Chakar The Great
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- Apr 25, 2018
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Source: The Wall Street Journal
ISLAMABAD, Pakistan—After a year of fending off an International Monetary Fund bailout, Pakistan’s Prime Minister Imran Khan wants to win one this week with a plan to jolt his economy into shape—potentially at the expense of the agenda that helped him get elected.
The IMF board is due to meet Wednesday in Washington to consider whether Pakistan is undertaking enough tough action to get a loan of $6 billion over three years.
Mr. Khan came to office in August promising jobs and welfare, but found the government in danger of default, with the economy drowning under budget and balance-of-payments deficits.
His administration took months to decide how to address the crisis, looking for an alternative to an IMF rescue likely to require steps that would shred his political program. He got billions of dollars in loans from regional allies—but it wasn’t enough.
Taxing ChallengePakistan aims to increase tax revenue at theexpense of short-term shocks in growth and inflation.Then, in April, Mr. Khan switched gears. He replaced his finance minister, central bank chief and the head of the tax collection authority. The government reached an agreement in principle with the IMF the following month.
In June, Pakistan’s army chief, Gen. Qamar Bajwa, was given a seat on a new economic decision-making body—an unprecedented official role that formalized the powerful military’s behind-the-scenes influence over government policy.
Gen. Bajwa told a seminar on Friday that there had been fiscal mismanagement in the government. “There cannot be any sovereignty in the absence of economic sovereignty,” he said.
In its economic surgery plan, Pakistan promises to improve tax collection by one-third, raise tax rates, curb government spending and increase gas and electricity prices in return for IMF support.
Growth will nosedive and inflation will spike, the government says. Middle-class voters who are Mr. Khan’s political base will be hit hard.
But he is betting that the economy stabilizes quickly. For Mr. Khan, it is better to deliver a short, sharp shock to the economy than endure the three years of austerity more typical of an IMF program, his aides said—a period that would take Pakistan to the cusp of the next election.
This way, they said, he will be able to return to his expansive political agenda in a year or 18 months if the plan works.
The IMF demanded action before approving the loan, unlike its past programs for Pakistan, but opposes a tax amnesty introduced by Mr. Khan’s government in an attempt to broaden the tax net.
Senior officials of the U.S. government, which holds sway over the IMF, have raised concerns that Pakistan would use the international funds to repay billions of dollars of loans from China, rather than to directly address the country’s structural economic challenges.
The U.S. plans to examine the conditions of the IMF package for Pakistan, having already “communicated our strong views,” the State Department’s acting assistant secretary for South and Central Asian affairs, Alice Wells, said in Congressional testimony in June. Pakistan is hoping for a meeting between Mr. Khan and President Trump in the next few weeks, Pakistani officials said.
Mr. Khan has said the country is in a debt trap and ordered an investigation into the borrowing of the last two governments. But debt continues to accumulate under his administration—much of it to China. From last July, shortly before Mr. Khan took office, through this March, $8.5 billion in foreign loans arrived in government coffers, of which $6.4 billion, or 75%, came from China, according to the Finance Ministry.
Mr. Khan has also turned to Arab nations to keep the economy afloat, with an additional $5 billion in loans from Saudi Arabia and the United Arab Emirates. Qatar said in late June that it would give $3 billion in loans and investments.
Mr. Khan has promised to create 10 million jobs and see 5 million low-cost homes built during his five-year term, as well as improving health and education services. The government’s plan seeks to eventually meet those goals by replacing consumption-based economic expansion driven by government borrowing and imports with more sustainable growth based on private investment and exports.
“This is like shock therapy,” said Sakib Sherani, an economist who formerly sat on the government’s economic advisory council. “The pain is unavoidable, so the idea is that it is better to get it over in one go.”
Abdul Hafeez Shaikh, who became de facto finance minister in April, has said an economic overhaul was needed regardless of an IMF bailout. He said more tax would have to be paid, especially by the rich, “even if that makes some people angry.”
Mr. Shaikh pointed to the country’s biggest industry, textiles, as not paying its fair share. A raft of tax exemptions for business will be removed.
“One of the reasons for going to the IMF is to signal to the world that we are serious, that we are ready to take difficult decisions,” Mr. Shaikh said Sunday.
“The stakes for our country are so high, that it cannot be business as usual,” he said in June.
In one unusual move, the military’s budget allocation will increase only slightly in the financial year that starts this month , while substantial increases have been the rule in the past. Meanwhile, civilian government spending will shrink.
Pakistan has one of the lowest tax takes in the world, making up just 13% of GDP. That compares with an average of 20% for emerging markets, according to the World Bank. Only two million people out of a population of 208 million are registered income-tax payers, the government says.
Economic expansion will fall to as low as 2.4% in the coming financial year, the government said, from 5.5% growth in the year before Mr. Khan came to office. That is well below the growth rate of around 7% required to absorb the annual entrants to the job market.
Inflation could reach 13%, the government said, compared with around 4% before Mr. Khan came to power. Interest rates have been raised. The rupee has been allowed to depreciate by a third over the last 18 months—that has curbed imports moderately, but exports haven’t picked up.
Some economists say 2.4% growth and the tax collection targets are optimistic. Even if Pakistan’s economy stabilizes, getting growth going again will be challenging. Some in the business community remain spooked by the previous policy indecision and threats by the authorities of jail over tax evasion and corruption.
“The structural problems are so acute that a brief period of economic stabilization is now not possible,” said Mushtaq Khan, a former chief economist at the central bank. “The can has perhaps been kicked off the cliff, not just down the road.”
ISLAMABAD, Pakistan—After a year of fending off an International Monetary Fund bailout, Pakistan’s Prime Minister Imran Khan wants to win one this week with a plan to jolt his economy into shape—potentially at the expense of the agenda that helped him get elected.
The IMF board is due to meet Wednesday in Washington to consider whether Pakistan is undertaking enough tough action to get a loan of $6 billion over three years.
Mr. Khan came to office in August promising jobs and welfare, but found the government in danger of default, with the economy drowning under budget and balance-of-payments deficits.
His administration took months to decide how to address the crisis, looking for an alternative to an IMF rescue likely to require steps that would shred his political program. He got billions of dollars in loans from regional allies—but it wasn’t enough.
Taxing ChallengePakistan aims to increase tax revenue at theexpense of short-term shocks in growth and inflation.Then, in April, Mr. Khan switched gears. He replaced his finance minister, central bank chief and the head of the tax collection authority. The government reached an agreement in principle with the IMF the following month.
In June, Pakistan’s army chief, Gen. Qamar Bajwa, was given a seat on a new economic decision-making body—an unprecedented official role that formalized the powerful military’s behind-the-scenes influence over government policy.
Gen. Bajwa told a seminar on Friday that there had been fiscal mismanagement in the government. “There cannot be any sovereignty in the absence of economic sovereignty,” he said.
In its economic surgery plan, Pakistan promises to improve tax collection by one-third, raise tax rates, curb government spending and increase gas and electricity prices in return for IMF support.
Growth will nosedive and inflation will spike, the government says. Middle-class voters who are Mr. Khan’s political base will be hit hard.
But he is betting that the economy stabilizes quickly. For Mr. Khan, it is better to deliver a short, sharp shock to the economy than endure the three years of austerity more typical of an IMF program, his aides said—a period that would take Pakistan to the cusp of the next election.
This way, they said, he will be able to return to his expansive political agenda in a year or 18 months if the plan works.
The IMF demanded action before approving the loan, unlike its past programs for Pakistan, but opposes a tax amnesty introduced by Mr. Khan’s government in an attempt to broaden the tax net.
Senior officials of the U.S. government, which holds sway over the IMF, have raised concerns that Pakistan would use the international funds to repay billions of dollars of loans from China, rather than to directly address the country’s structural economic challenges.
The U.S. plans to examine the conditions of the IMF package for Pakistan, having already “communicated our strong views,” the State Department’s acting assistant secretary for South and Central Asian affairs, Alice Wells, said in Congressional testimony in June. Pakistan is hoping for a meeting between Mr. Khan and President Trump in the next few weeks, Pakistani officials said.
Mr. Khan has said the country is in a debt trap and ordered an investigation into the borrowing of the last two governments. But debt continues to accumulate under his administration—much of it to China. From last July, shortly before Mr. Khan took office, through this March, $8.5 billion in foreign loans arrived in government coffers, of which $6.4 billion, or 75%, came from China, according to the Finance Ministry.
Mr. Khan has also turned to Arab nations to keep the economy afloat, with an additional $5 billion in loans from Saudi Arabia and the United Arab Emirates. Qatar said in late June that it would give $3 billion in loans and investments.
Mr. Khan has promised to create 10 million jobs and see 5 million low-cost homes built during his five-year term, as well as improving health and education services. The government’s plan seeks to eventually meet those goals by replacing consumption-based economic expansion driven by government borrowing and imports with more sustainable growth based on private investment and exports.
“This is like shock therapy,” said Sakib Sherani, an economist who formerly sat on the government’s economic advisory council. “The pain is unavoidable, so the idea is that it is better to get it over in one go.”
Abdul Hafeez Shaikh, who became de facto finance minister in April, has said an economic overhaul was needed regardless of an IMF bailout. He said more tax would have to be paid, especially by the rich, “even if that makes some people angry.”
Mr. Shaikh pointed to the country’s biggest industry, textiles, as not paying its fair share. A raft of tax exemptions for business will be removed.
“One of the reasons for going to the IMF is to signal to the world that we are serious, that we are ready to take difficult decisions,” Mr. Shaikh said Sunday.
“The stakes for our country are so high, that it cannot be business as usual,” he said in June.
In one unusual move, the military’s budget allocation will increase only slightly in the financial year that starts this month , while substantial increases have been the rule in the past. Meanwhile, civilian government spending will shrink.
Pakistan has one of the lowest tax takes in the world, making up just 13% of GDP. That compares with an average of 20% for emerging markets, according to the World Bank. Only two million people out of a population of 208 million are registered income-tax payers, the government says.
Economic expansion will fall to as low as 2.4% in the coming financial year, the government said, from 5.5% growth in the year before Mr. Khan came to office. That is well below the growth rate of around 7% required to absorb the annual entrants to the job market.
Inflation could reach 13%, the government said, compared with around 4% before Mr. Khan came to power. Interest rates have been raised. The rupee has been allowed to depreciate by a third over the last 18 months—that has curbed imports moderately, but exports haven’t picked up.
Some economists say 2.4% growth and the tax collection targets are optimistic. Even if Pakistan’s economy stabilizes, getting growth going again will be challenging. Some in the business community remain spooked by the previous policy indecision and threats by the authorities of jail over tax evasion and corruption.
“The structural problems are so acute that a brief period of economic stabilization is now not possible,” said Mushtaq Khan, a former chief economist at the central bank. “The can has perhaps been kicked off the cliff, not just down the road.”
