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Economy

Khan avoids talk of economy after Pakistan unveils tax targets

Prime minister focuses on tackling corruption as foundation for IMF loan

Pakistani Prime Minister Imran Khan's party won last year's election on a pledge to eliminate corruption.   © Reuters

ISLAMABAD -- Hours after the budget was announced on Tuesday, Pakistani Prime Minister Imran Khan took to national television with a forceful message: to accelerate a corruption crackdown. But for those listening for clues on economy policy, Khan made no such mention even though the country only has enough in its coffers to pay for two months' imports.

Since his election in the summer last year, Khan and his government have worked hard to avert a balance of payments crisis, managing to secure just over $9 billion in loans from China, Saudi Arabia and the United Arab Emirates.

But with its foreign currency reserves hovering at around just $9 billion, Pakistan's only option was to seek another $6 billion in financial aid from the International Monetary Fund -- a three-year plan it expects to be approved over the next few weeks. But bailouts have always been painful for recipient countries. The government announced earlier this week an ambitious plan to collect 5.55 trillion rupees ($36.2 billion) in tax revenue to meet IMF conditions.

What Khan failed to address in his speech is how the government hopes to implement this in a sluggish economy. Already, the government has lowered its economic growth forecast for the year ending this month to 3.3%, roughly half its target of 6.2%.

"Exactly how the government will achieve an ambitious target of a 37% increase in tax collections where there is an overall slowdown in economic activity is hard to understand," said Zubair Moti, a prominent Pakistani business leader in an interview with Nikkei.

Critics call Pakistan's creaking tax collection structure one of the world's worst performing. Against such a backdrop, agricultural output growth tumbled to just 0.85% this fiscal year, due to water shortages, while industrial growth ground to just 1.4%, significantly short of expectations. Pakistan is also reliant on foreign sources of energy, making it vulnerable to prices it has little control over.

Politicians close to Khan have insisted that the tax collection target is achievable. Minister for Finance, Revenue, Economic Affairs and Statistics Abdul Hafeez Shaikh told journalists Wednesday that the government will clamp down on widespread tax evasion, singling out the textiles industry.

"We believe annual sales from the textile sector in Pakistan are 1.2 trillion rupees but this sector pays only 6 billion rupees in tax. Shouldn't they pay more?" Shaikh said. Senior government officials added that the 17.5% sales tax on textiles alone should bring in 210 billion rupees, 35 times the amount collected now.

Western economists also pointed to challenges that Pakistan faces in income tax collection. Only 1% of the population pays income tax. Widespread corruption among tax collectors means that affluent Pakistanis can buy their way to paying much less than what they owe or not pay at all.

"The issues surrounding the tax collection system are neither straightforward nor easy to resolve," said one western economist who spoke to Nikkei on condition of anonymity.

Ministers in Khan's cabinet say the prime minister's single-minded focus on tackling corruption gives the government a chance in meeting its objectives. Khan's Pakistan Tehreek-e-Insaf, or Pakistan Justice Movement, won last year's election mainly on promises to eliminate corruption.

"In the past, we have had government's promise to eliminate corruption but no one was able to achieve this goal. Today, Imran Khan has no issues of corruption around him which is a fact of life that gives him a bigger moral authority to oversee an attack on corruption," one minister told Nikkei on condition of anonymity.

For now, Khan's government crackdown has focused on opposition politicians -- former President Asif Ali Zardari and Hamza Sharif were arrested on corruption allegations earlier this week.

Other opposition leaders warn that with the economic slowdown, the government's policies will lead to a public backlash against Khan and his regime. Pakistan has already increased gas and electricity tariffs and implemented a tax on mobile phone scratch cards, hitting consumers at a time when inflation is hovering above 7%.

"The economy has totally tanked and people are under stress which is certain to grow in future," said Shahid Khaqan Abbasi, the former prime minister and opposition leader in an interview with Nikkei.

A western diplomat agreed, saying that the austerity measures imposed by Khan's government could spark resentment. "This is a very unpredictable situation. You can't be sure how the public will react," he said.

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