JUNE 26, 2000 VOL. 155 NO. 25

Musharraf's Muddles
Pakistan's military leader promised change, but the battle for reform has been tougher than he expected
By HANNAH BLOCH Islamabad

Saeed Khan/AFP A protester drags a burning tire during a protest by traders over the arrests of shopkeepers in Islamabad. Musharraf's tax survey has angered the trading community

Armies are not political parties and, in theory, need not answer to anyone but their commanders. So it is unusual when a military regime behaves like a democratically elected government. In Pakistan, General Pervez Musharraf's eight-month-old administration is walking a tightrope, trying to balance the need for reform with the protests of powerful, entrenched interest groups. But the regime's willingness to compromise and appease may be undermining its ability to take Pakistan in the progressive, prosperous direction Musharraf says he is aiming for. At stake is the country's crippled economy--the revival of which is a keystone of Musharraf's reform plan--and the credibility of his military government.

The general came to power on a wave of goodwill and big promises for Pakistan's future. But recent weeks have presented his government its most serious challenge yet. A nationwide strike by merchants protesting a new 15% general sales tax and a survey designed to catch tax evaders dragged on for more than two weeks--the longest strike in Pakistan's history--disrupting commerce and costing the economy millions of dollars. In an unprecedented show of disrespect for the military, shopkeepers slammed down their shutters, jeered and hurled stones and shoes at soldiers accompanying officials distributing tax-survey forms. The traders don't want their business, much of which involves the black market, to be documented, and they rightly fear corruption--or worse--by tax officials. (Last month, a Faisalabad shopkeeper died in shackles while being questioned by tax authorities.) Complicating matters is the merchants' affiliation with the religious right, a constituency no Pakistani leader has dared to challenge.

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The merchants have vowed to resume their strike later this month, but the government literally cannot afford to abandon its tax program. "It's a long-drawn battle. It won't end so easily," says Akhtar Jamil, an income tax commissioner in Karachi. In an interview with Time, Pakistan's Finance Minister Shaukat Aziz, a former Citibank executive, could barely contain his exasperation: "In what other country do people say, 'I'm not going to pay tax'? Give me a break!"

In fact, it is the government that has been giving breaks, acceding to two major demands by the merchants that let tax cheats off the hook. Economists say this cuts out a major potential source of revenue. The concessions come in the wake of other capitulations by the government to financial and religious interests and, political commentators say, raise questions about Musharraf's ability to achieve real reform. In the spring, he put aside plans to crack down on Pakistan's multibillion-dollar economy of smuggled goods, and he backtracked on a promise to restrict the use of Pakistan's blasphemy law, which too often has been wielded as a tool of intimidation.

Taxation has been a major stumbling block for previous governments. Last year, former Prime Minister Muhammad Nawaz Sharif withdrew a general sales tax proposal when the merchants' lobby, one of his main constituencies, objected. That, among other problems, caused the International Monetary Fund to suspend a $1.56 billion line of credit, a much-needed infusion for Pakistan's struggling economy. But Musharraf looks determined to impose the sales tax and increase the number of income-tax payers, now a paltry 1.8 million out of Pakistan's population of 140 million. The government hopes to generate an additional $1.9 billion from taxes in the next year; analysts say it will be lucky to get $400 million.

With $38 billion in external debt, dwindling foreign investment and a budget deficit equivalent to 5.8% of the gdp, Pakistan faces huge challenges. Eighty percent of its budget is consumed by defense expenditures and interest payments. More than 30% of the population lives under the poverty line, nearly double the rate of a decade ago. No imf funding has come for the past year, and ongoing discussions with the fund have been inconclusive. The government has ambitious plans to sort out the mess. The annual budget announced last week lays out a three-year blueprint for the economy--three years being the Supreme Court-imposed limit on Musharraf's rule. The plan includes a tax overhaul, privatization of banks and the oil and gas industries, the beginnings of a modest social safety net and establishment of a micro-credit bank.

Many of the plan's elements make good sense to economists and are in keeping with imf priorities. "They know what to do," says a Western diplomat. "The whole problem is implementation." But if a military government cannot implement tough policies, even the best plan will make no difference.

With reporting by Ghulam Hasnain/Karachi

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