The Zardari government is in a fix. The IMF won’t give any more money to Pakistan until the government imposes a flat 15 per cent Revised General Sales Tax on most hitherto exempted goods and services. But the government’s coalition allies are balking at the prospect of a public backlash against rising prices. Worse, the opposition is gearing up to block any such move in parliament, and is even threatening to force it out of power. Damned if the government does and damned if it doesn’t.
The IMF’s reasoning is simple and forceful. If Pakistan wants the IMF to continue funneling its US$11.7 billion bailout package, it’s past time to streamline the country’s tax system. Pakistan’s Tax:GDP ratio has fallen from over 12 per cent in 2001 to about 9 per cent today (the target is 20 per cent), compelling the government to borrow big time from domestic and international finance institutions, quite apart from printing more notes. There simply isn’t enough money in the kitty to pay minimally for defense, debt servicing and infrastructure development without fueling inflation by running up unacceptably large fiscal deficits of over 8 per cent of GDP. Over 40 per cent of the population is now reckoned to be below the poverty line compared to about 25 per cent only four years ago.
The problem is accentuated by one fact: the US$1.5 billion per year earmarked for Pakistan by the Kerry-Lugar legislation for the next five years is also pegged to approval by the IMF, World Bank etc of various economic initiatives promised by Pakistan to plug the gaps. That explains why Hilary Clinton has been publicly urging Pakistan to tax the rich at home when it proffers the begging bowl to the American tax payer in Washington during hard times. Indeed, the new US ambassador in Pakistan, Cameron Munter, recently stressed much the same urgent sentiment before an august gathering of capitalist big-wigs in Karachi. For the record, there are less than 1.6 million income tax payers (population 180 million) and less than 150,000 registered sales tax payers in the country. There has never been any tax on agricultural incomes – which constitute about 40 per cent of GDP – and a range of taxes on wealth and property and gifts were abolished during the Musharraf years – parliament is dominated by big landowners, industrialists and contractors who refuse to tax themselves.
The opposition’s claims the RGST will lead to a big price hike and add to the burden of the poor and middle classes who are already groaning under a 25% inflation rate on account of an increase of over 100 per cent in the rates of fuel and power in the last year or so. The government’s admission that the RGST will add no more than Rs 60 billion to the exchequer – less than 5 percent of total tax revenues – is grist to the mills: the social hardship is disproportionate to the meager return to government. Under the circumstances, the government’s silence on galloping corruption in expenditures, subsidies, tax exemptions, power theft etc is deafening.
Unfortunately, however, the counter argument by the finance minister, Hafeez Sheikh, is falling on deaf ears. First, it is not the amount of additional tax revenues that is at stake because of the RGST but the principle of it and commitments to the IMF time and again. Second, it will facilitate documentation of the economy and reassure donors that Pakistan’s ruling classes are making amends for their laxity in the past, quite apart from making some sacrifices themselves too. Third, the expected price hike is exaggerated since small shopkeepers and businesses with annual turnovers of under Rs 7.5 million – who constitute an overwhelming majority of traders – will be exempted from the tax. Fourth, and most critically, many food items like wheat, rice, pulses, meat, poultry and vegetables etc which form a bulk of the poor man’s everyday basket will also be exempt.
The IMF has postponed its next handout until the government concedes its demand. The federal budget is leaking like a sieve. If the government risks a vote and fails, it could be booted out of office, plunging the country into a bigger crisis than the one envisaged by the passing of the bill. Meanwhile, the vultures are gathering: every coalition partner is posturing like a long lost public saviour by opposing the proposed Bill even as it is lining up for more ministries and perks and privileges as a quid pro quo. The joke in Islamabad is that there are many more ministers than ministries now because many ministries have been recently relegated to the domain of the provinces under the 18th constitutional amendment but the federal ministers are refusing to relinquish their perks and go home.
The stranglehold of the army and Supreme Court over the Zardari government is unrelenting. Now the wailing economy is kicking the shins of the government even as the IMF continues to wield its handcuffs. If President Asif Zardari can survive until the next election rolls round in two years, it will be a tribute to his acrobatic genius no less than to the political restraint imposed on the key principals – Army and America – by the strategic circumstances of the region.