IMF conditions fuelling Pakistan's political crisis

The IMF is forcing Pakistan to increase VAT as a condition of its loans to the country, while the coalition government has fractured over rising prices.

Economic turmoil and austerity are pushing Pakistan into political crisis after the second largest party in the coalition government pulled out in protest at rising prices. President Zardari has been reported to have called for debt cancellation for the South Asian country.

While there are concerns about VAT creating poverty and inequality here in the UK, in Pakistan the government has come close to being toppled because the international financial community is insisting Pakistan increases vat rather than forcing debtors to take a write-down.

Pakistan has a financial debt to the rest of the world of $60 billion; more than $3 billion leaves the country each year in repayments and interest on this debt. This debt is predicted to balloon to more than $70 billion by 2015.

At the end of 2008 the western banking crisis forced Pakistan to take almost $7 billion in new loans from the IMF, which came with strings attached such as increasing VAT. The IMF has withheld a further $3.5 billion in loans because the Pakistani government did not increase VAT. The IMF has now said Pakistan can take the $3.5 billion in loans in 2011, but only on condition VAT is increased and government spending is cut. The IMF has written to President Asif Ali Zardari urging the government to take immediate austerity measures.

If VAT is increased it will follow a trend of IMF conditions in the country. Through the 1980s and 1990s Pakistan increased VAT at the behest of the IMF, whilst reducing taxes on imports. As a percentage of tax revenue, sales taxes in Pakistan increased from 7 per cent in 1980 to almost 30 per cent by 2000. Overall taxes increased by 7 per cent for the poorest households, whilst falling by 15 per cent for the richest.

Shahid Hassan Siddiqui from the Research Institute of Islamic Banking says current IMF tax conditions will "hurt the poor". The Muttahida Qaumi Movement (MQM), the second-largest party in Pakistan’s coalition government, has announced it is pulling out of the coalition government in opposition to an increase in fuel prices.

In 2010, Pakistan was hit by the devastating floods which displaced 12 per cent of the population and have cost more than $10 billion (6 per cent of national income) so far. It has now been reported that President Zardari has joined the calls for debt cancellation for Pakistan, partly to help in the war in Afghanistan.

Western governments don’t want the Pakistani government to collapse. But neither do they want to give-up their economic control of the country based on Pakistan’s debt and IMF loans and conditions.

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Update: On Friday 7 January it was reported that the fuel price increase had been reversed.