RAWALPINDI, Pakistan—On the campaign trail just over a year ago, former cricket star Imran Khan won the prime ministership promising to create 10 million jobs, provide low-cost housing and better health and education services—a cornucopia for his base of support among Pakistan’s rising middle class.
Now Mr. Khan finds himself testing that support as an economic austerity plan forces him to tax that middle class more while the economy is slowing sharply.
“The middle-class person is dying,” said Kaiser Mahmood, a salesman in a shoe store in the sprawling Raja Bazaar commercial center in Rawalpindi, a northern city next to the capital that provided important support for Mr. Khan’s party in the election. “Food prices have rocketed, electricity bills have rocketed. People don’t have any money left over to come here to buy shoes.”
When Mr. Khan became prime minister in August 2018, he found he had inherited runaway trade and budget deficits and fast depleting foreign currency reserves. He put the brakes on the economy and then turned reluctantly in May to the International Monetary Fund for a bailout—Pakistan’s 22nd IMF program—which demanded further steps to stifle demand.
Mr. Khan’s government says it has saved Pakistan from the danger of defaulting on foreign debts accrued before it came into power, and that its reforms will break Pakistan out of an endless boom-and-bust cycle.
The plan is to replace unsustainable growth based on borrowing and imports with an economy driven by exports and an expanded tax base that can create jobs and fund a welfare state.
Between the two phases has come a lot of economic pain, however.
Interest rates have been doubled to over 13%—among the highest in Asia—and the rupee has slumped. Inflation has almost tripled from the year before Mr. Khan took office, to 11%, and economic growth has more than halved to 2.4%. Experts question whether there is a viable strategy to get the economy motoring again.
Mr. Khan is trying to accomplish what no Pakistani government, military or civilian, has pulled off: getting people to pay tax. Just 1% of the country’s population of 208 million pays income tax.
Smaller retailers plan to go on strike this month unless talks with authorities lead to a softening of government demands that they begin to pay income tax and sales tax, collect withholding tax and document their suppliers. Businesses said they feared being blackmailed by inspectors if they enter the tax net, despite government assurances it is working to end graft in the notoriously corrupt tax system.
Mr. Khan came to power partly by harnessing the emergence of a sizable middle class, which demanded better services than established political parties had delivered. Even the lower middle classes are often forced to rely on private schooling and health care.
Signs they are struggling abound. Between January and September this year, food inflation in urban areas shot to 15% from 3%. Car sales were down 39% in the first quarter of the current financial year, which began in July, while motorcycle sales fell 17%.
Former Finance Minister Hafiz Pasha, an economist, estimates that by the end of Mr. Khan’s second year, two million workers will have lost their jobs and up to eight million people will be pushed into poverty.
“You have the makings of an Arab Spring in this country,” said Mr. Pasha, referring to the popular uprisings in Arab nations starting in 2011. “This is a bomb waiting to explode.”
Mr. Pasha said the government, in the IMF program, had overadjusted the economy, and instead of going after the rich for tax revenue was unnecessarily targeting small traders.
Recent political polling shows the largest opposition party is now neck and neck with Mr. Khan’s.
Big businesses are suffering, too, from the slowdown. They are also being taxed more aggressively, and many are concerned about getting entangled in a government anticorruption drive.
Two dozen tycoons took their concerns this month to army chief Gen. Qamar Bajwa. The military’s support is vital to any leader in coup-prone Pakistan.
Gen. Bajwa told them he stood behind the government and its policies, according to participants in the meeting. Opposition politicians say the military helped bring Mr. Khan to power, a charge denied by his party and the army.
After missing many economic targets in its first year, the government says it is now beginning to see an improvement in economic fundamentals needed to restart growth. The IMF agrees, saying on Tuesday that “we have seen good signs.”
In the last three months, the trade and budget deficits both improved by a third, tax collection is up 16%, while the rupee has now steadied. Volumes of major exports are showing solid growth.
“The economy is stabilizing at a rapid rate,” said Hammad Azhar, who as Minister for Economic Affairs is responsible for external assistance, working alongside the finance minister. “The good thing is that once the economy has stabilized, we can move toward the growth phase.”
On the streets, that is a hard sell. A consumer confidence survey conducted in August by Ipsos found that 89% were less confident about making a household purchase than a year ago. The Federation of Pakistan Chambers of Commerce and Industry wrote to the prime minister this month to complain that “the economy has not shown any visible healthy signs even after the lapse of 13 months” since he took office.
Business confidence remains in negative territory, according to the central bank’s monthly survey. Students and recent graduates—a support base for a party that appealed to youth with its idealistic message—are facing a tough jobs market.
SHARE YOUR THOUGHTS
How can Pakistan get on the right economic track without too much pain for its emerging middle class? Join the conversation below.
Firmly in the government’s tax sights are shopkeepers and their suppliers—mostly small businesses—which make up nearly 20% of GDP but pay almost no tax. Next, professionals such as lawyers and doctors—who often take payment in cash—will be pursued, according to the government.
Midway through a recent afternoon at the market in Rawalpindi, many wholesalers and stores complained that they had yet to make a single sale.
They said that tax and documentation demands were too stringent for a sector that has lived in the informal economy since the country was formed.
“How can 70 years of dishonesty be fixed overnight?” said Muhammad Rafiq Qureshi, a hardware wholesaler in Rawalpindi. “People are scared because they don’t know how much tax they will be told to pay.”
Write to Saeed Shah at email@example.com
Copyright ©2019 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8