Protests Spread In Pakistan After Taxes Rise Under IMF Bailout

On paper, Pakistan’s deal with the International Monetary Fund for a $7 billion bailout seemed like an inevitability. A period of crushing inflation, depleted foreign currency reserves and other economic shocks pushed the South Asian nation to the brink of default.

But locking down the funds recently might have been the easy part.

The finer print of the IMF program, which included increasing taxes by a record 40%, has caused panic across Pakistan. Leading to the deal, electricity prices jumped threefold for some people and the price of milk in Karachi surpassed what it would cost in Paris. Many Pakistanis now spend more than half of their income on food. And items from rice to shoes are increasingly out of reach for an already shrinking middle class.

“People simply have no power to buy,” said Niaz Muhammad, who sells produce in an affluent area of Islamabad, the capital. Customers who used to purchase fruits and vegetables from him daily are now doing so only a couple of times a week, he said. “It’s not just me facing this. Everybody is.”

Prime Minister Shehbaz Sharif, whose coalition government has only been in power for seven months, is urging patience in a country that can no longer keep up. Over the past few years, Pakistan has lurched from one crisis to the next, including a tempestuous period of political unrest and deadly floods that caused billions of dollars in damage.

For a stretch, Pakistan reported Asia’s highest inflation rate. Though consumer prices have somewhat moderated this year, the cost of essentials continues to inflict pain. Incomes aren’t rising and purchasing power has roughly halved or more over the past five years. Inflation, which averaged 23% or so in the last fiscal year, is far higher than the average salary hike of 5% to 10% for Pakistan’s vast population of daily wage earners, according to government data.

In an interview with a local broadcaster, Finance Minister Muhammad Aurangzeb acknowledged “transitional pain” from the IMF bailout. “But if we are to make it the last program,” he said, “then we have to carry out structural reforms.”

The IMF has also publicly defended terms of the deal. In a column, Esther Perez Ruiz, the lender’s resident representative, pointed out that Pakistan’s economic metrics have broadly improved over the past year and the momentum must be sustained.

“Further efforts are essential to meet the aspiration for a better life for a broader spectrum of the Pakistani people,” she wrote recently for The News International, a local media outlet.

A pivotal question now is whether Pakistanis will bear the higher tax rates or mobilize for yet another change of government. Protesters appear on the streets regularly to vent their frustrations at Sharif and a political establishment they believe has looted them for decades without a payoff. The latest IMF program, which was secured two weeks ago, is the 25th time Pakistan has received bailout money since achieving independence.

Authorities will also want to avoid the kind of deadly protests that gripped Kenya in June and July, and that forced the government there to reverse tax hikes linked to IMF-backed austerity measures, putting billions of dollars of funding from the Washington-based lender at risk.

In a recent policy note, Moody’s Ratings warned that “a resurgence of social tensions on the back of high cost of living” could make it more difficult for Pakistan to implement reforms agreed upon with the IMF. Beyond a 40% general tax hike, Pakistani officials plan to increase taxes on agricultural income and within the retail sector.

Electricity prices are an especially sensitive issue, roiling rich and poor alike. In a recent video on social media, the popular actor Rashid Mehmood held up his inflated electricity bill and said he no longer wanted to live anymore. 

“This has become too much,” he said. 

Outside a hospital in Karachi, Ashrat Bano, 55, a cleaner in the building, expressed similar frustration. Electricity is now her biggest monthly expense. She routinely borrows money to support a family of four. 

“I can’t pay it,” Bano said.

While almost nobody disputes that Pakistan needs to widen its tax base – the South Asian nation has one of the world’s lowest tax-to-GDP ratios at about 9% – the latest budget has triggered an uproar. Though taxes have risen for the middle class, there’s been no cut in state expenses for the new fiscal year, which started in July. Revenue generated from salaried Pakistanis fills 42% of the government’s tax coffers.

Private companies aren’t happy either. Pakistan’s current corporate tax of about 30% is among the highest anywhere. Exporters who were protected for decades by the government because they earned valuable dollars were also brought into the existing tax regime — bumping their tax rate from 1% to 29%.

Eighteen export associations published front page advertisements for multiple days in a row in leading newspapers to protest the move.

To meet the moment, multinational companies are resorting to “shrinkflation.” Nestle SA and Procter & Gamble Co. have reduced the purchasable quantities of products including yogurt and diapers. PepsiCo Inc.’s Aquafina launched a more compact water bottle two years ago. And bread is available in smaller loaves, including a four-slice one. 

Ali Khizar, head of research at Business Recorder, said it’s hard to find a bright spot these days for salaried workers. Car sales are the lowest in two decades. The price of air conditioners has doubled over the past couple of years. And Pakistan’s best and brightest are moving out of the country at a record pace.

Though the new taxes will help tame inflation, he said, the economic slowdown will continue.

“The misery of the middle and lower middle class is not likely to go away anytime soon,” Khizar said.