For many, words such as debt crisis, austerity measures, bailout programme might just invite a cursory glance. For some, it may be painstaking sigh that these words are heard with. What has been happening in Greece has been nothing short of a play with equal components of ethos, pathos and logos. And it is not over for them yet.
Some thought the climax of the Greek tragedy was reached when the public voted ‘No’ on a landmark referendum to a bailout programme of the International Monetary Fund (IMF). The consequences are yet to be seen as speculation is rife of what’s next. The cancellation of the EU summit and the future of Greece remains the play ‘coming-soon’.
Economic calamity is likely without any respite in the offing, banks will remain broke, pensioners will remain empty handed and the already high unemployment will worsen. But what can be certain after the Greek crisis is a lesson – a lesson for developing countries like Pakistan who also rely on IMF bailout programmes.
How did Greece reach this point? Low tax collection and a huge shadow economy that did not contribute were major reasons. This led to huge borrowings that it could not return and the debt kept piling up.
Countries borrow money all the time by selling bonds to investors. In Greece’s case, it backfired when the country borrowed beyond its means.
Greece crisis began with the infamous global economy meltdown in 2007. As the economy declined, the government was required to spend more, despite the low revenue, and soon Greece was drowning in debt.
Read: Can a Greece default affect Pakistan?
In 2010, Greece received its first bailout. European leaders, along with the IMF, gave billions of euros to Greece to stay afloat. However, these bailouts came with conditions to cut spending, introduce taxation measures and make the economy more efficient. This is quite similar to the IMF’s $6.6 billion programme for Pakistan where it has asked the country for similar measures.
In Greece, austerity was the new lifestyle, government salaries were cut, taxes were hiked, state pensions were frozen and early retirement was implemented. However, the debt situation worsened as austerity grew harsher.
What Pakistan can do
In this part of the world, the Greece crisis remains an oblivious concern. The Pakistani stock market was apathetic, foreign banks in the country carried on their daily business and the country’s negligible trade relations with Greece did not matter. Nevertheless looking from a macro perspective, the Greek crisis carries valuable lessons for those who stay heavily dependent on the IMF.
The Pakistani government, relatively comfortable in seeking loans from international organisations, can draw several parallels from the crisis-ridden European economy. In 2013, the PML-N government managed to secure the $6.6 billion bailout as it looked to avert a balance of payments crisis.
As in the case of Greece, Pakistan’s loan programme also came with conditions, which included plans to improve tax collection and eliminate loop holes and exemptions. It also had a programme to restructure and privatise public sector enterprises, which would generate significant revenue.
However, Pakistan’s performance has been alarming in the last 18 months since the release of the loan. In five of the seven reviews the IMF Board had to give waivers on several conditions and reforms that could not start or be completed. The government’s performance on energy and taxation fronts remains discouraging. The delay in implementing energy reforms is costing the country roughly 2% of Gross Domestic Product each year.
Read: Financial meltdown: Greece faces ‘difficult’ eurozone judgement day
Similarly, despite introducing five mini-budgets and blocking taxpayers’ refunds, the government failed to achieve a three-time downward revised tax target of Rs2.605 trillion in the recently-concluded fiscal year.
It remains to be seen how Pakistan will manage to repay its bailout program.
Greece’s austerity measures are another issue Pakistan can take a leaf out of.
The IMF’s bailout programme meant Finance Minister Ishaq Dar had to unveil several strict policies during his budget announcement if Pakistan is to avert a crisis. These included hikes on all major taxes, higher capital gains tax and withholding tax on bank transactions, services tax etc.
Greece did not have a choice but to implement strict economic policies that led to a unsatisfied population and policies that did not suit Greece’s microeconomic structure. In an economy where small businesses are more prevalent, mortgages are few and self-employment is dominant, austerity practices can rebound.
Pakistani authorities can take heed from Greece’s example and learn from its mistakes in order to ensure it does not fall into a similar path.
The writer is a staff correspondent
Published in The Express Tribune, July 13th, 2015.
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