The Washington PostDemocracy Dies in Darkness

Hit by inflation, debt and falling currency, Pakistan tries to tax the rich

Pakistan's Prime Minister Imran Khan attends a session of the Shanghai Cooperation Organization summit in Bishkek, Kyrgyzstan, Friday, June 14, 2019. (Alexei Druzhinin/AP)

GUJJAR KHAN, Pakistan — As he shouldered bales of straw for buffalo fodder and tossed them from a truck in 110-degree heat, Habib Gul, 58, ticked off the reasons he is angry at Prime Minister Imran Khan and his efforts to salvage Pakistan’s bankrupt economy.

“Sugar is up. Flour is up. Electricity is up,” Gul said, his graying beard flecked with straw dust. “Everyone on this truck voted for him. He’s going after the thieves and scoundrels as he promised, but he has done nothing for the poor. With the high prices and new taxes, Imran Khan is ruining us.”

Twenty miles away, in an electronics market in Rawalpindi, dealer Fatiullah Khan, 35, explained why mobile phone shelves are half-empty. With Pakistan’s rupee in free fall against the dollar, he said, imported handsets lose half their value by the time a shipment arrives, and profit evaporates.

“Everything here is at a standstill,” he said. “The government allowed the dollar to go up and up, and it has devalued the whole business community. We welcome actions against corruption in the elite, but small businesses should be safeguarded.”

Few Pakistanis face the levels of hunger, fear or despair that have driven millions of people from the Middle East and Central America to flee their countries. But the new leaders of this nuclear-armed nation, which shares borders with India, Afghanistan and China, cannot afford an eruption of public unrest or a revival of the Islamist terrorism that has left it bereft of foreign allies and investors.

Many people still support Khan’s efforts to stabilize the debt-ridden economy while tackling money laundering and tax evasion. But they say the pain of austerity measures, combined with new taxes and free-market fiscal policies, is becoming unbearable.

Khan, who took office a year ago, inherited a severe economic and financial crisis, forcing him to take actions he had once repudiated. He borrowed huge sums from China and Saudi Arabia, ended foreign exchange controls and slapped taxes on numerous goods and activities, hoping for a bailout by the International Monetary Fund that would allow Pakistan to start repaying its whopping $97 billion foreign debt.

Late Wednesday, the IMF rewarded Khan by approving a 39-month loan package worth $6 billion, but the relief came a high cost. In June, the rupee fell to an all-time low of 162 against the U.S. dollar. Inflation reached 9 percent and exports stagnated, leaving Pakistan with a trade deficit of over $30 billion.

“Imran Khan keeps saying the dollar will come down, but people are beginning to doubt. He is asking them to pay more taxes, but they want to know where the money goes,” said Majid Shabbir, an official of the Islamabad Chamber of Commerce and Industry. 

Shabbir said Pakistan’s fiscal and economic ills are the product of repeated policy swings by previous governments, dependence on foreign aid, mistrust between the public and private sectors, and a culture of tax avoidance. These trends have stunted economic development even as the population has soared to nearly 210 million. 

Pakistan, mired in debt and inflation, cracks down on corruption

In mid-June, a government survey painted a dismal picture of the economy, with a 3.3 percent growth rate. Then Khan released his first budget, full of austerity measures including salary freezes for civil servants and a 13 percent cut in military expenditures. Khan pleaded with the nation for patience, vowing that stability would return soon.

Already, the tough measures, especially plans to impose new business taxes, have spurred protests by traders and strike threats by mill owners. But Pakistan’s army chief expressed strong support for the government’s actions, an unusual gesture that underscores the severity of the crisis.  

And with only 2 million Pakistanis filing tax returns each year, the ratio of revenue collection to gross domestic product is less than 12 percent — one of the lowest in the world. The rich, declared Khan’s top finance adviser, Abdul Hafeez Shaikh, “will have to be true to the country and pay taxes.”

Khan’s most popular initiative is his push to prosecute corrupt business owners and politicians, recover funds that have been illegally sent abroad and persuade wealthy Pakistanis to declare hidden assets in exchange for a “no questions asked” legal amnesty. 

Last month, the National Accountability Bureau, an independent agency, arrested former president Ali Asif Zardari on charges of money laundering, and earlier this year it convicted and jailed former prime minister Nawaz Sharif on charges of hiding his wealth abroad, in part by indirectly purchasing London real estate.

Khan’s asset declaration program appears to have been a huge success. On Wednesday, when the amnesty deadline expired, officials said about 137,000 people had registered to declare their assets, with about $400 million worth of taxes to be collected. Federal revenue agents also began seizing large undeclared properties, including 350 acres that a wealthy opposition legislator had reportedly registered in the names of his servants. 

But confiscated wealth does not necessarily trickle down to those least able to bear the brunt of other emergency measures. 

“This is a very difficult time for Pakistan, and people are being asked for sacrifices,” said Waqar Masood Khan, a former finance official. “It is essential to give confidence to the people, to investors, to business owners. This cannot afford to fail.”

Sitting under a mango tree in Gujjar Khan, Mohammed Anwar, 64, said rising fuel prices had doubled the cost of a taxi to the nearest hospital. 

In a gas station nearby, owner Raja Amir said the steep drop in the currency’s value had hit oil importers badly, driving up the cost of each fuel truck delivery from $62 to $93.

“Everyone knows that there is a crisis and that corruption and looting in past governments are to blame,” Amir said. “But I say to Imran Khan, now it’s your time. You have to stick to your words and deliver to the people. Otherwise, they will have no hope at all.”

Editor`s Note:

This story was updated to reflect new information on asset declarations and tax liabilities.

Shaiq Hussain in Islamabad contributed to this report. 

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