the Pakistan Tehreek-e-Insaf (PTI), the last government didn’t want to make any decisions that might reduce its popularity. And so, instead of taking difficult economic decisions, like broadening the tax base, cutting down on subsidies and closing the fiscal deficit gap, it went on a spree of internal and external borrowing, adding a colossal $60 billion to the national debt.
This was economically, and eventually, politically unsustainable. While the current PTI government wants to take the difficult decisions of restructuring the economy, it treads this path with caution for two reasons. First, the combined opposition could exploit public resentment to destabilize the government.
Second, the PTI doesn’t have a majority of its own in the federal or Punjab governments. It has shifty allies that have agendas and group interests that may not converge with theirs. The fear is that if they saw the PTI in trouble, they would be the first to jump the sinking ship.
It is encouraging that the government has taken important, painful decisions before going to the IMF for Pakistan’s 13th bailout package. Reports on the ground are that the IMF is ready to support Pakistan and help weather its economic storm while nudging it to undertake economic reforms. These reforms include documenting the economy, broadening the tax base, reducing the losses of public entities by privatizing them, and more importantly by cutting down subsidies on gas and electricity eventually cutting down the fiscal debt.
However, the government will have to balance the painful consequences of reforms, particularly the removal of subsidies, with economic logic. It certainly has the will, and its heart in the right place for much delayed structural economic reforms. With the blessing and cover of the IMF, it now also has international support. The question is, will it give populism up for hard economic choices that will most certainly diminish its popular appeal before the next elections? That remains to be seen.
– Rasul Bakhsh Rais is Professor of Political Science in the Department of Humanities and Social Sciences, LUMS, Lahore. His latest book is “Islam, Ethnicity and Power Politics: Constructing Pakistan’s National Identity” (Oxford University Press, 2017).