Abdul Hafeez Shaikh faces a complex set of challenges.
Appointed mid-March as principal adviser on finance to
Pakistans prime minister a role that makes him
Pakistans de facto finance minister Shaikh is
eager to back smart taxes, rather than demanding more tax,
ahead of this Junes annual budget.
But his scope for action is limited.
Pakistan has been forced to accept tough conditions under a
$11.5 billion loan programme with the IMF, agreed towards the
end of 2008 to stave off a balance of payments crisis amid
plummeting investor confidence and a sharp depletion of foreign
At the same time Shaikh, a former privatization minister for
ex-president Pervez Musharraf, is under pressure from the
countrys mainstream population to provide economic
incentives. In recent weeks, public protests have taken place
in some of Pakistans larger cities against long duration
electricity cuts, caused by the failure of the government to
keep up supply with the pace of demand from consumers. The
electricity issue is among the most vivid examples of a
challenge where the Pakistani government just doesnt have
the financial space to respond quickly at a time when it must
also try to keep its budget deficit close to limits agreed with
The juggling act that is central to any finance
ministers brief in Pakistan is far from easy. As a
country with south Asias lowest tax to GDP ratio, at
around 9%, Pakistans economic future lies in part in its
ability to revamp the tax collection system and arm its
government with enough revenue to undertake pressing
infrastructure and social development and social needs. These
include raising expenditure in areas such as education and
Meeting the challenge of drawing in more revenue to fill the
coffers is central to a multitude of issues surrounding
Pakistans economic future. These range from ensuring an
improvement in badly needed internal stability to gaining
favour for preferential access for exports to key foreign
markets, such as the EU and the US, as a step to revive local
industries. Representatives of Pakistans large textile
sector, the countrys largest industrial employer, say
that a combination of issues ranging from falling output due to
long power cuts and failure to secure preferential access to
foreign markets, are undermining prospects for their industry.
We badly need a shot in the arm for our textiles
especially. If we dont succeed, textile factory owners
will have to lay off people and they [laid-off employees] will
feel compelled to protest on the streets, says an
official at the textile ministry in Islamabad, who asked not to
Shaikh is cautiously optimistic: There is a lot of
inner resilience in Pakistan, and there is a lot of potential.
Right now, foreign investment and privatization are down, and
one has to jump-start these processes, he tells
Emerging Markets in an interview. Growth is
fairly modest. These are difficulties, but they can be overcome
with a great deal of effort.
While Pakistan may have enjoyed periods of rapid economic
growth in its history, the past three years have been ridden
with widespread insecurity linked to the activities of Taliban
militants, who have carried out suicide and bomb attacks
targeting scores of privately owned and government facilities
across Pakistan. The security crisis has eaten into large parts
of the economy. Economic confidence has been hit hard as a
result, as businessmen hold back on large investment decisions,
until conditions normalize.
As a result, new foreign direct investment has dried up.
This is in sharp contrast to the mood during the July
2007June 2008 financial year, when Pakistan received
about $8.4 billion in foreign direct and equity investment and
earnings from the countrys privatization plans the
highest investments in these areas in any given year.
The once emerging privatization programme, cited as a model
for the developing world, is at a standstill. While foreign
investors are not interested in making long-term commitments to
Pakistan, the economy is expected to grow this financial year
ending June 30 by just 3% on official data substantially
down from 8% in 2005.
One part of the governments response has been to seek
special access from its foreign partners for Pakistans
exports to enter markets in Europe and the US. During talks in
Washington on March 24 with a US delegation led by US secretary
of state Hilary Clinton, a high-powered Pakistani delegation
raised the issue of more access for Pakistans fledgling
exports, notably textiles, to enter the US market.
The US so far remains non-committal, though its officials
say they are looking at other still unspecified
ways to provide further economic support to Pakistan.
The plea in Washington followed a public call from Prime
Minister Yusuf Raza Gilani, seeking international support for
Pakistans war economy as its military fights against
militants from the Taliban and Al-Qaeda in areas along the
Gilani has sought an acceleration of $15 billion in
international assistance promised to Pakistan through a club of
bilateral donors under the Friends of Democratic
Pakistan grouping, as well as bilateral US assistance and
money owed by the US to refund Pakistan for its expenditure on
internal anti-terrorist operations.
As a follow-up to Pakistans request in Washington, the
country has sought similar preferential access to European
markets. The underlying theme in these recent initiatives has
been trade not aid a phrase heard frequently
in the power corridors of Islamabad.
The drive for enlarging Pakistans exports is in large
measure fuelled by anxieties over possible unrest across the
main cities of Pakistan, driven by unemployed young people who
are angered by the lack of opportunities and the absence of
basic services such as electricity. For the past two years,
increasingly long power cuts have triggered public riots in
parts of the country.
Critics, however, say the governments failure to
translate its policies into successful economic reforms
global concerns over the countrys direction. For many
observers, reforming the tax collection system is the key to
reviving Pakistans international credibility.
Less than 1% of Pakistans population of 180 million
pays income tax, creating a widespread impression of continued
official tolerance for evasion. Global market access will
come in part if the players outside Pakistan are convinced of
its determination to turn itself around and become more serious
about reforming its economy, says Sarfraz Qureshi, a
widely respected economist and former head of the
government-run Pakistan Institute of Development Economics.
If people outside Pakistan do not see enough reforms
taking place within the country, it is not reasonable to expect
them to be conciliatory towards calls for major incentives such
as access to foreign markets, adds Qureshi.
One immediate challenge is a government promise made to
introduce VAT from July 1, when the new financial year begins.
VAT is meant to clamp down on widespread tax evasion on the
collection of indirect tax, by introducing a mechanism which
Pakistani officials say will eventually emulate some of the
worlds more successful models in this area.
Shaikh says he remains committed to VAT and its introduction
in July. Our president and prime minister have already
committed themselves to VAT from the new fiscal year, he
says, referring to the financial year that begins in July.
But western economists in Islamabad say there is
disagreement between the government and the IMF after the fund
found the federal tax collection agency the Federal
Bureau of Revenue (FBR) was unready to introduce the
tax. The gap in the FBR included a failure to establish a
system to identify tax evaders followed by steps to investigate
them and, depending on the evidence, to eventually prosecute
them under the countrys tax evasion laws.
The issue of VAT has led to accusations that Pakistan is
again dragging its feet on a key tax-related reform. In the
past two decades since Pakistan enrolled on an IMF loan
programme, the fund has repeatedly urged the country to adopt
tougher measures against tax evaders. Part of the complacency,
according to senior government officials, comes from concern
among the countrys leaders over a possible backlash from
business and industry leaders who are opposed to tax
This is an example of the government failing to see
through a reform that it had promised. The evidence is that of
the ruling regime not being prepared to take unpalatable
measures, says Omar Ayub Khan, a former junior finance
minister and now an opposition leader. The reform agenda
has suffered because the political direction is not clear. Our
leaders are not capable of selling their reform plans to
Western economists tend to agree, although they argue that
Pakistan will not be able to delay progressive economic reforms
indefinitely. Frankly, many people outside Pakistan are
becoming very tired of Pakistan. If we dont see a VAT
introduced by July 1 this year, a tax which had the backing of
the countrys top leaders, then the IMF will probably have
to apply lots of pressure on Pakistan, says a western
economist in Islamabad who asked not to be named. The
countrys position as the frontline state bordering
Afghanistan has brought it squarely under the global
A number of western countries, notably the US, are keen to
discuss the long-term economic direction of the country. These
discussions are built on the intention of promoting a
progressive partnership with Pakistan whereby the country
becomes a bulwark against Al-Qaeda and Taliban militants.
POWER TO THE POOR
In the past year, Pakistans military has won
recognition from the US and other western countries after an
unprecedented push against Taliban militants, first in the
northern Swat valley and later in areas along the Afghan
border. However, the governments determination to fight
Taliban militants will not, of itself, block the flow of young
Pakistanis joining ideologically charged Islamic zealots:
internal economic incentives are vital.
It is all about reforming the state, the systems of
internal governance and principally the economy, says one
western economist in Islamabad. The fight will eventually
be won only if you... provide reason to the young and poor,
through fresh economic opportunities, to feel
Shaikh, armed with his previous experience as privatization
minister, agrees with the need to reform the economy. The
difference, however, between his previous tenure and today is
mainly that of a different set of parameters. The robust growth
of the economy a few years ago allowed Pakistan to undertake
unprecedented steps such as privatization of its state-owned
telecom company, but nowadays the persistent security challenge
undermines prospects. That is mainly because the insecurity has
prompted many investors domestic and foreign, with a
long-term interest in Pakistan to delay their investment
Hopes for the future come from international commitments for
foreign assistance and a growing pressure in private
discussions in Washington and elsewhere for Pakistan to rebuild
key areas that will sustain its economic revival.
As the countdown continues to the annual budget, Shaikh says
his optimism is based on a combination of Pakistans
previous economic history and the international support that
the country can expect to receive as foreign aid. The
opportunity is there, says Shaikh. And we are
convinced of the need to build on that and revitalize our
economy. We can still act and set the direction for a