The move to slash expenses of foreign missions was recommended by the National Austerity Committee (NAC), which was constituted by PM Shehbaz Sharif to suggest ways to cut spending for the country in the wake of the financial crisis and impending debt payment default.
Austerity measures
In a directive titled “Rationalisation of Foreign Mission Abroad”, issued by the Prime Minister’s Office (PMO) on February 21, the PM sought an action plan from the foreign ministry within two weeks, said a report by The News International.
“The committee has recommended that the expenditure on Pakistan missions abroad may be reduced by 15%. Some of the suggestions included offered curtailing the number of missions, and reducing the number of officers and staff,” the report added.
Pakistan has a chronic balance of payments problem which was exacerbated in the last year, with the country’s forex reserves declining to critical levels.
As of February 10, the central bank had only $3.2 billion in reserves, enough to cover barely three weeks of imports.
To stem dollar outflows, the government has imposed restrictions, allowing imports of only essential food items and medicines until a bailout is agreed upon with the IMF, which is seen as essential for the country to stave off default.
The government’s strategy to restrict imports in order to safeguard reserves has turned out to be a double-edged sword, however, as several industries rely on imported inputs to continue operations.
As a result, multiple companies across sectors have either suspended operations or scaled down production levels, leading to layoffs.
Pakistan: Hike in fuel prices to raise inflation, people staring at bleak future
IMF’s tough conditions
Before a bailout can be finalised, the International Monetary Fund set out several conditions that were labelled as “beyond imagination” by PM Sharif.
Among many tough steps, the IMF demanded that Pakistan boost its low tax base, end exemptions for the export sector, and raise artificially low energy prices.
In order to secure the critically-needed funds, the country has already removed artificial caps on its currency resulting in it shedding more than a quarter of its value, fuel prices have jumped by almost a fifth and are expected to rise further, and the key policy rate has been hiked.
Pakistan raises taxes on luxury imports
Following the global financier’s statement that Pakistan must take steps to ensure that its high earners pay taxes and only the poor get the subsidies “if it wants to function as a country”, Pakistan’s National Assembly passed a Bill on February 20 to raise taxes on a raft of luxury imports and services.
The supplementary finance bill increases sales tax from 17% to 25% on imports ranging from cars and household appliances to chocolates and cosmetics. People will also have to pay more for business-class air travel, wedding halls, mobile phones, and sunglasses. A general sales tax was raised from 17% to 18%.
The foreign minister said the higher taxes would generate an additional $650 million .
Pakistan is desperate to unlock the $1.1 billion tranche of a $6.5 billion package but has been struggling to meet the tough conditions set by the global financier — specially since an election is due by the end of the year and the government is reluctant to be too harsh in case it is punished at the polls.
The IMF and Pakistan recently concluded the ninth review of the bailout package without a staff-level agreement after 10 days of talks.
(With inputs from agencies)
Watch Pakistan: Amid massive economic crisis, defence minister Khwaja Asif says country has gone bankrupt