At the Apex Committee meeting over terrorism in Peshawar on Friday, Prime Minister Shehbaz Sharif complained that the International Monetary Fund (IMF) mission visiting the country for discussion to resume its bailout package was giving a ‘very tough time’ to Finance Minister Ishaq Dar and his team.
It is time the Fund did it. Period. If Pakistan wants to break up with the lender of last resort, it must dive deeper into muddy fiscal waters to fix the economy to deal with what the prime minister described as ‘unimaginable economic challenges’ facing the country.
With the country’s foreign exchange reserves shrunk to a ‘critically low’ level of $3.09 billion, enough to cover only 18 days of suppressed imports, the government is left with no other option but to accept the IMF diktat. The resumption of the programme is crucial to staving off a sovereign default as it will not only ensure the disbursement of $3bn from the Fund through June but also unlock inflows from other multilateral and bilateral creditors. But the resumption of the programme can do only so much: provide some fuel to the country to stay afloat for a few more months.
Indeed, the IMF conditions for its dollars are ‘beyond our wildest dreams’ as the premier put them and require a strong political will to implement in an election year due to the unbearable pain they will cause to the low-middle-class people already struggling to survive soaring price inflation. A report in this paper last week shows how white-collar people are forced to compromise on whatever ‘lifestyle’ they had because of the consistent increase in price inflation spurred by recent currency depreciation and fuel rate increase.
If we are not forced to withdraw energy subsidies and sell bankrupt public-sector businesses, no effort to fix this economy will ever succeed
People have been forced to work multiple jobs to make ends meet and cut meals. The slightly better-off ones are shifting from cars to two-wheelers. Yet that story and many others on inflation can’t even capture a fraction of the pain common Pakistanis are experiencing as they are being asked to pay the price of the profligacy and wastefulness of the ruling elite.
The economy is being strained by multiple stresses. The most important, which is also at the heart of the current discussions with the IMF, pertains to the state’s inability to collect enough taxes, resulting in massive fiscal deficits year after year and the accumulation of foreign debt to cover the deepening hole. Whenever under pressure from the lenders, successive governments have always chosen the easier route to fill this hole by raising taxes on the existing taxpayers instead of plugging the loopholes deliberately left open for the dishonest to avoid payment of their due share of taxes.
“We can never overcome our fiscal and foreign exchange troubles without making it difficult for the people to spend ‘dirty money’ they have with impunity on real estate, cars, imported luxuries, and what not. People will start paying taxes only when they know that they cannot spend their illegal money to purchase luxuries or park it in real estate, gold and dollars,” argues Ahmed Kamal, a textile exporter and the owner of a popular local clothing brand.
“Everyone is stealing tax: be they importers, retailers, wholesalers, textile and sugar factory owners, other industries, etc. The painful thing is that the state encourages this through policies. The tax non-filers pay is just 5 per cent on the purchase of a piece of real estate — that too on the Federal Board of Revenue of Pakistan rate and not its market value at which they buy.
“This helps them avoid becoming tax filers, evade full payment of their taxes and park their dirty money there. Why? Is it not discriminatory and regressive? I pay 30-35pc tax on my income before I can buy a plot. Why can’t the non-filers be subjected to the same rates? Who would want to pay their taxes in such an environment?”
Everyone is evading tax, be they importers, retailers, or businessmen — the painful thing is that the state encourages this through policies
Likewise, according to a customs clearing agent based in Karachi, the tax authorities have created significant incentives for importers and retailers to evade payment of full customs duty on their imports by under-invoicing or under-declaring their value by up to 40-50pc.
Take Pakistan’s trade number with China. Pakistan’s imports from China in 2021 were recorded at $20.6bn against China’s exports of $24.4bn to Pakistan. The gap represents the under-declared value of the imported goods. That is not all. Most large Pakistani retailers have discovered a way of dodging tax payments by bringing such expensive luxury items like perfumes, branded ladies purses, etc, in personal baggage.
“They have hired ‘carriers’ who go to Dubai every week and bring back suitcases full of such items. The expensive branded watches, perfumes, purses and whatnot we buy from major department stores are brought in this way. I know a case where one of my clients imported a Porsche car by air under the personal baggage scheme. Can this happen anywhere else?” he chuckled.
Ahmed Kamal, who says the textile industry stole Rs25bn in taxes because the textile spinners bought at least two million bales of ginned cotton and sold their yarn to downstream manufacturers off-the-books last year, is of the view that Pakistan’s foreign exchange troubles can’t be solved by depreciating the currency, and without stopping the circulation of dirty money in the economy and controlling under-invoicing of imports.
“We have depreciated the rupee from Rs230 a dollar to Rs273 a dollar. But has it abolished the black market? If you want to buy dollars for travel or pay fees for your children studying abroad, you pay Rs290 a dollar in the black market.
“The foreign exchange companies offer a cheaper rate, but don’t sell you at that rate. Why? It is because there is a huge demand for dollars from retailers as well as importers who under-declare the true value of their imports. The currency devaluation is no answer to our problems without addressing the real issues that are at the core of our economic and foreign exchange troubles.”
“We wanted to import embroidery machines and ink printers from China. When we approached an importer, he asked us to pay him half the price in cash here in Pakistan and establish a letter of credit for the rest. After we refused to do so, he plainly refused to do business with us, saying he couldn’t risk damaging his deals with the others.
“How on earth can you abolish hawala/hundi business without eliminating its demand? These are the decisions the government is required to take to fix the economy. It’s like that you can’t reduce the demand for petrol by keeping its prices low.”
Another industrialist, who owns textiles and other businesses, believes that it is time Pakistan seriously listened to what the world has been telling it for years. “We have to implement economically harsh and politically tough decisions. I am not worried about currency depreciation or petrol prices. You cannot subsidise what you do not produce.
“The government should realise that the time for business as usual is over. If we do not withdraw energy subsidies and sell bankrupt public-sector businesses like Pakistan International Airlines, steel mills, railways, banks and so on, no effort to fix this economy will ever succeed.
“Let us swallow this bitter pill, open up trade with the regional countries, and set about dismantling the regressive policies and distortions holding us back. India did it in the 1990s. They sidelined those who were opposed to the reforms. We should also do it if we want to progress. The IMF medication can help us through the present crisis. If we want to avoid a repeat of this crisis we will have to do a major surgery.”
Published in Dawn, The Business and Finance Weekly, February 6th, 2023
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