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Economic blasphemy
In saving itself, Pakistans government has jeopardised the economy
ON JANUARY 3rd Pakistans central bank began printing rupee notes carrying the signature of Shahid Kardar, who was appointed governor of the State Bank of Pakistan in September. Unfortunately inflation has robbed money of over 15% of its value in the past year, and no let-up is in sight for the new notes. It is the most visible sign of an economy slouching towards another financial crisis.
At the start of the year the government raised petrol prices, prompting the Muttahida Qaumi Movement (MQM) to quit the coalition government led by the Pakistan Peoples Party (PPP). It left the PPP with a choice between saving the government and saving the economy, as Maleeha Lodhi, Pakistans former ambassador to the United States and Britain, put it in the News, a Pakistani daily.
On January 6th the PPP made its choice, reversing the price rise. The decision has rescued the government but also robbed the exchequer of 5 billion rupees ($58m) a month. By the end of the fiscal year in June, the governments deficit could reach 6.5% of GDP, according to Sayem Ali of Standard Chartered bank, or even 8% if oil prices continue to rise, according to Mohsin Khan of the Peterson Institute, in Washington, DC.
Pakistans budget has a lot to bear. The World Bank reckons that recovering from the summers devastating floods, which damaged over 1.6m homes, will cost up to $10.8 billion. To date, aid has been modest. Donors have pledged just $2.1 billion, or $11 per person, compared with $363 per person promised to Haiti after its earthquake a slightly unfair comparison perhaps.
Yet Pakistans fiscal troubles are antediluvian. It is one of the most lightly taxed countries in the world. Fewer than a quarter of the countrys firms declare any taxable revenues, and only 11 out of every 1,000 of its citizens pay tax on their incomes, according to the World Bank. As a result, tax revenues amount to a mere 10% of Pakistans GDP.
The government had hoped to raise that ratio by broadening its sales tax, which is riddled with exemptions. Yet it lacked the heart to defy lobbies which slip through the threadbare tax net. They include exporters who escape tax on their domestic sales, as well as retailers and wholesalers who elude tax altogether. The proposed reforms also proved unpopular with the broader public, who resent paying anything to a government that gives them so little in return.
The governments failure has jeopardised its agreement with the IMF, which is withholding the remaining $3.5 billion of the bail-out funds it offered back in 2008. At that time, the rupee was tumbling and Pakistans foreign-exchange reserves barely covered three weeks worth of imports. If the country is not yet in similar trouble, it can thank Pakistani folk abroad, whose remittances surged by 16.8% in the second half of 2010, compared with a year earlier (see chart). This is one reason why the rupee has not sunk further, and why the central banks reserves still cover six months worth of imports.
Yet foreign investment has slowed to a trickle, and higher commodity prices will add to the countrys import bill. Meanwhile, Pakistans foreign debt must be serviced. The finance minister is in a pickle. If Pakistanis lose heart, too, they may quit the currency, scrambling for dollars instead. Should that happen, Pakistans reserves will quickly vanish. And here is the big difference between 2008 and today: Pakistan has already had its IMF rescue.
Pakistan's troubled finances: Economic blasphemy | The Economist
In saving itself, Pakistans government has jeopardised the economy
ON JANUARY 3rd Pakistans central bank began printing rupee notes carrying the signature of Shahid Kardar, who was appointed governor of the State Bank of Pakistan in September. Unfortunately inflation has robbed money of over 15% of its value in the past year, and no let-up is in sight for the new notes. It is the most visible sign of an economy slouching towards another financial crisis.
At the start of the year the government raised petrol prices, prompting the Muttahida Qaumi Movement (MQM) to quit the coalition government led by the Pakistan Peoples Party (PPP). It left the PPP with a choice between saving the government and saving the economy, as Maleeha Lodhi, Pakistans former ambassador to the United States and Britain, put it in the News, a Pakistani daily.
On January 6th the PPP made its choice, reversing the price rise. The decision has rescued the government but also robbed the exchequer of 5 billion rupees ($58m) a month. By the end of the fiscal year in June, the governments deficit could reach 6.5% of GDP, according to Sayem Ali of Standard Chartered bank, or even 8% if oil prices continue to rise, according to Mohsin Khan of the Peterson Institute, in Washington, DC.
Pakistans budget has a lot to bear. The World Bank reckons that recovering from the summers devastating floods, which damaged over 1.6m homes, will cost up to $10.8 billion. To date, aid has been modest. Donors have pledged just $2.1 billion, or $11 per person, compared with $363 per person promised to Haiti after its earthquake a slightly unfair comparison perhaps.
Yet Pakistans fiscal troubles are antediluvian. It is one of the most lightly taxed countries in the world. Fewer than a quarter of the countrys firms declare any taxable revenues, and only 11 out of every 1,000 of its citizens pay tax on their incomes, according to the World Bank. As a result, tax revenues amount to a mere 10% of Pakistans GDP.
The government had hoped to raise that ratio by broadening its sales tax, which is riddled with exemptions. Yet it lacked the heart to defy lobbies which slip through the threadbare tax net. They include exporters who escape tax on their domestic sales, as well as retailers and wholesalers who elude tax altogether. The proposed reforms also proved unpopular with the broader public, who resent paying anything to a government that gives them so little in return.
The governments failure has jeopardised its agreement with the IMF, which is withholding the remaining $3.5 billion of the bail-out funds it offered back in 2008. At that time, the rupee was tumbling and Pakistans foreign-exchange reserves barely covered three weeks worth of imports. If the country is not yet in similar trouble, it can thank Pakistani folk abroad, whose remittances surged by 16.8% in the second half of 2010, compared with a year earlier (see chart). This is one reason why the rupee has not sunk further, and why the central banks reserves still cover six months worth of imports.
Yet foreign investment has slowed to a trickle, and higher commodity prices will add to the countrys import bill. Meanwhile, Pakistans foreign debt must be serviced. The finance minister is in a pickle. If Pakistanis lose heart, too, they may quit the currency, scrambling for dollars instead. Should that happen, Pakistans reserves will quickly vanish. And here is the big difference between 2008 and today: Pakistan has already had its IMF rescue.
Pakistan's troubled finances: Economic blasphemy | The Economist
