Economic challenges have grown bigger after the Panama papers verdict. The incumbent Prime Minister Shahid Khaqan Abbasi has given his vision to pursue both the reform agenda and continuity in policies with increased emphasis on broadening the narrow tax base - a pledge that may antagonise him with the business community that is already resisting the prevalent economic policies.
In his brief speech made immediately after winning the vote of confidence in the National Assembly last week, the new prime minister, whether for 45 days or the remaining nine months of the current PML-N tenure, said taxes will be recovered from all the potential tax payers.
No doubt Abbasi, who is considered one of the economic heavyweights in the government, looked determined when said he would not be compassionate and the taxation issue was close to his heart without which, he believed, the state cannot function nor any development take place. Nevertheless, he is understood to be facing vicious opposition from the business community largely the traders as was the case with finance minister Ishaq Dar.
This happened for the first time that the third PML-N government experienced tough criticism from the business community that was otherwise on the forefront to bring former prime minister Nawaz Sharif into power. Moreover, with the passage of time, differences between the government and the business community widened over various issues including the filing of tax returns that ultimately brought infamous withholding tax more vocally in the new budget.
Things began to get sour when the government introduced harsher methods to enforce tax laws particularly against non-filers, and elaborately taxed the real estate sector.
Ishar Dar has again named as the finance minister in the new cabinet. Now it is to be seen how strictly Dar takes up his job and implements the taxation policy.
There is an emerging view that the economy has suffered another political uncertainty following the ouster of the prime minister by the Supreme Court. International credit rating agencies including Moody’s Investor Services are not assessing the current situation in Pakistan, favourably. Their assessment is not conclusive but they do warn that this could lead to downgrading of Pakistan’s current credit rating.
“If heightened political uncertainty and strife among various branches of government disrupt the administration’s economic and fiscal agenda, macroeconomic stability and the government’s access to external finance could be impaired, weighing on Pakistan’s credit rating profile,” Moody’s Investor Services said last week. It suggested that Pakistan faces problems in obtaining foreign inflows and that the existing political uncertainty must go to implement the economic agenda jointly proposed by both the government and the international financial institutions (IFIs).
The assessment of the New York-based credit rating agency, which is often followed by other such agencies, had affirmed Pakistan’s B3 rating and maintained a stable outlook in July this year with important caveats, “any material widening of fiscal deficit, renewed weakening of the external payments position, loss of multilateral/bilateral financial support, or significant escalation in political tensions would also weigh on Pakistan’s credit profile”.
Sadly, the Federal Board of Revenue (FBR) has continuously fallen short of its ambitious collection aims, and successive governments failed to achieve annual targets after offering relief to various sections of the society.
FBR chairman Tariq Bajwa admitted the other day that the government missed its 2016-17 revenue collection target due to extending Rs170 billion worth of tax concessions. This was the reason, he said, the FBR collected Rs3.362 trillion by June 30 this year against the collection target of Rs3.621 trillion; a shortfall of Rs259 billion. He told the Senate Standing Committee on Finance that the FBR took a hit of Rs111 billion due to the government’s decision to not increase the prices of petroleum products. The government also offered Rs16.5 billion relief by reducing sales tax on fertiliser, Rs11.5 billion relief to the former prime minister’s textile package, Rs28 billion relief due to zero-rating of five export-oriented sectors and Rs2.7 billion relief to pesticides.
Interestingly, Bajwa said ‘no’ when the senators questioned him whether the finance ministry considered negative implications of Rs170 billion tax relief while revising downward the tax collection target to Rs3.521 trillion. But he did concede that FBR revenue collection target of Rs3.362 trillion was higher by 8 percent over the collection made during the preceding year.
Officials of the FBR invariably accept that the revenue collection through controversial withholding tax regime, though is automatic, it is not collected efficiently because of not having a better monitoring system.
Part of the problem is that no civil or military government devised any coherent tax policy for the corporatisation of businesses to achieve improved economic growth. Since no effort was made in the past to tax all segments of the society particularly by discouraging the informal economy and fixed revenue collection, targets were never achieved.
Tax net cannot be broadened without offering a better investment climate and fair governance.
There is no denying the fact that the third PML-N government got tough against its own favoured business community, whose leaders had always helped Nawaz Sharif come into power, by cracking down on tax evaders and no tax filers. This greatly irked the Federation of Pakistan Chambers of Commerce and Industry and its outfits. Those who thought that the new administration of Prime Minister Abbasi would change the stance, were disappointed when they heard him saying in the parliament that taxation would be his foremost priority.
Over the years, the country’s revenues and debt, especially external debt, remained two key challenges that could not be met adequately while declining exports also became a big hurdle to manage any potential growth needed to turnaround the struggling economy.
The PML-N government obtained $35 billion worth of loans in the last four years, including $10 billion for repaying the old debt and the remaining to bolster fragile exchange reserves standing at $16 billion, excluding $5 billion of the commercial banks.
Does the new prime minister have any plan to increase exports which came down to $20 billion and are just 6.7 percent of the total size of the economy? How would he manage $12.1 billion current account deficit? Is there any new strategy to increase foreign direct investment? Is it true that current tax incentives are not enough to lure FDI?
Foreign investors, it is generally observed, are shy of investing because of not having transparent and consistent policies and because of decaying infrastructure and energy shortages in terms of cost of doing businesses; also proposed by the World Bank. The issue gets compounded when the foreign investors seek arbitration for settling disputes in the international court and similar other forums. There are said to be many disputes worth $5-8 billion in various international dispute resolution courts.
On top of all this, the government’s efforts become zero when there is no effective mechanism to curb mounting corruption, which $4-5 billion a year in Pakistan.
The list of challenges is pretty long and requires consensus among all the political players for plausible success. Perhaps a new Charter of Economy (COE), as proposed by finance minister Dar on the pattern of Charter of Democracy (COD) can be made. The economy is suffering due to the indifference of all the political players, and this demands attention of all, including the military establishment and the superior judiciary.
This also requires preparing irreversible long term policies that implemented robustly with strong political will to attract local and foreign investors for transforming key economic indicators. The job could be supervised by a board, comprising official and unofficial experts who should be honest, dedicated and well versed in the subject. Once this is done, there will be real economic turnaround.
The writer is a senior journalist based in Islamabad
