PAKISTAN: Toxic austerity attack comes hot on the heels of a pandemic

 31 Jan 2022 (by Abdul Khaliq): As the IMF executive board met on January 28 to decide on Pakistan`s request for the revival of $6bn Extended Fund Facility (EFF), the government remained optimistic having fulfilled all the five conditions imposed by the global lender to revive its 39-month program suspended since April last year, including approval of the mini-budget and State Bank of Pakistan Amendment Act by parliament. With the EFF revival, the payment of about $1bn would bring the total disbursement under the $6bn EFF to about $3.027bn.

With the government conceding to IMF’s latest toxic conditions, strong criticism is voiced within and outside parliament. Amidst strong resistance by the opposition during the approval of the mini-budget, the ruling PTI last week bulldozed a set of bills in the Parliament aiming at so-called “austerity measures”. However, this action has hit a sharp decline in the popularity of the Imran Khan government. Handing the control of the State Bank of Pakistan over to IMF in the name of “institutional autonomy” has attracted strong opposition from all sections of society, including some members of the govt.

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 recent passage of the mini-budget, 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, 17% of sales tax has also been imposed on the imported raw material used for making infant food. Even though poultry and beef are among the basic food items that have been exempted from tax, the same may get costlier given the sales tax on imported machines used in the poultry sector from 10 to 17% in addition to increasing tax on local poultry and cattle feed from 7to 17%.

The general sales tax is also going to increase, from 10 to 17%, on dairy items. Similarly, 5% advanced tax is going to be imposed for several services, covering laundry and dry-cleaning services, services by car dealers, marriage halls, catering, IT services, web designing and hosting and call centres, among others. Medicines could also get expensive with the withdrawal of tax exemptions on the pharmaceutical sector. It will also lead to the imposition of a 17% sales tax on imported raw material for pharmaceutical active ingredients.

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 by 5 to 10 %. The tax on cottonseed will adversely impact cotton growers and allied industries. 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. high taxation will increase the price of these commodities for the end consumers and subsequently add to food inflation. In nutshell a new tsunami of inflation is going to hit Pakistan, causing negative repercussions.

The government’s excuse of global commodity price boom as a 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% across the border in India. [1]”

It is pertinent to mention is the 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 feeling more agony as the latest round of price adjustments works its way through the economy. The expected resumption of the IMF program in the coming weeks may further force the government’s hand, leading to an increase in power tariffs.

Amidst this dismal scenario, according to one conservative IMF estimate, Pakistan’s “external financing requirement stands at $ 28 billion in 2022-23 [2].” Which expands dark shadows over Pakistan’s ailing debt-trapped economy.

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