Kristalina Georgieva, Managing Director of the IMF, made astute yet heartfelt remarks about how Pakistan needs to raise more tax revenue and carefully target subsidies to reach the deserving, but on closer inspection, it is clear that she has said nothing new.Her words reflect the Fund’s public position since the start of the Extended Fund Facility (EFF) programme in 2019.
The Fund’s field mission, which recently visited Pakistan for the EFF’s 9th review, reiterated and pressed the same position. Moreover, the Fund has not been the only voice advocating for this course of action: most economists have repeatedly stated that the tax net must be expanded and cost-of-living subsidies must be carefully targeted to reach the poor and vulnerable.
To be sure, the PDM government has paid frequent and effusive lip service to Pakistan’s less fortunate. Prime Minister Shehbaz Sharif and his economic czar, Ishaq Dar, have repeatedly stated that they will not place any additional burden on the poor. But ten months after Sharif took office, we can see how his government’s actions match its words.
For example, we know that inflation has been unchecked in recent months while the government has been dragging its feet on the rupee free float. And, while Dar fought valiantly against the imposition of a petroleum development levy (PDL) on fossil fuels in the name of protecting the poor from inflation, he was making the economy pay for a portion of the rich’s V8s and Land Cruisers’ fuel bills.Furthermore, in the recently passed mini-budget, Dar carefully avoided tax proposals aimed at the banking and retail sectors. He also did not use this opportunity to bring the real estate or agricultural sectors into the tax net.
Instead, he agreed to a 1% increase in the massively inflationary sales tax, effectively shifting the burden to the people. We also know that Pakistani students studying abroad face untold difficulties as a result of the government’s unspoken rule that denies their parents access to foreign exchange while allowing PSL franchises to splurge hard currency on foreign players.
Pakistani banks have reported profits in recent years, primarily by fishing in the troubled waters of a crisis-torn forex market. It is widely assumed that Pakistan’s virtually untaxed retail sector could easily shoulder the burden of the country’s additional revenue needs at this critical juncture, but Dar chose not to go that route because traders are one of his party’s major constituencies. Agriculture accounts for nearly a quarter of Pakistan’s GDP but has remained untouchable for taxation purposes for decades due to the dominance of large landowners in the legislature. For similar reasons, the highly profitable real estate sector remains unaffected.
This is the context in which the IMF chief decided to lend his support to Pakistan’s citizens. PM Sharif must understand that Georgieva has no intention of running for office against him.
Also, coming from her, this is equivalent to saying that the Fund is willing to assist Pakistan in erecting safety nets to protect the vulnerable but not in increasing rents for the well-off rentier classes. Her remarks also contain an ominous warning: the ability of Pakistan to function as a country is at stake, and she used the opportunity to advise against sovereign debt restructuring, which is nothing more than technical default.
Will her rallying cry be enough to rouse those in power from their slumber? Let us hope so, especially since the EFF’s ninth review is still in progress. But Dar and company must keep in mind that even if everything goes well and the staff-level agreement is secured and approved by the Fund’s executive board, that will only be half the job done because China holds the majority of Pakistan’s bilateral and commercial debt, and China is likely to press Pakistan to put its house in order before extending any relief.