Pakistan recently announced the completion of the M5 Motorway, a 244 mile, $2.89 billion mega highway financed through the China-Pakistan Economic Corridor (CPEC). While hopes are riding high that infrastructure projects can jump start its fragile economy, no amount of flashy infrastructure investment can compensate for Pakistan’s poor underlying business climate. It’s not an infrastructure problem. It’s a misgovernance problem.
China has pledged to invest more than $60 billion in CPEC projects by 2030, with the goal of developing new “ports, highways, motorways, railways, airports, power plants and other infrastructure” in Pakistan. Yet, CPEC, part of the Belt and Road Initiative (BRI), has been criticized for its use of debt financing as a means of extending China’s sphere of influence. With Pakistan facing continual debt crises, foreign reserves depletion, and the IMF predicting CPEC linked debt servicing will rise to $45 billion (9.9% of GDP) by FY2022/23, costly projects will only further increase Pakistan’s already ballooning debt liabilities.
This past July, the IMF approved a $6 billion loan package to Pakistan, contingent on the implementation of austerity measures. While the IMF bailout was likely a necessary evil to ensure at least short term macroeconomic stability, Pakistan will need to address the core issues of corruption, high taxes, government efficiency and political stability if it wants to achieve longer-term economic growth and prevent future debt crises.
In response to the IMF package requirements, Pakistan recently unveiled a new budget with an “ambitious tax revenue target of Rs5.6tn ($35.4bn)— an increase of more than 30 per cent compared with last year — to balance its Rs7tn budget.” Yet, with only 1% of Pakistanis actually paying taxes, Islamabad faces an uphill battle in achieving this goal. The government’s efforts thus far don’t look promising, with hundreds of thousands of businesses going on strike in protest of an increased sales tax. Blindly raising taxes on small businesses won’t bridge the revenue shortfall the government faces. Combatting tax fraud and corruption will. Pakistan should aim to become a low tax, high tax compliance nation.
According to the Business Anti-Corruption Portal, “The Pakistani tax administration is highly susceptible to bribery and other corrupt practices.” In particular, companies often complain about “demands for advance tax payments,” and confusing and inconsistent “federal and provincial tax regulations.” Furthermore, because taxes are routinely evaded by Pakistan’s wealthy and entrenched elite, the tax burden falls “overwhelmingly on the poor who pay in various indirect ways.” Tax administration corruption, combined with new business taxes, is a recipe for economic depression, and no new highway or airport will address the underlying problems the business community and the impoverished (who make up 1/3 of the population) face.
Customs administration is also plagued by rampant corruption, with businesses indicating that “irregular payments and bribes are common.” “Burdensome import procedures, tariffs, and corruption at the border are cited by businesses as the biggest impediments for importing.” The legal system, while officially protecting land rights, lacks clarity on land titling and inefficiently manages contract disputes. A corrupt bureaucracy increases barriers to conducting business, with “irregular payments and bribes” commonly being necessary to secure public services and licenses.
Combine this with regular political instability, and it’s no wonder the country has “failed to attract any significant foreign investment” in recent years, except from China. No Pakistani prime minister has ever completed a full term in the country’s history, and the regular removal of political leaders is a major reason why Pakistan ranks 147th out of 190 in the World Bank’s 2018 Ease of Doing Business ranking. Foreign investment, especially equity driven foreign direct investment (as opposed to foreign debt financing), is directly linked with economic growth, providing access to new export markets, investor expertise, networks, and new jobs.
Flashy infrastructure projects just serve as red herrings that distract from Pakistan’s real economic problems. Some of these projects do have the potential to drive economic growth, but only if the government effectively reforms the bureaucracy and tackles corruption. Pakistan’s energy crisis is a continual contributor of debt to the state’s balance sheet, with the country requiring regular and costly oil imports. With “20% of existing energy lost to pilferage,” and almost no attempts at diversifying the country’s fuel mix, blackouts have become a regular occurrence. Irregular power delivery has strangled the manufacturing and service sector, and according to a World bank survey, “66.7 percent of the businesses in Pakistan cite electricity shortages as a more significant obstacle to business than corruption (11.7 percent) and crime/terrorism (5.5 percent).” Energy infrastructure projects have a high potential to improve ease of business, but only if projects are efficiently planned and executed.
But with nine out of ten firms reporting an expectation of bribes to secure government contracts, and the aforementioned theft of state-energy resources, energy projects will likely just continue the trend of expensive, debt financed infrastructure as a cosmetic solution to structural economic problems. High levels of corruption correlate with significantly lower average incomes, levels of foreign investment, trade, and efficient resource distribution.
It has been treated as “an article of faith” for many Pakistani politicians “that investment in infrastructure is a foolproof way of boosting the economy.” The country is “blessed” with a myriad of “modern and spacious” airports that are largely underused. All this infrastructure awaits an economic boom that has never arrived, and until Islamabad addresses rampant corruption and poor economic fundamentals, Pakistan will continue to be plagued by perpetual macroeconomic crises and poor economic growth.