In the face of Pakistan's gravest economic crisis, which has brought the country to the brink of default, it is countless people that the world should be most worried about. And yet it is precisely these people that Pakistan's politicians are failing. In the world's fifth largest country of 230 million densely packed, highly polarized and heavily armed people, the consequences of this neglect could be disastrous--for both Pakistan and its neighbours, The News.com wrote.
The tragedy is that it did not have to be this way. Scarcely a year and a half ago, Pakistan was performing comparatively well. It had handled Covid considerably well somehow, keeping both casualties and the economic fallout remarkably low. In addition, its foreign exchange reserves rose to all-time highs of over USD 20 billion.
At the end of 2021, with a large amount of external debt coming due over the next few years, it was now time to resume the IMF program that had been paused due to Covid. Everybody knew it was the only route to safety, The News.com wrote.
This is when Pakistan's policymakers let their people down. Amid political instability, a populist energy subsidy created a fiscal hole of 1.5 per cent of GDP. More recently, the Pakistani Rupee was artificially propped up through curbs on imports, bringing many industries to their knees.
Meanwhile, no attempt was made to reduce wasteful government spending or energy usage. No attempt was made to win back external creditors who have dumped Pakistani assets, unnerved by highly irresponsible comments from key policymakers. Promises made to the IMF were broken and wild accusations were hurled at them. As a result, our foreign exchange reserves have today been nearly depleted and the currency has tanked, The News.com wrote.
Meanwhile, the IMF has watched Pakistan commit hara-kiri with some bemusement. All this time, the crucial IMF program has largely been in limbo. The fault for this lies mainly with our policymakers. The Fund now finally appears willing to help pull us back from the abyss by reviving the program. Regrettably, however, the Fund is also complicit in some grave mistakes.
First, despite proclamations of protecting the poor and passing the burden of adjustment on the rich, the main fiscal measure the Fund has agreed with the government is an increase in the sales tax--a highly regressive measure. There is not even a hint of taxing property (an unproductive asset where illicit wealth is stashed), agriculture (which is dominated by large landlords) or the retail sector (home to most of Pakistan's nouveaux riches). This is a historic opportunity missed to broaden the tax base in a progressive way, The News.com wrote.
Second, the only real protection being offered to the poor is through BISP, a cash transfer program covering 9 million families who live on less than 70 cents a day. They will receive an extra 30 cents per day. In a country where 40 per cent of the population--90 million people--earn less than the World Bank's middle-income poverty line of USD 3.65 per day and where inflation is running at a 50-year high of 30 per cent, this protection is nothing but cosmetic.
Third, the government and the IMF are pretending that Pakistan's public debt is sustainable. Pakistan has external financing needs of USD 35 billion in each of the next five years, against foreign exchange reserves of just USD 4 billion. During this time, the government will need to pay 5 per cent of GDP each year in interest on the debt it owes to residents and foreigners, The News.com wrote.
Pakistan's total tax take is only 10 per cent of GDP. If ever a country needed debt relief, it is Pakistan. Denying this is a recipe for disaster. It will impose unbearable austerity on an antagonised population already laid low by a major cost of living crisis and political dysfunction. It could spark a major social revolt.
First and foremost, the IMF program needs to be immediately revived. For this, some pragmatism and flexibility are needed on both sides. Second, debt relief must be delivered, despite the obvious coordination difficulties. Third, the most vulnerable have to be genuinely protected while shifting the burden of austerity on the well-off.
Beyond this immediate relief, Pakistan must once and for all tackle the underlying maladies that have led it to the IMF a record 23 times--a low tax take, faltering exports and abysmal levels of investment in human and physical capital. A good place to start would be to redefine its social contract. This will require Pakistan's warring elites to put aside their differences and finally gamble on economic development. In turn, the global community can help by providing a conducive environment for Pakistan's exports and by investing in the country.
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