His inaugural speech as the Prime Minister (PM) last Sunday, Imran Khan addressed many issues. Most of what he said could not be disagreed with, at least on face value. Obviously, fixing the economy had to be one of the most important challenges for any new PM. Part of fixing the economy is related to bringing austerity measures to the government’s operational expenditures and increasing tax collections in view of the rising debt. This, he has promised to implement come what may. All of this certainly looks wonderful; but the paradox is that austerity alone cannot keep this country’s economy afloat.
Understandably, the austerity programmes aim to reduce government’s liabilities and increase revenues. Both aims can be achieved through privatisation of state owned enterprises, removal of or reduction in subsidies, targeting tax evasion and increasing tax collection. The irony is that these measures could slow down the growth of an economy which is already suffering from low growth. For instance, if the government removes subsidies and downsizes its employees, it will lead to increased unemployment. Similarly, if it raises taxes or cracks down on corporate tax evaders, itwill cause more layoffs and price hikes. Ultimately, this means consumers will have less money to spend. A 2012 IMF report on Eurozone austerity measures testifies to austerity measures having this outcome.
Similar outcomes can be found in our past too. In 1999 when General Pervez Musharraf rose to power in a military coup, the debt-to-GDP ratio was around 76 percentin Pakistan. The speech he gave was quite similar to the one by Imran Khan on Sunday. Musharraf promised a programme of economic reforms, debt reduction and poverty alleviation through privatisation to reduce government liabilities, crackdown on corruption, and overhaul the taxation system. In his first two years he implemented these means with such a zeal that it scared away many businesses and investments. By 2001, the debt-to-GDP ratio hit115 percent. Had it not been for 9/11and the fiscal largess it ended up bringing to Pakistan, the country was heading for a sovereign default.
Imran Khan’s austerity scheme, which includes disposing off of luxury cars, employees, and the hospitality expenses of PM House; will hardly bring a few dozen millions in savings. Add to this the one-time proceeds of a few billion and annual saving in costs from the privatisation of PIA and Pakistan Steel Mills. This amounts to peanuts for a country with an annual budget of Rs 4.75 trillion
In our neighborhood, erstwhile Iranian president Ahmadinejad too thought adopting rhetoric of simple living would cure the ills of Iranian economy in the age of political and economic globalisation. To walk the talk, he insisted on staying in his own house instead of the presidential palace until security agencies forced him to see sense. He would refuse to sit on the VIP seat of the presidential plane, eventually replacing it with a cargo plane. Despite all this along with other populist austerity measures, it was during his tenure that Iran saw the highest budget deficit since the Iranian revolution.
Now if we look at Pakistan, interestingly, our current debt-to-GDP ratio is just over 67 percent, which is still lower than our average for the last 25 years, 69.3 percent. Countries normally go for austerity measures when their debt-to-GDP ratio is beyond 90 percent, which means that the debt weighing the country down amounts to almost as much as its economy can earn annually. As the risk for creditors becomes exceptionally high, they demand higher interest rates and loans become expensive for the recipient country. Besides, Imran Khan’s austerity scheme, which includes disposing off of luxury cars, employees, and the hospitality expenses of PM House; will hardly bring a few dozen millions in savings. Add to this the one-time proceeds of a few billion and annual saving in costs from the privatisation of PIA and Pakistan Steel Mills. This amounts to peanuts for a country with an annual budget of Rs 4.75 trillion.
Ostentatious austerity and going into overdrive against corruption and tax fraud will not only cost this government in time, energy and resources. It will also expose its own contradictions. For instance, what may justify having an advisor to the PM on media affairs when he’s already got a minister of information and broadcasting? Or what might justify an advisor on accountability affairs when the country has got an independent accountability body in the National Accountability Bureau?
What really matters is how tax collection can be increased by at least five digits from the current approximate 11 percent of the GDP. The new government must then capitalise on a current economic growth rate of 5.7 percent to consistently maintain it at over6 percent for the next five years. The government will be better served if it dispenses with its temptation for a spectacular populist campaign against corruption and tax fraud. It should diligently and quietly deliver the good governance it has promised and and ensure ease of business for increased revenue and economic growth.
The writer is a sociologist with an interest in history and politics. He tweets @ZulfiRao1
Published in Daily Times, August 25th 2018.