Pakistan's Unending Debt Enslavement

Dr. Ikramul Haq in The Friday Times

Nearing 76 years of independence, our leaders in power want to celebrate liberation from colonial rule after pushing the country into a deep debt trap. This paradox depicts what Zulfikar Ali Bhutto highlighted in his masterpiece, Myth of Independence. What makes the situation more painful is the fact that every time a new loan is obtained, those in power express jubilation as if an extraordinary goal has been achieved.

The signing of a nine month US$ 3 billion standby arrangement (SBA) with International Monetary Fund (IMF) on June 29, 2023, was commemorated like August 14, 1947 by Premier Shehbaz Sharif and Finance Minister Muhammad Ishaq Dar et al. The same was the practice in all earlier governments and mindset of previous rulers. This indeed is the worst possible manifestation of our subjugated ruling elites—tragically all governments, civil and military alike, have forced the nation to remain incarcerated in the debt prison.

In 2016, I brought up the burning issue of debt enslavement of Pakistan and the callous attitude of our ruling elites. In 2023, the situation is no different, rather worse. All the six budgets presented by the PML- N government from 2013-2018, four by the Pakistan Tehreek-i-Insaf (PTI) from 2018 to 2022 and two by Pakistan Democratic Movement (PDM) from 2022 to 2023 have common characteristics, with the main emphasis on ensuring economic enslavement through burgeoning debts. The PDM with their fourth-time Finance Minister Ishaq Dar heading the economy has finally obeyed all of IMF’s commands in a revised budget 2023-24, as he did when PML-N obtained a US$ 6.6 billion bailout package in 2013.

Our history of IMF programs is old and seemingly never ending. On December 19, 2019, as per a statement issued by IMF, its Executive Board completed the first review of Pakistan’s economic performance under the Extended Fund Facility (EFF). Completion of the review allowed Pakistan to draw Special Drawing Rights (SDR) 328 million (about US$ 452.4 million), bringing total disbursements to SDR 1,044 million (about US$ 1,440 million). It may be remembered that IMF Executive Board approved the 39-month, SDR 4,268 million (about $6 billion at the time of approval of the arrangement, or 210 percent of quota) Extended Fund Facility (EFF) for Pakistan on July 3, 2019. It was later extended to June 30, 2023, but as in the past ended unsuccessfully with new short term 8-month US$ 3 billion SBA for which complete credit is given by Ishaq Dar to Premier Shehbaz Sharif. 

For the coalition government of PTI claiming prior to elections that “we will never beg” obtaining IMF’s US$6 billion bailout was a great “achievement,” though the conditions imposed by the lender of the last resort were the most stringent in our history of getting such packages since 1958.

It is a matter of record that the PTI coalition government secured over US$13 billion in foreign loans in the fiscal year 2019-20 alone! It was the second highest amount in history. Making things more painful was the reality that we started borrowing just “to repay maturing external debt and cushion the shrinking foreign exchange reserves.” During the fiscal year 2017-18, we received gross loans of $13.2 billion from bilateral and multilateral lenders including, IMF and commercial creditors, according to a report, quoting data compiled by the Ministry of Economic Affairs.

Pakistan received $29.2 billion in foreign loans from 2017-2019 that included US$26.2 billion by the PTI government since August 2018. Out of this, US$19.2 billion was used just to repay maturing external debt and the remaining was added to “external public and publicly guaranteed debt.” The resultant increase in debt-servicing as repayments contracted as new foreign loans, increased substantially. For the fiscal year 2020-21, the cost of external debt servicing was estimated at Rs. 315 billion though we had secured over US$300 million or about Rs. 50 billion temporary relief from the G20 group’s moratorium on debt servicing.

In fiscal year 2018-19, Pakistan borrowed US$16 billion, including balance of payments support from Gulf countries, and returned US$9.1 billion worth of loans. In fiscal year 2019-20, gross foreign loans stood at US$13.2 billion and repayments amounted to slightly above US$10 billion. The Ministry of Finance said we did not have any option but “to borrow to repay maturing loans and stabilize foreign currency reserves that dipped below $10 billion in May 2020 after the outflow of hot foreign money of over $3 billion”.

According to a press report, “the withdrawal of hot foreign money, on the one hand, exposed the State Bank of Pakistan’s (SBP) ill planning and on the other highlighted the fragility of foreign exchange reserves that were built on the back of foreign borrowing. The dip in foreign exchange reserves triggered panic borrowing by the economic managers of the PTI government.” Resultantly, the government “started borrowing from the commercial, bilateral and multilateral creditors exceeded the budgetary target due to the dip in SBP’s foreign currency reserves, low inflows under the Saudi oil facility and the decision not to float Eurobonds valuing at $3 billion. The PTI government, like its predecessor, has also been unable to fully capitalize on non-debt creating inflows like exports, remittances and foreign direct investment”, the report added. 

Like the previous PML-N government, the PTI also relied on short-term foreign commercial loans. Against the budgetary estimate of $2 billion, it took $3.4 billion in foreign commercial loans. Commercial loans are always considered expensive due to their short maturity period and relatively higher interest rates compared with the official bilateral and multilateral credit. Two Chinese financial institutions, China Development Bank ($1.7 billion) and Bank of China ($500 million), provided about two-thirds or $2.2 billion of total foreign commercial loans. Dubai Bank extended $564 million, Ajman Bank $300 million, Citibank $148 million, Standard Chartered $27 million and Suisse Bank AG $205 million.

The PTI government also sought US$15 billion in gross foreign loans in 2020-21 for debt servicing and building foreign currency reserves in the absence of non-debt creating inflows. Out of the estimated external borrowing of US$15 billion, nearly US$10 billion, or two-thirds, were used to return the maturing loans, excluding interest payments. The pattern under the PDM has not changed, rather assumed further accentuation.

Decades of dependence of local and foreign debts has made Pakistan a weak and vulnerable state—though every government keeps on harping the mantra of having nukes and an unparallel ‘strategic location.’ Now Ishaq Dar after inking fresh SBA with IMF, while terming it a “great success” proudly claimed: “… the government convinced the IMF that it would be very unfair if $ 2.5 billion balance amount of the concluding program was not given to Pakistan… only potential of the mines sector of the country is six thousand billion dollars. Pakistan possesses substantial assets amounting to $3000 billion… We need to make efforts to free our economy from foreign aid.”

It may be remembered that on concluding talks with IMF in 2018, the PML-N government proudly announced: “this is the first time we have successfully completed the program in 15 years and the sixth in its 58-year relationship with IMF.” The detail story of that sordid subjugation and what happened thereafter was highlighted here in 2019 and more recently on this paper’s pages.

IMF Agreements (1958-2023)

Since 1958, Pakistan has entered into 23 programs with the IMF. On December 8, 1958 the military government signed a one-year Standby Arrangement (SBA), which it terminated prematurely in nine months. The second SBA was signed on March 16, 1965 and concluded on March 15, 1966. Yet another one-year SBA completed on May 17, 1973. The fourth SBA, signed on August 11, 1973, ended on August 10, 1974. The fifth one was on November 11, 1974 and concluded on November 10, 1975. The sixth was signed on March 9, 1977—it was terminated exactly after one year. On November 24, 1980, an Extended Fund Facility (EFF) was concluded which lasted for three years—ended on November 23, 1983. After a gap of five years, two simultaneous programs, Structural Adjustment Facility (SAF) and SBA were signed on December 28, 1988. Both continued beyond the agreed timeframe and ended in 1990 and 1992, respectively.

The ninth program, again a one-year SBA, was signed on September 16, 1993 but was terminated prematurely on February 22, 1994. The 10th program comprised two separate facilities—SAF and EFF—signed on February 22, 1994 for a period of three years. However, both the facilities were terminated much before maturity—on December 13, 1995. The 11th SBA was signed on December 13, 1995. It ended on September 30, 1997. The 12th program was of two separate facilities, the Poverty Reduction Growth Facility (PRGF) and an EFF. Both were signed on October 20, 1997 and continued till October 19, 2000. Under the 13th program, another SBA was signed on November 29, 2000 and continued until September 30, 2001.

The 14th Extended Credit Facility/PRGF was signed on June 12, 2001 and terminated on May 12, 2004. A three-year SBA was signed on November 24, 2008 but was prematurely terminated on September 12, 2010 after Pakistan could not initiate tax and energy reforms. The PML-N signed an agreement in September 2013 and was successfully completed. The PTI government’s US$ 6 billion extended EEF ended unsuccessfully on June 30, 2023. Under the just concluded SBA, the IMF would give US $3 billion dollars within a period of nine months and the first tranche of the US$ 1.1 billion would be released after the IMF board meeting in mid July 2023.

Finding the right path 

Managing a high fiscal deficit coupled with massive debt burden is the toughest challenge faced by our economic managers. The obvious and undisputed solution is substantial increase in resources and drastic reduction in spending, but it is easier said than done. For the last many decades, Pakistan’s fiscal policy has remained under immense pressure owing to perpetual failure of underperformance of Federal Board of Revenue (FBR), continued security related outlays, rise in wasteful expenditure and greater than targeted subsidies, losses of State-owned Enterprises (SOEs) etc. Other alarming elements remained great fiscal deficit, sluggish exports and high imports.

The burgeoning fiscal deficit and ever-increasing debt burden are not isolated phenomena. These are related to lack of political will to undertake fundamental structural reforms, enforce fiscal discipline, crackdown on parallel economy, increase tax collection, abolish perks and benefits of the ruling elites, eliminate wasteful expenses, dismantle rent-seeking structures, ensure rule of law, and stop reckless borrowing and ruthless spending. The perpetual failure to tap the actual tax potential has forced successive governments to rely more and more on external and internal borrowings, pushing the country into a ‘debt prison.’ In the just ended fiscal year 2023, the FBR failed to meet even the original target of Rs. 7470 billion, what to speak of the revised figure of Rs. 7640 billion even after mini budget, levying additional oppressive taxes of more than Rs. 270 billion through the Finance (Supplementary) Act of 2023 and Tax Laws (Amendment) Act, 2023. 

Collection of below potential revenue of Rs. 7.15 trillion (provisional) by FBR has raised serious questions about the State’s ability to meet its needs, in fact to ensure its economic viability, Collection of Rs. 16 trillion at federal level alone is not possible without restructuring the entire tax system for enhancing revenues to decrease/eliminate the burgeoning fiscal deficit, which is estimated at Rs. 7.5 trillion in the federal budget of 2023-24 . Even in the revised budget of 2023-24 and Finance Act 2023 approved on June 21, 2023, there is nothing to tax the high net-worth rich and mighty sections of society through progressive direct taxation.

Taxes are byproduct of economic growth and the new federal and provincial governments after general elections 2023 should not impose further oppressive taxes even if suggested by IMF. New vistas of non-tax revenues should be explored by making locked assets productive, ending circular debt and losses in SOEs, and drastic cut in wasteful non-development expenditure. Efforts should be made to achieve high economic growth of over 7 percent for a sustainable period of at least one decade.

Are we ready to put our house in order through fundamental structural reforms? Nadeem Ul Haque, Vice-Chancellor of Pakistan Institute of Development Economics (PIDE) has very rightly pointed out: “The IMF or no donor or external friend can help us with putting our house in order. We have to build a modern state and a modern society that is responsible and ready to participate in the global economy of the 21^st century. Without that we will continue to bleed and require the IMF again and again.” 

Let us take the example of Finland, a small country of 5.56 million people with GDP of nearly US$ 300 billion in 2022 (Pakistan with population of 225 million has a GDP of around US$ 350 billion, it was US$ 348.3 billion in 2021). In 2022, Finland’s tax-to-GDP ratio was 43 percent and ours only 10.1 percent.

Unfair taxation is the biggest impediment in the way of economic and industrial growth. What a tragedy that the rich and mighty get VIP facilities, plots, perks and benefits at taxpayers’ expense. They are the beneficiaries of the state’s resources—generated mainly by the poor farmers, suppressed landless tillers and toiling industrial workers. Pakistan is not a poor country—the state’s kitty is empty because of unwillingness of the rich to pay due taxes, the colossal wastage of taxpayers’ money on unproductive expenses and non-exploitation of vital natural and human resources.

Absentee landlords, a list which now include mighty generals who have been allotted State lands under award and rewards, have been resisting proper personal taxation on their enormous income and wealth. This anti-people alliance of military-judicial-civil complex, corrupt and inefficient politicians and greedy businessmen controlling and enjoying at least 90% the State resources contribute less than 2% towards national revenue collection and nobody talks about it.

We can easily generate taxes of Rs. 16 trillion through FBR alone. The dire need in today’s Pakistan is rapid industrialization, especially promoting agro-based industries to provide employment to the poor rural population and ensure fair distribution of resources to reduce inequalities. The IMF or any other donor will not tell us how to achieve these goals. We will have to promote research to find our own solutions to become a modern and dynamic nation as pleaded by Dr. Nadeem Ul Haque and many others.

Resource mobilization should be given priority to build infrastructure, facilitate growth of small and medium sized firms in the industrial sector and small farms in the agricultural sector for an employment intensive and equitable economic growth process. To end economic apartheid, large corporations, especially loss-bearing SOEs, with equity stakes for the poor can be established through public-private partnerships. This would set the stage for a structural change that could help achieve economic growth for the people and by the people, which is presently confined to the elites only.

Imran Khan alone is not to blame

Pervez Hoodbhoy in The Dawn

PAKISTAN’S mad rush towards the cliff edge and its evident proclivity for collective suicide deserves a diagnosis, followed by therapy. Contrary to what some may want to believe, this pathological condition is not one man’s fault and it didn’t develop suddenly. To help comprehend this, for a moment imagine the state as a vehicle with passengers. It is equipped with a steering mechanism, outer body, wheels, engine and fuel tank.

Politics is the steering mechanism. Whoever sits behind the wheel can choose the destination, speed up, or slow down. Choosing a driver from among the occupants requires civility, particularly when traveling along a dangerous ravine’s edge. If the language turns foul, and respect is replaced with anger and venom, animal emotions take over.

Imran Khan started the rot in 2014 when, perched atop his container, he hurled loaded abuse upon his political opponents. Following the Panama exposé of 2016, he accused them — quite plausibly in my opinion — of using their official positions for self-enrichment. How else could they explain their immense wealth? For years, he has had no names for them except chor and daku.

But the shoe is now on the other foot and Khan’s enemies have turned out no less vindictive, abusive and unprincipled. They have recorded and made public his recent intimate conversations with a young female, dragged in the matter of his out-of-wedlock daughter, and exposed the shenanigans of his close supporters.

More seriously, they have presented plausible evidence that Mr Clean swindled billions in the Al Qadir and Toshakhana cases. Which is blacker: the pot or the kettle? Take your pick.

Everyone knows politics is dirty business everywhere. Just look at the antics of Silvio Berlusconi, Italy’s corrupt former prime minister. But if a vehicle’s occupants include calm, trustworthy adjudicators, the worst is still avoidable. Sadly Pakistan is not so blessed; its higher judiciary has split along partisan lines.

The outer body is the army, made for shielding occupants from what lies outside. But it has repeatedly intruded into the vehicle’s interior, seeking to pick the driver. Free-and-fair elections are not acceptable. Last November, months after the Army-Khan romance soured, outgoing army chief General Qamar Javed Bajwa confessed that for seven decades the army had “unconstitutionally interfered in politics”.

But a simple mea culpa isn’t enough. Running the economy or making DHAs is also not the army’s job. Officers are not trained for running airlines, sugar mills, fertiliser factories, or insurance and advertising companies. Special exemptions and loopholes have legalised tax evasion and put civilian competitors at a disadvantage.

A decisive role in national politics, whether covert or overt, was sought for personal enrichment of individuals. It had nothing to do with national security.

While Khan has focused solely on the army’s efforts to dislodge him, his violent supporters supplement these accusations by disputing its unearned privileges. When they stormed the GHQ in Rawalpindi, attacked an ISI facility in Pindi, and set ablaze the corps commander’s house in Lahore, they did the unimaginable. But, piquing everyone’s curiosity, no tanks confronted the enraged mobs. No self-defence was visible on social media videos. The bemused Baloch ask, ‘What if an army facility had been attacked in Quetta or Gwadar?’ Would there be carpet bombing? Artillery barrages?

The wheels that keep any economy going are business and trade. Pakistanis are generally very good at this. Their keen sense for profits leads them to excel in real-estate development, mining, retailing, hoteliering, and franchising fast-food chains. But this cleverness carries over to evading taxes, and so Pakistan has the lowest tax-to-GDP ratio among South Asian countries.

The law appears powerless to change this. When a trader routinely falsifies his income tax return, all guilt is quickly expiated by donating a dollop of cash to a madressah, mosque, or hospital. In February, the pious men of Markazi Tanzeem Tajiran (Central Organisation of Traders) threatened a countrywide protest movement to forestall any attempt to collect taxes. The government backed off.

The engine, of course, is what makes the wheels of an economy turn. Developing countries use available technologies for import substitution and for producing some exportables. A strong engine can climb mountains, pull through natural disasters such as the 2022 monster flood, or survive Covid-19 and events like the Ukraine war. A weak one relies on friends in the neighbourhood — China, Saudi Arabia, and UAE — to push it up the hill. By dialling three letters — I/M/F — it can summon a tow-truck company.

The weakness of the Pakistani engine is normally explained away by various excuses — inadequate infrastructure, insufficient investment, state-heavy enterprises, excessive bureaucracy, fiscal mismanagement, or whatever. But if truth be told, the poverty of our human resources is what really matters.

For proof, look at China in the 1980s, which had more problems than Pakistan but which had an educated, hard-working citizenry. Economists say that these qualities, especially within the Chinese diaspora of the 1990s, fuelled the Chinese miracle.

The fuel, finally, is the human brain. When appropriately educated and trained, it is voraciously consumed by every economic engine. Pakistan is at its very weakest here. Small resource allocation for education is just a tenth of the problem.

More importantly, draconian social control through schools and an ideology-centred curriculum cripples young minds at the very outset, crushing independent thought and reasoning abilities. Leaders of both PTI and PDM agree that this must never change. Hence Pakistani children have — and will continue to have — inferior skills and poorer learning attitudes compared to kids in China, Korea, or even India.

The prognosis: it is hard to see much good coming out of a screeching catfight between rapacious rivals thirsting for power and revenge. None have a positive agenda for the country.

While the much-feared second breakup of Pakistan is not going to happen, the downward descent will accelerate as the poor starve, cities become increasingly unlivable, and the rich flee westwards. Whether or not elections happen in October and Khan rises from the ashes doesn’t matter. To fix what has gone wrong over 75 years is what’s important.

The UK is one of the most corrupt nations on Earth

Fortunes are being made by political favourites, while Brexit could cement London’s reputation for money laundering writes George Monbiot in The Guardian

‘Awarding coronavirus contracts to unusual companies, without advertising, transparency or competition now appears to have been adopted as the norm.’ Photograph: Andrew Milligan/PA


Fear, shame, embarrassment: these brakes no longer apply. The government has discovered that it can bluster through any scandal. No minister need resign. No one need apologise. No one need explain.

As public outrage grows over the billions of pounds of coronavirus contracts issued by the government without competition, it seems determined only to award more of them. Never mind that the consulting company Deloitte, whose personnel circulate in and out of government, has been strongly criticised for the disastrous system it devised to supply protective equipment to the NHS. It has now been granted a massive new contract to test the population for Covid-19. 

Never mind that some of these contracts have reportedly cost taxpayers £800 for every protective overall delivered. Never mind that at least two multi-million pound contracts appear to have been issued to dormant companies. Awarding contracts to unusual companies, without advertising, transparency or competition now appears to have been adopted as the norm. Several of the firms that have benefited from this largesse are closely linked to senior figures in the government.

Every week, Boris Johnson looks more like George I, under whose government vast fortunes were made by political favourites, through monopoly contracts for military procurement. Any pretence of fiscal rectitude or democratic accountability has been abandoned. With four more years and the support of the billionaire press, who cares?

The way the government handles public money looks to me like an open invitation to corruption. While it is hard to show that any individual deal is corrupt, the framework under which this money is dispensed invites the perception.

When you connect the words corruption and the United Kingdom, people tend to respond with shock and anger. Corruption, we believe, is something that happens abroad. Indeed, if you check the rankings published by Transparency International or the Basel Institute, the UK looks like one of the world’s cleanest countries. But this is an artefact of the narrow criteria they use.

As Jason Hickel points out in his book The Divide, theft by officials in poorer nations amounts to between $20bn and $40bn a year. It’s a lot of money, and it harms wellbeing and democracy in those countries. But this figure is dwarfed by the illicit flows of money from poor and middling nations that are organised by multinational companies and banks. The US research group Global Financial Integrity estimates that $1.1tn a year flows illegally out of poorer nations, stolen from them through tax evasion and the transfer of money within corporations. This practice costs sub-Saharan Africa around 6% of its GDP.

The looters rely on secrecy regimes to process and hide their stolen money. The corporate tax haven index published by the Tax Justice Network shows that the three countries that have done most to facilitate this theft are the British Virgin Islands, Bermuda and the Cayman Islands. All of them are British territories. Jersey, a British dependency, comes seventh on the list. These places are effectively satellites of the City of London. But because they are overseas, the City can benefit from “nefarious activities … while allowing the British government to maintain distance when scandals arise”, says the network. The City of London’s astonishing exemption from the UK’s freedom of information laws creates an extra ring of secrecy.

The UK also appears to be the money-laundering capital of the world. In a devastating article, Oliver Bullough revealed how easy it has become to hide your stolen loot and fraudulent schemes here, using a giant loophole in company law: no one checks the ownership details you enter when creating your company. You can, literally, call yourself Mickey Mouse, with a registered address on Mars, and get away with it. Bullough discovered owners on the Companies House site called “Xxx Stalin” and “Mr Mmmmmm Xxxxxxxxxxx”, whose address was given as “Mmmmmmm, Mmmmmm, Mmm, MMM”. One investigation found that 4,000 company owners, according to their submitted details, were under the age of two.

By giving false identities, company owners in the UK can engage in the industrial processing of dirty money with no fear of getting caught. Even when the UK’s company registration system was revealed as instrumental to the world’s biggest known money-laundering scheme, the Danske Bank scandal, the government turned a blind eye.

A new and terrifying book by the Financial Times journalist Tom Burgis, Kleptopia, follows a global current of dirty money, and the murders and kidnappings required to sustain it. Again and again, he found, this money, though it might originate in Russia, Africa or the Middle East, travels through London. The murders and kidnappings don’t happen here, of course: our bankers have clean cuffs and manicured nails. The National Crime Agency estimates that money laundering costs the UK £100bn a year. But it makes much more. With the money come people fleeing the consequences of their crimes, welcomed into this country through the government’s “golden visa” scheme: a red carpet laid out for the very rich. 

None of this features in the official definitions of corruption. Corruption is what little people do. But kleptocrats in other countries are merely clients of the bigger thieves in London. Processing everyone else’s corruption is the basis of much of the wealth of this country. When you start to understand this, the contention by the author of Gomorrah, Roberto Saviano, that the UK is the most corrupt nation on Earth, begins to make sense.

These activities are a perpetuation of colonial looting: a means by which vast riches are siphoned out of poorer countries and into the hands of the super-rich. The UK’s great and unequal wealth was built on colonial robbery: the land and labour stolen in Ireland, America and Africa, the humans stolen by slavery, the $45tn bled from India.

Just as we distanced ourselves from British slave plantations in the Caribbean, somehow believing that they had nothing to do with us, now we distance ourselves from British organised crime, much of which also happens in the Caribbean. The more you learn, the more you realise that this is what it’s really about: grand larceny is the pole around which British politics revolve.

A no-deal Brexit, which Boris Johnson seems to favour, is likely to cement the UK’s position as the global entrepot for organised crime. When the EU’s feeble restraints are removed, under a government that seems entirely uninterested in basic accountability, the message we send to the rest of the world will be even clearer than it is today: come here to wash your loot.

Oligarchs hide billions in shell companies. Here's how we stop them

The Panama Papers have helped tax authorities recover over $500m around the world. Property registries could ensure that even more is recovered

Frederik Obermaier and Bastian Obermayer in The Guardian 

 

According to Navi Pillay, the former UN high commissioner for human rights, ‘The money stolen through corruption every year is enough to feed the world’s hungry 80 times over.’ Photograph: Arnulfo Franco/AP


Two years ago we published the Panama Papers after an anonymous source provided 2.6 terabytes of internal data from the dubious Panamanian law firm of Mossack Fonseca. We shared the data with 400 journalists worldwide and together revealed how the wealthy and powerful use shell companies to hide their assets. Such companies are exploited by dictators, drug cartels, mafia clans, fraudsters, weapons dealers and regimes like North Korea and Iran to hide their shady business transactions.


As a consequence, Sigmundur Davíð Gunnlaugsson, the prime minister of Iceland, resigned. Pakistani prime minister Nawaz Sharif did the same, and in the United Kingdom even David Cameron’s father was implicated. So far, the Panama Papers have helped tax authorities around the world to recover more than $500m in unpaid taxes and penalties. It could be far more if lawmakers finally take action.

After publishing the Panama Papers, we have heard a lot of promises from politicians around the world. They have talked about the need for transparency, and while the discussion is warm, the details are complicated: a multilateral exchange of information and stronger anti-money laundering regulations are as difficult to implement and control as they sound.

But why bother? There is a far less bureaucratic and more powerful measure: public beneficial ownership registries. Databases in which citizens can easily access and explore the owners of companies. Not the nominee director, not the fake shareholder – the real owner. The person at the center of the matryoshka-like corporate structures, or, as experts refer to them: the ultimate beneficial owner of a company.

A database of actual owners would enable companies to check with whom they are actually doing business with. It would enable activists, journalists and skeptical citizens to investigate the individuals running dubious companies which earn millions in alleged “consulting contracts”, which are in many cases nothing more than concealed payments of corruption money. It would also give prosecutors the opportunity to follow dark money without having to rely on nerve-racking, time-consuming legal maneuvers with foreign governments.

Searchable by company and by individual names, it would enable investigators to see if Dictator X or Autocrat Y owns companies in Country Z. Combined with a public property register, it would narrow, if not close, loopholes which allow oligarchs and their relatives to betray their own citizens and stash plundered money across the globe.

Creating beneficial ownership registries will not be easy. Recently, the UK House of Lords rejected an attempt to force overseas territories under British control to create said registries. And in the United States, where some states make it more difficult to vote than to start a company, there has yet to be any reasonable public discussion about creating these transparent registries, making America a willing accomplice in global corruption. The treasury department in 2015 estimated that approximately $300bn in illicit proceeds are generated in the US per year!

Critics of public beneficial ownership registries often say that exposing company owners could put them in danger of blackmail or even kidnapping. However, no data supports such claims and there will likely never be any. As it is, the financial elite often surround themselves with the symbols and spoils of wealth, such as big cars, yachts and villas. There is no desire to hide their treasure; in fact, they often flaunt it.

Corruption is a scourge. It hits the poor first and hits them hard. Whole continents are plundered, the proceeds of human trafficking are laundered, wars are financed and violent religious extremism is supported.

The word “corruption” comes from the Latin “corrumpere”, which can mean “to destroy”. Corruption destroys democracy. Corruption costs citizens extraordinary amounts of money. According to estimates, corruption consumes more than 5% of the global gross domestic product.

Developing regions lose more than 10 times the money they receive in foreign aid to illicit financial schemes. Without corruption and the shell companies that make it possible, there might be no need for aid to Africa or Asia. Most importantly, corruption kills. According to Navi Pillay, the former United Nations high commissioner for human rights, “The money stolen through corruption every year is enough to feed the world’s hungry 80 times over”.

As Louis Brandeis, the late associate justice of the supreme court of the United States, once pointed out sunlight is the best disinfectant. Hence let the sunshine in! Lawmakers must make public beneficial ownership registries a priority to ensure that institutions remain transparent and democratic.

There is no legitimate reason to allow individuals to own anonymous companies or to help new “entrepreneurs” to create them. Lava Jato in Brazil, the Fifa scandal and nearly every other major corruption case have involved opaque company structures created to bribe, receive bribes or to hide dirty money.

Financial crimes rely on exploiting anonymous companies and trusts, and secrecy jurisdictions like the British Virgin Islands, the Cayman Islands and the states of Delaware and Nevada are partners in those crimes. They must be held accountable.

Waiting for a global solution means waiting a long time, if not forever. The only way to draw the corporate curtain back and expose corruption is for lawmakers to work in the public interest and create public beneficial ownership registries and public property registries now. The more countries that adopt these measures, the less places dictators, human traffickers, weapons dealers and oligarchs can hide.

Lawmakers that claim to stand against corruption should do so by fighting for these kinds of registries now, or forever hold their peace.

Europe’s strategic choices on Brexit

Gideon Rachman in The FT



Talk to EU policymakers and you will be told that Britain has yet to make the hard choices on Brexit. The standard line is that Theresa May’s government is still trying to “have its cake and eat it” — leaving the EU, but retaining many of the benefits of membership. Britain must drop this “magical thinking” and make some crucial decisions. Once that is done, the structure of the future EU-UK relationship will be dictated by law and precedent. 

That argument has some truth to it. But what it misses is that the EU also has important choices to make. By treating Brexit as, above all, a legal process, the EU is largely ignoring the political and strategic implications of Britain leaving the EU. That is an intellectual failure that could have dangerous consequences for all sides. 

It is clearly true that the EU is a legal order. But it is also a political organisation. The EU is perfectly capable of creating new laws — or interpreting current ones with extreme flexibility — when it is politically necessary. 

There are many examples of this flexibility in action. France and Germany broke the EU’s Stability and Growth pact — rather than accept legally mandated fines for breaking its budget-deficit rules. There was a “no bailout” clause for the euro, but Greece was bailed out. Now the European Commission is pursuing Poland for breaching the rule of law, but ignoring equally egregious breaches in Hungary. 

So the EU can cherry-pick the law, when it is politically convenient. It can therefore make strategic and political choices on Brexit. And, broadly speaking, it has three options. 

Staying tough means sticking with the current line. Britain has chosen to be a third country. There can be no special deals — no “cherry-picking” in the EU’s favoured jargon. There are only two viable models for a “third country”: Norway (which involves membership of the single market) or Canada (which is a pure free trade agreement). Britain must pick one and then accept the consequences. 

The arguments for this purist stance are that it protects the integrity of the EU’s single market. If Britain keeps some benefits of EU membership, while ditching many of its obligations, then all 27 members of the EU might seek special deals, and the single market could unravel. 

By contrast, if Britain suffers economically from Brexit, that could actually benefit the EU. It would underline the negative consequences of leaving the organisation and undermine Eurosceptic parties across the continent. And jobs and tax revenues could migrate from Britain to the EU. 

Compromise on Brexit, the second option, would mean embracing the idea that there should be special arrangements between Britain and the EU. Britain is not any old third country. It has been crucial to the European balance of power for centuries. It has been a member of the EU for decades. And it is currently a major trading partner and military ally for most EU countries. So it sounds unrealistic to say that the UK must be treated exactly like Norway or Canada. 

As the EU attempts to navigate an emerging world order — with a rising China and an unpredictable and protectionist US — the strategic alignment of Brexit Britain is uncertain. So it makes sense for the EU to try to pull the UK into a new sort of “special relationship”. By contrast, a Britain that feels humiliated or impoverished by the EU could be an uncomfortable neighbour — with Russia as an extreme example of what can happen when a major European power is at odds with the EU. 

Some Europeans, particularly the French, agree that Britain should continue to play a major strategic role in European affairs. But they do not accept that this has any implications for Britain’s economic relationship with the EU. This sounds like a European version of the dreaded “cherry-picking”. 

There are plenty of areas where the EU could adopt a more flexible approach on its economic partnership with Britain — if it made the political choice to do so. These could involve the free movement of people, the role of the European Court of Justice, and the mutual recognition of product standards and financial regulations. 

The EU’s final option is to force a crisis. If it concludes that Brexit can be reversed and that this is in the EU’s interest (and those are both big “ifs”), then Europe might try to force a political crisis in Britain. This would involve hanging tough for now, hoping that the political fissures in Britain widen and that the May government collapses. 

A new administration in the UK might reconsider Brexit — particularly if there was a fresh offer from the EU, perhaps on free movement of people. That might create the impetus for a second referendum in the UK, and a vote to reverse Brexit. 

But this approach is also fraught with danger. Crises are obviously unpredictable. If the crisis happened too late in the process, Britain might simply crash out of the EU without a deal. And it is also entirely possible that a second referendum would result in a second vote to leave the EU. 

There are powerful arguments to be made for and against each of these three courses of action. But pretending that there are no strategic choices facing the EU should not be an option. That is simply an evasion of responsibility.

A tax haven blacklist without the UK is a whitewash

Prem Sikka in The Guardian







At the heart of the intensifying debate about fairness and inequality is tax. Who can think without shuddering of the opportunity costs incurred by needy economies robbed of the tax to which they are entitled? In that context, and against the backdrop of exposure exercises such as the Paradise Papers, there was understandable enthusiasm for the European Union’s latest list of uncooperative tax havens. It arrived this week, amid much ballyhoo and talk of toughness. What a disappointment.

The EU put 17 extra-EU jurisdictions on a blacklist: American Samoa, Bahrain, Barbados, Grenada, Guam, South Korea, Macau, Marshall Islands, Mongolia, Namibia, Palau, Panama, St Lucia, Samoa, Trinidad and Tobago, Tunisia and the United Arab Emirates. They could lose access to EU funds and incur sanctions soon to be announced. But contrast the list with what we know was revealed about international tax avoidance by both the Paradise and Panama Papers.

The EU seems to have targeted countries with little economic, military or diplomatic weight. The list includes Panama, which was central to the Panama Papers, but not Bermuda, which was central to the Paradise Papers. In imperialist mode, the EU paints a picture that broadly says that “those over there” in low-income countries, at the periphery of the global economy, are a source of the world’s economic problems and should face sanctions. The blacklist does not include any western country, even though accountants, lawyers, banks and much of the infrastructure that lubricates global tax avoidance are located in the west. Also excluded are UK crown dependencies and overseas territories, which have undermined the tax base of other countries for decades.

Another 47 jurisdictions are included in a “greylist”: these are not compliant with the standards demanded by the EU, but have given commitments to change their rules. This list includes Andorra, Belize, Bermuda, the Cayman Islands, Guernsey, the Isle of Man, Jersey, Liechtenstein, San Marino and Switzerland. But even that is deficient. And Luxembourg is missing altogether.

Where is the UK on either list? It offers special tax arrangements to non-domiciled billionaires that are not available to British citizens. We are deeply complicit. The UK has long enabled large companies and accountancy firms to write favourable tax laws, and has entered into sweetheart deals with major corporations.


The UK has long enabled accountancy firms to write favourable tax laws, and entered into sweetheart deals

The issue of tax avoidance is not going away. Corporations and wealthy elites are addicted to it. And many of the tax havens, as comparatively small countries, are not readily going to dilute their practices, as a decent standard of living cannot easily be provided by seasonal tourism, agriculture and fishing.

But the EU blacklist is a wasted opportunity because there are things the international community can do. Tax havens should, for example, be offered favourable financial grants by the EU and other countries to rebuild their economies and become hubs for new industries, and research and development. Grants should be conditional on step-by-step progress towards meeting specified benchmarks on transparency, accountability and cooperation, including a publicly available register of beneficial ownership of all companies and trusts, and a list of the assets held by wealthy individuals. Havens would need to commit to automatic exchange of information with other countries on any matter relating to tax or illicit financial flows.

The accounts of corporations and limited liability partnerships holed up in tax havens should also be made public. At the very least, the EU and the UK should insist that the public accountability mechanisms in tax havens match those on mainland Europe.

As for jurisdictions that reject reform, they should face sanctions. The imposition of a withholding tax, of say 20%, on all interest and dividend payments to individuals and companies would reduce their attractiveness. Labour’s 2017 manifesto contained that idea.

The EU, the UK and other countries could also ensure that no individual or company under their jurisdiction would be able to import or export any goods or services from designated tax havens. The UK is being asked to pay a fee to secure access to EU markets after Brexit; by the same logic, a fee should be demanded from tax havens in the shape of better transparency and accountability. Persistently aggressive jurisdictions might suffer travel and visa restrictions, or be denied the use of international satellites that tax havens rely on for communications and financial transactions.

These ideas, and there are others, may not curb the predatory practices of tax havens overnight, but any or all would give the sponsors and users of these territories considerable food for thought. Action is often promised, but how many weak governments have sought refuge behind the claim that global tax avoidance requires international solutions, while at the same time undermining possibilities of international solutions? Too many.

We cannot afford to go on like this. Be brave and follow the money.

Why do people care more about benefit ‘scroungers’ than billions lost to the rich?

Robert De Vries and Aaron Reeves in The Guardian


The Paradise Papers have once again revealed the ingenuity and energy the super-rich are willing to deploy to keep their money away from the taxman. By illuminating the scale of this injustice, journalists have provided an invaluable service. And yet the revelations do not seem to have generated the level of public outrage that might have been expected.

At a time of staggering global inequality, it is perhaps surprising that people are not more animated by the determination of the ultra-rich to avoid their obligations to support our roads, hospitals, soldiers and schools – when regular citizens are unable to take advantage of such arrangements. However, this relative lack of concern is consistent with research on people’s attitudes towards tax avoidance.

Last year’s British Social Attitudes survey asked Britons about their feelings on this issue. Our analysis of this data (with Ben Baumberg Geiger of the University of Kent) revealed that the British public believes tax avoidance to be commonplace (around one third of taxpayers are assumed to have exploited a tax loophole). In moral terms, people seem rather ambivalent; less than half (48%) thought that legal tax avoidance was “usually or always wrong”.

By contrast, more than 60% of Britons believe it is “usually or always wrong” for poorer people to use legal loopholes to claim more benefits. In other words, people are significantly more likely to condemn poor people for using legal means to obtain more benefits than they are to condemn rich people for avoiding tax. This is a consistent finding across many different studies. For example, detailed interviews conducted by the Joseph Rowntree Foundation in the wake of the 2008 financial crisis found that people “tended to be far more exercised by the prospect of low-income groups exploiting the system than they were about high-income groups doing the same”.

This discrepancy is reflected in government priorities. Deep public antipathy towards benefit “scroungers” has been the rock upon which successive Conservative-led parliaments have built the case for austerity. Throughout his premiership, David Cameron, along with his chancellor, George Osborne, kept the opposition between “hardworking people” and lazy benefit claimants right at the centre of their messaging on spending cuts. Though gestures have been made towards addressing widespread tax avoidance by the wealthy, very little has actually been achieved. This stands in stark contrast to the scale and speed with which changes have been made to welfare legislation.

Will the Paradise Papers shift the public’s focus? The leaks alone are seemingly not enough. The 2016 British Social Attitudes survey was conducted just four months after the release of the Panama Papers. Even then, the British public remained more concerned about benefit claimants than tax avoiders.

Fundamentally, the Paradise Papers are about numbers – vast sums of money disappearing offshore that could be spent on public services here in the UK. However, as the former chair of the UK Statistics Authority, Andrew Dilnot, has often pointed out, people are bad at dealing with numbers on this scale. Unless you are an economist or a statistician, numbers in the millions and billions are just not particularly meaningful.

The key is to link these numbers to their consequences. The money we lose because people like Lewis Hamilton don’t pay some VAT on their private jet means thousands more visits to food banks. The budget cuts leading to rising homelessness might not have been necessary if Apple had paid more tax. Fewer people might have killed themselves after a work-capability assessment if companies like Alphabet (Google) had not registered their offices in Bermuda, and the downward pressure on benefits payments was not so intense. 

The causal chains connecting these events are complex and often opaque, but that does not make their consequences any less real, especially for those who have felt the hard edge of austerity.

The Paradise Papers have dragged the murky world of offshore finance into the spotlight. However, calls for change may founder against the British public’s persistent focus on the perceived crimes of the poor. That is, unless we – as academics, politicians, journalists and others – can articulate how the decisions of the very rich contribute to the expulsion of the vulnerable from the protection of state-funded public services. Quite simply, people get hurt when the rich don’t pay their taxes.

Britain's role in the growth of tax havens

Andrew Verity in The BBC


Here's the received wisdom: when the British Empire faded in size and significance after World War Two, a few scattered islands around the globe wanted to keep their imperial ties to London.

The British government had to find a way to reduce the economic dependence of the likes of Bermuda, Montserrat or the British Virgin Islands, so it awarded them special tax-exempt status, creating the conditions for a thriving financial services industry.

Yes, tax evasion and money laundering may have got a little out of hand from time to time, but overall it succeeded in lifting them out of dependence on the UK government.

But there's a deeper story. It wasn't by design that the remnants of a dying British Empire morphed into a world leader in offshore financial services, selling secrecy and tax avoidance to multi-nationals and the wealthiest individuals in the world.

Instead, the crucial moment was more of an accident - which gave rise to advantages no-one had foreseen.

And it began not in Bermuda or Jersey but in another offshore centre - "offshore" not to the UK, but to the US - the City of London.

Incentives to avoid

When the 20th Century began, income tax was in single digits and progressive taxation - charging richer people a higher rate - had barely begun.

In the run-up to World War One, chancellors of the exchequer - from Asquith to Lloyd George - began raising taxes to pay for social reforms, such as the old age pension.

As the war progressed, the state demanded more and more income tax from every citizen and higher rates for the wealthy, leading to a top rate of 30% by 1919.

Accountants to wealthy individuals began to devise ways to avoid tax. Clients could become resident in Jersey, where tax rates were far lighter.

Or, if they wanted to stay in London, they might put their money in a trust registered elsewhere, perhaps on the Isle of Man, where in theory it was no longer theirs - and therefore not visible to the prying eyes of an Inland Revenue inspector.

David Lloyd George served as Chancellor in Herbert Henry Asquith's government, before rising to PM in 1916

But it was in the dying days of the Empire that the offshore financial services industry truly boomed.

Defined by purpose rather than geography, "offshore" means any jurisdiction that seeks to attract investors on the basis of light taxes and looser regulations.

On that basis, the epicentre of the offshore industry is not Nassau in the Bahamas or George Town in the Cayman Islands.

As author Nick Shaxson points out in his fascinating offshore expose, Treasure Islands: "The modern offshore system did not start its explosive growth on scandal-tainted and palm-fringed islands in the Caribbean, or in the Alpine foothills of Zurich. It all began in London, as Britain's formal Empire gave way to something more subtle."

By accident - not design

In 1957, Britain and its imperial remains were trying to recover from a financial crisis. The previous year the UK had joined forces with France and Israel to try to recapture the Suez Canal after it was nationalised by the defiant anti-colonial Egyptian President, Gamal Abdel Nasser.

Viewing the invasion as European imperialism at its worst, the US refused any assistance.

By the end of 1956, a run on the pound was under way. The Bank of England wanted to curb the outflow of pounds by boosting interest rates sharply, but Her Majesty's Treasury had other ideas.

Since the Bretton Woods economic conference of 1944 towards the end of World War Two, countries had agreed to control movements of capital to curb the speculative flows into and out of countries that had worsened the economic crises of the past.

If, say, Tate & Lyle wanted to invest several million pounds in a new sugar production facility in Jamaica, it would need signed approval from Her Majesty's Treasury.

Normally this was a formality. But during the Suez crisis, the Treasury announced that, on a temporary basis, it would no longer approve foreign capital investments.Image copyrightREUTERSImage captionThe Bank of England did not get its way against the Treasury

The City's merchant banks were alarmed. Arranging finance for projects in the former colonies was their lifeblood. How would they avoid ruin?

Digging through the archives, financial academic Gary Burn unearthed what happened next.

Hearing the banks' complaints in a series of meetings, the Bank of England agreed in late 1957 to allow the commercial banks to continue to lend and borrow to foreign clients on two conditions:
the lending had to be in a currency other than sterling, and
both sides of the transaction - the lender and the borrower - had to reside somewhere other than the UK
"The decision was momentous in all respects," says one of the leading experts in offshore finance, Prof Ronen Palan of City, University of London. "They simply deemed certain transactions as not taking place in the UK. Where did the transactions take place for regulatory purposes? Nowhere.

"I think it wasn't at all by design; it was a mistake. They didn't understand the implications. It was seen as an accounting device."

The so-called "Eurodollar" was born - a global offshore financial market, transacting in dollars and allowing unlimited sums to be borrowed and lent, but under the control of no single state. No act of Parliament (or Congress) sanctioned the decision. There was no thoughtful policy-making, no careful debate.

Success of the Eurodollar

The Treasury was at first left in the dark. But within years the implications were obvious - this could revive the City of London's fortunes.

"By the time the Treasury figured it out, they thought, 'this is good business for the City'," said Prof Palan.

Banks from all around the world could borrow and lend in dollars without being subject to US tax or banking regulations - making banking in dollars more profitable out of London than out of Wall Street.

Offshore banks didn't have to hold money in reserve for every dollar they lent (as they would in the US), which would dramatically cut their costs.

While transactions were arranged in London, the lenders and borrowers could be registered anywhere. But the parties to Eurodollar transactions needed addresses.

So, zero-tax jurisdictions from the Cayman Islands to the Montserrat were used by London's investment banks as the official tax residences of their wealthy customers.

Clients could avoid both tax and undesirable scrutiny - for example from the US tax authorities.

In the British Overseas Territories, local laws were passed to attract more registration business, collecting modest fees that mounted up. No need for a bank branch out there - just a drawer in an offshore lawyer's filing cabinet.

The City of London began its recovery to become the centre of finance it is today

Howls of protest from the US government were ignored. Between 1960 and 1970, the size of the Eurodollar market went from $1bn to $46bn.

In the 1970s, countries rich in petrodollars from soaring oil prices were faced with a dilemma: repatriate the money to New York - where they would be taxed on it - or keep it offshore.

By 1980, the so-called Eurodollar market was worth more than half a trillion.

After the deregulation of the City of London in the 1986 "Big Bang", US banks joined in, setting up in London.

And as the 1990s and 2000s progressed, it became the undisputed global centre for foreign currency trading.

Not for the weather

Banks' wealthy individual and corporate clients didn't incorporate in the Cayman Islands or the British Virgin Islands because they liked the weather there - many never visited.

Offshore centres were attractive to businesses looking to reduce their tax bill, but sometimes, more importantly, to avoid what they regarded as excessive regulation.

Cayman Islands-registered companies were used heavily, for example, by the energy giant Enron as it built its business model based on fraudulent accounts.

Tax-free, light regulation jurisdictions, including the Bahamas, the Cayman Islands and Delaware in the US, became the corporate locations of choice for legitimate hedge funds.

They were also used to incorporate the vehicles at the heart of the global financial crisis - the 'structured investment vehicles' that did not show up on bank's balance sheets and bought billions of mortgage-backed securities, massively increasing the unnoticed risks in the global financial system which led to the crisis of 2008.

Likewise, the British Virgin Islands has been used by many legitimate businesses. It has also become the favourite secrecy jurisdiction for clients of the Panama-based law firm exposed in last year's Panama Papers revelations, Mossack Fonseca.

Since those revelations, governments around the world have pledged to improve transparency with measures such as automatic information sharing and registers of beneficial owners of offshore companies.

Many of those measures are yet to be enacted or tested.

But as the Paradise Papers are now confirming, the secrets of Britain's offshore empire are no longer quite so safe.