Pakistan mulls 'flood taxes'
By Syed Fazl-e-Haider
KARACHI - The government in Islamabad may impose a 2% tax on all imports to
generate about 50 billion rupees (US$584 million) in additional revenue to pay
for reconstruction and rehabilitation projects in the wake of the floods that
have devastated the country over the past two months. It may also impose a
special income tax.
Pakistani officials reportedly proposed the taxes during a decisive phase of
talks with the International Monetary Fund (IMF) in Washington on loan
restructuring and emergency assistance for flood victims.
The IMF continues to insist on more tax and energy sector
reforms within the present fiscal year, despite its concerns about the impact
of the floods that have swept the length of Pakistan, Dawn reported, citing
Pakistani officials. Islamabad would have to implement tax and energy sector
reforms within the current fiscal year, which ends next June, if it wants to
continue an US$11.3 billion loan arrangement that is due to expire in December.
It is now harder for the calamity-hit country to meet the conditions of the
lending program, agreed with the IMF in 2008. Finance Minister Hafeez Shaikh,
who is in Washington, is trying to persuade the IMF to ease the existing loan
terms or consider new financing. A lump-sum payment of the remaining two
installments of $2.6 billion is also being sought.
The country has so far obtained $8.7 billion from the IMF, which has forced the
government to take unpopular decisions such as monetary tightening and
increasing power tariffs.
Figures released this week show that the fiscal deficit widened to 6.3% of
gross domestic product (GDP) in the 12 months to June, missing the 4.2% target
agreed with the IMF as part the 2008 bailout agreement. Prime Minister Yusuf
Raza Gilani is afraid that the fiscal deficit may climb even higher in the
current fiscal year as a result of the recent floods.
"The budget deficit before the flood crisis was estimated to reach 4.5% of GDP.
Now it is estimated to be as much as 6-7% of the GDP," Reuters reported Gilani
as saying. "The floods have inflicted damage to the economy which may by some
estimates reach $43 billion, while affecting 30% of all agricultural land."
Two fund-raising measures - a tax on imports and incomes - are being discussed
with the IMF, and after fine tuning will be put before the federal cabinet for
approval, Dawn reported, citing a senior government official. The proposed
taxes would be imposed initially for the fiscal year ending next June, but
could be continued for a further 12 months.
There are three options before the government in its dealings with the IMF.
Islamabad could end the ongoing standby arrangement (SBA) by the end of
December, seek a new loan program, or ask the IMF to grant a three- to
six-month extension in the present program, reported Daily Times, citing
officials. The best option before the government is to seek an extension in the
loan program so as to keep relations with the IMF intact, the report said.
Complicating matters, the IMF has reportedly asked the country to grant full
autonomy to the central bank, the State Bank of Pakistan, although the
rate-setting institution has been without a boss for the past three months,
itself a breach of the bank's rules. Some analysts believe that the delay in
appointing a new governor reflects the extent to which the government has been
distracted by a host of problems.
Yaseen Anwar, the State Bank deputy governor, took over as acting governor in
June after Salim Raza resigned has bank head citing personal reasons. The
deadline to appoint a new governor ends this Thursday, prompting speculation
that acting governor Anwar will get the job.
A priority for the new governor will be tackling inflation, which hit 12.3 % in
July and may climb as high as 25%, according to officials, as the prices of
foods and other essentials surge amid shortages arising from crop damage, at
present estimated at $1 billion. The inflation target for the year to next June
is 9.5%.
The rice harvest in the marketing year that starts on November 1 may be as low
as 4.4 million tonnes, down 35% from the previous year, Bloomberg reported,
citing a report by a unit of the US Department of Agriculture.
Given the numerous crises buffeting the government, the state of the economy
has at times appeared to be given a low priority.
"The government has been dealing with terrorism and volatile politics and the
economy sometimes takes a back seat," The News reported a local analyst as
saying. "Now it has to deal with the floods."
Rising prices may put pressure on the central bank to increase its discount
rate, presently at 13%, already one of the highest in the world. Higher
borrowing costs may impede investment and undermine economic growth, which
officials now estimate at 2.5% for this fiscal year, 2 percentage points below
the government target.
"The central bank may not have much of a choice, and will tighten the policy,"
Bloomberg reported Sayem Ali, an economist at Standard Chartered Pakistan in
Karachi as saying. "The pace of inflation is definitely moving north, and the
central bank is expected to react accordingly."
The outlook for much-need foreign investment is also grim. For the past couple
of years, foreign investment in Pakistan has been falling amid fears of a
further deterioration of law and order and concern at the economy's poor
performance. Foreign direct investment plunged 46% in July to $98 million
compared with a year earlier, according to the central bank.
Local analysts see little hope of an increase in foreign investment in the
present circumstances, with flooding affecting 25% of the population and vital
resources and infrastructure being washed away.
The affected 40 million people, instead of participating in the economy, will
now be a burden as they will take up resources that would otherwise be
allocated for development projects, Dawn reported research analyst Abid Saleem
as saying. "A couple of years before, the rising repatriation of foreign
exchange was a concern but now the falling figure is a cause for worry, which
means the country has no place for FDI."
The flooding has also reduced the prospects of Pakistan garnering an improved
credit rating, which would have helped to reduce the country's borrowing costs.
Moody's Investors Service forecasts that the country's economy will grow about
3% in the current fiscal year, down from the 4.5% estimated before the floods.
Moody's, which raised Pakistan's credit-rating outlook to stable from negative
in August last year, rates the country's foreign and local-currency debt at B3,
six levels below investment grade.
"The upside room for ratings is limited but downside risks are captured
adequately now," Aninda Mitra, a sovereign analyst at Moody's, was reported as
saying by Bloomberg. "The impact could be much more severe for Pakistan's
agriculture and overall gross domestic product growth than was previously
thought."
Syed Fazl-e-Haider (http://www.syedfazlehaider.com) is a
development analyst in Pakistan. He is the author of many books, including
The Economic Development of Balochistan (2004). He can be contacted at sfazlehaider05@yahoo.com.
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