Uncle Sam to the rescue

There is no question that Pakistan needs to get its fiscal house in order. To this end, the IMF Standby Agreement, which comes with a whole array of terms and conditions designed to enforce fiscal discipline, was a blessing in a disguise. Yet it appears that even the dire straits that the economy was in during 2008 and 2009 was not enough to shock the government into behaving rationally.

Having already given in to the bureaucracy’s reticence towards implementing the value added tax (VAT) – a levy that can help curb tax evasion, distribute the burden of taxation evenly and generate more revenues – the government has now sought to escape the inevitable consequences of an IMF punishment for failing to meet its end of the bargain. The IMF had explicitly required the government to implement the VAT as a condition for its financial assistance, a condition that the government has made no secret that it plans on ignoring.

Yet the government is enlisting the assistance of the US in ensuring that the IMF’s conditionality becomes meaningless by asking Washington to pressure the IMF into releasing the latest tranche of its loans while disregarding the fact that Pakistan has reneged on its end of the bargain. The Americans can usually be relied upon to “help” Pakistan at junctures where a little bit of tough love would suit the country better.

It is disappointing that the government is going through such extraordinary lengths to ensure that it does not have to do the right thing — implement the VAT. The hassle in trying to avoid the tax is about as much work the government would have to do to levy it. It would probably be best if the government swallowed its pride, honestly explained to the people of Pakistan that it has no choice and then impose the tax which will benefit it in the long-term anyway.

Published in The Express Tribune, June 19^th, 2010.