Pakistan Civil Society Submission to the Independent Expert on Foreign Debt and Human Rights

This submission to the Independent Expert on Foreign Debt and Human Rights comes at a crucial juncture in Pakistan’s socio-political and economic history. In 2018 after the general elections no single party could gain an overall parliamentary majority, resulting in the formation of a coalition government, with Imran Khan as Prime Minister. The PTI government was elected on the manifesto to fight corruption and debt burden. It inherited a damaged economy and huge debt. However, in the last four years, it has miserably failed to arrest the galloping public debt and its adverse impacts on the lives of the working classes.


Meanwhile, the global attention has been further focused on Pakistan, with the rapid revival of the Taliban regime in neighbouring Afghanistan soon after the withdrawal of US forces in August 2021. The attention of the international community remained focused on Pakistan not only due to the gross human rights violations for since long but also, due to its alleged covert support to the Taliban in the resurge of the Taliban.

In the aftermath of the US debacle in Afghanistan, the country has been increasingly shifting, redesigning and redefining its geo-strategic partnerships to align with its socio-political development agenda. The crumbling economy has augmented the government dependency on increased foreign borrowings, leading to austerity measures, as well as curtailing its social spending. This has far-reaching implications on the rights and liberties of its citizens – especially relating to the progressive realization of their social, economic and cultural rights.

 Debt situation

With the PTI govt in place, Pakistan’s foreign borrowings had increased by many folds. Foreign debt increased significantly between 2018-2022. Figures showed that the total debt and public debt situation deteriorated during the tenure of the current PTI government.

External debt has swelled to $119.8 billion. Debt servicing devouring all over resources. In 2018, it was $93 billion. In 2021, our external debt exceeds $119 billion. In 2018, we paid $6 billion in debt servicing. In 2020 debt payments on external debt exceeds $12 billion. In 2017, a mere five years ago, Pakistan’s total debt payment amounted to 39 % of FBR taxes. Today, our total debt payment consumes 75 % of FBR taxes. The Debt-to-GDP ratio increased from 76% in 2018 is now over 90%. Similarly, with regard to debt to the export ratio: In 2018, we paid 19% of our exports in debt servicing. In 2021 we pay over 35% of exports towards our debt servicing. Based on the current trajectory, by 2025, our debt payments will swallow 100 per cent of FBR taxes. Pakistan will become totally dependent on bank and non-bank borrowing plus foreign aid. [1]

Pakistan is compelled to meet debt service requirements at great human and social costs to its population. The wartime levels of spending, driving deficits and public debt to new highs.

 Impact of rising debt

The current spell of inflation comes hot on the heels of a pandemic during which Pakistan’s economy has experienced a negative growth rate of 0.4% and a pre-pandemic austerity cycle that eroded the purchasing power of millions of citizens. After more than three years of misery, citizens are experiencing more pain as the latest round of price adjustments works its way through the economy. The resumption of the International Monetary Fund (IMF) program may further force the government’s hand, leading to an increase in power tariffs and a return to highly unpopular austerity measures.

High levels of debt servicing have taken place at the expense of social investment, including investment in services that contribute to the realization of human rights of access to health and education. Capital expenses for social welfare and the provision of public services such as health care and education have been curtailed.

Foreign debt has an impact on social development and the enjoyment of human rights as they are linked to the conditionalities set forth by lending institutions. The IMF, World Bank and other IFIs insist on several structural changes being affected in the years to come including the consolidation of the fiscal deficit, increasing taxes, restricting public expenditure, reforming state-owned enterprises through privatization. Conditions imposed by the IMF are aimed at narrowing balance deficits and other macro-level indicators, while the costs and risk of those adjustments are invariably transferred to the people. For instance, proposals that increase tax revenue have not adequately addressed the disparity between direct and indirect taxes. It has increased indirect taxes affecting ordinary people.

The record rise in energy prices; gas, electricity and fuel, has triggered a fresh round of inflation, sending the prices of food, transport and other essential items to new highs and putting more pressure on lower- and middle-income groups. Pressed hard by the highest inflation (13 per cent), people may not find any relief in future either.

Using the lower-middle-income poverty rate ($3.2 per day), the World Bank (WB) has estimated that poverty in Pakistan has increased from 4.4 per cent to 5.4 per cent. By using the upper-middle-income poverty rate ($5.5 per day) methods, the poverty stood at 78.4 per cent in 2020-21 and it would be standing at 78.3 per cent in 2021-22 and is projected to come down to 77.5 per cent in 2022-23. The World Bank’s Macro Poverty Outlook on Pakistan stated that the incidence of poverty is estimated to have increased in FY20 from 4.4 to 5.4 per cent, using the international poverty line of $1.90 per day, with more than two million people falling below this poverty line. Moreover, 40 per cent of households suffered from moderate to severe food insecurity [2].

The share of indirect taxes has increased by seven per cent against direct taxes during the tax year 2019-20 after hovering around 60 per cent on an average over the last decade. According to the Federal Board of Revenue (FBR) data of last one decade, the share of indirect taxes was 61.3% in 2010-11, followed by 60.8% in 2011-12, 61.8% in 2012-13, 61.1% in 2013-14, 60.1% in 2014-15, 60.9% in 2015-16, 60.1% in 2016-17, 60% in 2017-18, 62.2% in 2018-19 and 67.9% in 2019-20. On the other hand, the share of direct tax collection has reduced correspondingly to 32.1% in 2019-20 against 38.7% in 2010-11 [3]. The growing share of indirect taxes and presumptive levies in tax revenues means that the burden of the wealthy is being shifted onto the low-middle-income people.

 Toxic austerity

Amidst Pakistan’s debt-stricken economy and with prices of everyday essentials; food and fuel rising sharply, the negative inflationary impacts of the IMF fresh conditions on the low-and middle-income segments of the population are beyond doubt. As a result of the latest ‘austerity measures, the impending onslaught of inflation is so sure that the finance minister has himself admitted that the withdrawal of certain tax exemptions would directly or indirectly affect the common people.

With the imposition of new taxes, several edibles; especially imported ones, are going to get costlier. 17% sales tax has been imposed on a number of items that were earlier exempted from taxes. Moreover, the withdrawal of sales tax exemption for various crop seeds, agriculture inputs and farm implements will have far-reaching consequences for the already struggling farming community, raising their cost of cultivation. Similarly, maize, rice and vegetable seeds are also facing the same predicament as the additional tax will result in overall productivity loss and food security concerns.

The prices of 28 essential commodities have climbed rapidly due to the record-hitting fuel costs, resulting in inflation of 18.09 per cent on an annual basis [4]. As a direct effect of the hike in the prices of petroleum products, the prices on everyday conveniences such as milk, pulses, ghee, and lentils have shot up, according to the federal bureau of statistics.

Food and dairy Farmers fear their sector may be the worst victim with production costs rising substantially, causing a liquidity crunch in the rural economy. `With fertilizer already priced out of farmers` reach, this price hike is bound to hit the production of different food items. Wheat prices that have been in an upward spiral for the last three years, would see a further jump due to an increase in transportation charges.

The government’s excuse of global commodity price boom as the major reason behind galloping inflation has little currency. It is important to recognize that the inflationary storm engulfing Pakistan is far more significant than in other peer economies: From January 2020 to September 2021, food prices in Pakistan increased by almost 18 % compared to almost 6% in India. [5]”

 State of Health

Pakistan is spending far less on healthcare. The country’s health expenditure totalled 1.2 per cent of the GDP in the 20-21 financial years against five per cent advocated by the WHO [6]. Pakistan is a known low-spender on health. To put things into perspective, according to estimates done in 2017-18, Pakistan spent $45 per person on health, while Iran spent $484 and Qatar spent $1,716 per capita [7]. Pakistan’s “spending on health has been less than 1% of GDP since decades [8].” The fact remains that by local standards a huge increase is required in order to advance towards the goal of UHC in Pakistan, yet it is far below $86.

The government claims that the recently launched Sehat Sahulat Program is a milestone towards social welfare reforms; ensuring that the identified under-privileged citizens across the country get access to their entitled medical health care without any financial obligations. However, a strong view is that it is a bonanza for private hospitals by and large. It is tantamount to privatization of the health sector as around 75% of patients visit private hospitals and 25% turned up at the government health facilities [9].

 State of Education

Historically, in Pakistan, the state’s commitment to social service delivery – education in particular- has often competed with (and lost out against) heavy debt repayments, large and ever-expanding defence budgets and unproductive expenditures on running an oversized government. Currently, Pakistan has the world’s second-highest number of out-of-school children (OOSC) with an estimated 22.8 million children aged 5-16 not attending school, representing 44% of the total population in this age group. In the 5-9 age group, 5 million children are not enrolled in schools and after primary-school age, the number of OOSC doubles, with 11.4 million adolescents between the ages of 10-14 not receiving formal education [10].

Pakistan’s literacy rate is stagnant at 60% in 2019-20 since 2014, while cumulative education expenditures by the federal and the provincial governments in the fiscal year 2020 stood at 1.5% of the GDP as compared to 2.3%of the GDP in the fiscal year 2019, says the Economic Survey 2020-21 [11]. Inadequate financing is one of the major reasons behind this lowest budgetary allocation well short of the 4 per cent target. [12]

Source: https://tradingeconomics.com/pakistan/public-spending-on-education-total-percent-of-gdp-wb-data.html

Pakistan, a country marred by the education crisis has allocated a meagre budget – only 2% of the GDP – to education. It is hence not surprising that Pakistan failed to achieve the Millennium Development Goal (MDGs) of universal Primary education and gender equality (MDGs 2 and 3).

 Social Protection

Pakistan has no system of unemployment benefits and citizens’ pensions. Employment-based contributory schemes do not cover the country’s 27 million workers in the informal economy. Due to the narrow-targeting of social protection programs, the poorest population receive smaller and smaller benefits, while most people are excluded. Out of 80 million, only 1.5 million people have been able to benefit. Social protection in Pakistan is grouped together with poverty alleviation. The focus is on protecting the poorest of the poor, rather than building a system that protects everyone. Individual benefits and the lifecycle approach rarely feature in policy discussions.

All social assistance schemes in Pakistan are needs-targeted. Employment-based contributory schemes for workers in the formal economy have a wage ceiling at, or near, the minimum wage. The Zakat, Ushr and Bait-ul-Mal schemes are only for the ‘deserving poor. The Benazir Income Support Program is also poverty-targeted, as it uses the National Socio-Economic Registry, a proxy means testing (PMT)-based registry. Programs across the county use the registry to identify beneficiaries, including initiatives for persons with disabilities (the Khidmat Card), older persons (Ba- Himmat Buzurg), health insurance (Sehat Sahulat) and Ehsaas emergency cash transfers.

Employment-based contributory schemes only cover workers in the formal economy. This leaves workers in the informal economy, who account for 71.7 % of the non-agricultural workforce, without any form of coverage [13].

Budget allocations for social protection are based on fiscal space and policy priorities. The Ehsaas Emergency Cash Transfer Program shows that it is possible to create fiscal space for social protection when the political will exists.

Financing for social protection in Pakistan largely stems from the public sector. Fiscal space is always tight. The country’s tax-to-GDP ratio in 2020-21 was 9.6%, with COVID-related shutdowns affecting revenue collection. Even before this, this ratio had been steadily declining, from 12.9% in 2017–18 to 11.4% in 2019-20. the country has a narrow tax base and relies heavily on indirect taxes, which made up 62.2% of total tax revenue in 2019-20 [14].

Revenue generation is further constricted by concessions and exemptions in the tax regime. For example, income is taxed according to its source, rather than on the basis of earning thresholds. With indirect taxes, the share of sales tax has increased significantly in recent years, amounting to 38.1% of tax revenues in 2019–20. The critical analysis of public policies that ostensibly focus on macro-economic stability demonstrates that they may have an indirect, and adverse impact on the basic rights of the people, especially of the low-income earners.

 IMF Conditionalities severely impact vulnerable people, particularly women

IMF and Pakistan have reached an agreement for further loan disbursement, with Pakistan agreeing to significant cuts. Like previous loans, the current arrangement follows the neoliberal agenda of the IMF. The IMF-imposed conditionalities include a broad range of fiscal consolidation measures, based on privatization, deregulation, curtailing subsidies, limiting social sector spending, as well as tax reforms.

The situation for women has become further untenable. Pakistan already lags on global gender equality: It ranks third to last in the latest Global Gender Gap Index 2021. Economic participation and opportunity, educational attainment, and health and survival of women and girls are a matter of serious concern. Gender-based violence is on the rise, and convictions are rare. Female labour force participation is one of the lowest in South Asia at 22 per cent. Approximately 70%of women are in the informal sector without any social protection. The neoliberal conditionalities imposed by the IMF – and enforced by the Government for lack of choice – exacerbate gender-based discrimination

Access to healthcare has become limited, as the petrol price increase has made public transport costs prohibitive. Steep rises in electricity bills have made using light at night difficult, so most of the paid and unpaid work must be done during daylight. Girls are being taken out of school to manage household chores. Even with a rise in minimum wages, the cost of living has become unmanageable due to inflation. Violence within the households has reportedly increased as the whole family faces the pressure of making ends meet.

 Conclusion

Pakistan’s exceptionally long relationship with the IMF spans almost seven decades, with 23 loan programmes valued at $38 billion. Despite this long tenure and Pakistan following the IMF’s expert guidance and macroeconomic principles, the programs’ stated objectives of boosting economic growth, reducing poverty, facilitating structural reform, or containing a domestic economic crisis are still far from being achieved.

The economy of Pakistan is currently in intensive care. However, IFIs and CRAs present a rosy picture under the garb of self-serving interpretations of debt sustainability. How can a country like Pakistan – with 45 per cent of the population living below the poverty line, 12 per cent inflation rate and a debt-to-GDP ratio of around 90 per cent – have the ability to pay back over US$ 1 billion per month?

Recommendations:

  • The international financial institutions should keep the impact of their policy prescriptions on the population insight, especially the impact on vulnerable communities, and not only focus on the budgets and balance sheets. Social stability is as important and where that is undermined it leads to political instability too.
  • If the IFI’s do not adapt radically their policy the sovereign government should adopt new policies giving priority to guaranteeing the fulfilment of human rights for the people.
  • A slower-paced, nuanced, and people-centred approach to reforms is proposed and people should be the centre of economic planning and implementation.
  • Military budget and lavish govt. expenditures should be cut down to create fiscal space for social spending on health and education.
  • The privileges of the rich and corporate sector– in the form of tax breaks, cheap input prices, higher output prices or preferential access to capital, land and services (estimated $4.7 billion) equivalent to 8 % of the country’s GDP– should be withdrawn.
  • With a large undocumented economy and a heavy reliance on indirect taxes, Pakistan’s system of taxation is far from equitable. There is an urgent need to improve domestic resource mobilization to create fiscal space for social services such as education and healthcare, as well as to build a robust and resilient system of social protection for all.
  • Free up fiscal space for the social sector-beginning with the consolidation of social protection financing. Similarly, options to create a more equitable balance between direct and indirect taxation by widening the net for direct taxes, both for individuals and corporations.
  • Independent debt audits with active citizen involvement must be considered as an integral component of a comprehensive sovereign debtworkout mechanism. Audits should take place at the national level and should be responsible for the assessment of the legality/legitimacy of all the previous loans.

Submitted by:

  1. CADTM-Pakistan (www.cadtm.org)
  2. Institute for Social & Economic Justice (www.isej.org.pk)
  3. Women in Struggle for Empowerment (www.wise.pk)

 

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