On to the second review
Dr Ashfaque H Khan
Tuesday, January 21, 2014

Last week (January 14) I wrote on the staff report for the first review of the ongoing IMF programme and highlighted the contradictory statements of the IMF pertaining to Pakistan’s economy. Dr Hafiz Pasha, an outstanding economist and a former finance minister of Pakistan, also noted the same in his recent article and argued, “the time has come to stop the double speak”.

It is absolutely clear that the current IMF programme is all about building foreign exchange reserves and paying off the IMF loan on time. Dr Muhammad Yaqub, the former governor of Pakistan’s central bank, called this programme a ‘self-serving programme’ and my good friend Dr Ehtisham Ahmed – a former senior official of the IMF – termed this as ‘development lending’.

Dr Ehtisham believes that the geo-political environment has changed dramatically with the agreement of the major powers with Iran which opens up an alternative exit strategy from Afghanistan. As such, Pakistan is losing its strategic importance and, therefore, should not expect much leniency from the IMF.

Perhaps, the changing geo-political environment is dictating the views of the IMF viz Pakistan, a development on which I have no expertise to comment. I have always known the IMF as a professional institution, supporting the member country financially in a period of distress.

The IMF mission is expected to arrive in Pakistan by the end of this month for a second review of the programme; major issues pertaining to fiscal balance will come under serious discussion. The first agenda item is likely to be the recently announced tax amnesty scheme. The IMF, like many of us, considers this tax amnesty scheme as something that undermines the principles of self-assessment and poses risks to the integrity of the tax system. By offering such an amnesty scheme, the government has admitted its inability to tax those who refuse to pay their due taxes. Successive governments in the past offered such tax amnesties but failed to broaden the tax base.

The IMF is likely to discuss the investment incentive package which provides immunity from audit for those taxpayers who pay 25 percent more than what they paid in the previous year. It also provides immunity from tax scrutiny of the sources of fund, if invested in specific sectors. Both schemes are anti-tax reforms and should have been avoided.

The third issue that is likely to come under discussion is the recently published report ‘Taxation by Misrepresentation’, which argues that nearly half of the lawmakers did not pay their taxes whereas 12 percent did not even possess a National Tax Number. This is a serious issue and has brought a bad name to the country. Many world leaders have castigated Pakistan for its failure to tax its own rich and powerful classes.

Although the finance minister has committed to publish the taxpayers’ directory by February 2014, which should be appreciated by all, is this enough? No. Bringing the total income of the parliamentarians under the direct tax net will be the real test of the IMF mission.

The fourth item of discussion will be the lower-than-target tax collection. The Federal Board of Revenue (FBR) has collected Rs1020 billion in the first half of the current fiscal year which is 14.7 percent higher than the corresponding period of the last fiscal year. In order to achieve the target as given by the IMF – of Rs2345 billion (as opposed to budgeted target of Rs2475 billion) – the FBR requires collecting Rs1325 billion in the second half. In other words, tax collection must increase by 25.4 percent in the second half as against 14.7 percent in the first half.

This appears to be a tough target to achieve. My calculation suggests that in the absence of additional tax measures the FBR may collect Rs2250 billion at the most, up by 16.2 percent over the last year. To achieve even this lower tax revenue target, the FBR will have to collect Rs1325 billion or 16.4 percent more in the second half.

Fifth, the re-emergence of circular debt to over Rs200 billion will be another point that will come up. After clearing the circular debt with Rs480 billion, the government was supposed to move towards eliminating the sources that caused circular debt to grow. The government increased the power tariff by an unprecedented proportion in one go without addressing the many loopholes that contributed to the upsurge in circular debt.

For example, little or no effort has been made to curb power theft, reduce technical losses, increase recovery of electricity bills (in fact, recovery has declined from 88 percent to 75 percent), stop free electricity provision to Wapda employees, undertake technical audit of power plants and, most importantly, to change the heads of Genco and Discos. Without addressing the core issues listed above, the unprecedented hike in power tariff was bound to give rise to circular debt. This was nothing but wrong sequencing of power sector measures in the IMF programme.

Sixth, given the revenue-expenditure trend emerging thus far, budget deficit may reach 7-7.5 percent in the current fiscal year. To achieve the budget deficit target as agreed with the IMF (5.5 percent of GDP), the government would have to cut the development expenditure drastically, ensure that it receives Coalition Support Fund from the US, and manages to sell 3G licences. If the last two sources of funds are not materialised, Pakistan may face serious budgetary problems even with drastic cuts in development spending.

Seventh, the PSEs continue to bleed and remain a heavy burden on the national exchequer, destabilising the budget and adding to public debt. The present government has embarked on an ambitious privatisation programme which is in danger and is likely to be derailed for two reasons: first, there appears to be little support for privatisation from the major political parties of the country. They will certainly oppose the privatisation programme. Second, the government itself will be responsible for its derailment.

For example, in an earlier article (October 15, 2013) I wrote very clearly that for transparent privatisation the government needs to strengthen the Privatisation Commission by inducting chartered accountants, legal experts, banking and financial sector experts, etc. To the best of my knowledge, no efforts have been made in this direction as yet.

I also wrote that the Privatisation Board must be strengthened with competent and professionally clean personalities and that the government must refrain from inducting those who are even remotely aligned with the ruling party. On the contrary, the government appointed all those as members of the Privatisation Board who are politically linked with the ruling party.

No matter how transparent the privatisation process may be, in the presence of a politically connected board, such transactions are liable to become controversial – particularly in the presence of a vibrant media and an active judiciary. The current Privatisation Board must be changed before any privatisation is undertaken. We will wait for the IMF to speak on this subject during the second review.

The author is principal and dean at NUST School of Social Sciences &

Humanities, Islamabad.

Email: ahkhan@nbs.edu.pk

http://www.thenews.com.pk/Todays-New...-second-review