Money Matters

Cure the ills

By Mansoor Ahmad
Mon, 06, 22

The need of the hour is to start living within our means and generate resources locally. Even a penny of wasteful spending must be stopped. The huge fiscal deficit is not sustainable. Lavish imports deplete our foreign exchange.

Cure the ills

The need of the hour is to start living within our means and generate resources locally. Even a penny of wasteful spending must be stopped. The huge fiscal deficit is not sustainable. Lavish imports deplete our foreign exchange.

Pakistan is facing dire straits due to the balance of payment crisis, falling foreign exchange reserves, free-falling rupee and meagre exports due to industrialisation growing at a snail’s pace. To go for rapid industrialisation, the government needs both local and foreign investment.

Pakistan’s foreign direct investment dropped five percent to $1.597 billion in the eleven months of this fiscal year, central bank data showed last week. In May 2022, FDI saw a net inflow of only $141 million, compared with an inflow of $199 million in the previous month, down 29 percent year-on-year and 17 percent month-on-month.

Similarly, the country’s tax to GDP ratio is too low to generate enough revenues for the state. Something that has also been raised by the International Monetary Fund. The low tax to GDP ratio speaks volumes about tax evasion in the country.

All over the world, tax revenues remain the main source of governments’ spending capacity. The Federal Board of Revenue’s failure to raise Pakistan’s tax-to-GDP ratio beyond 9 percent to 12 percent shows the state would always face constraints when investing in essential public services, and finance economic and social development. It is this lack of access to revenue that has forced successive governments in Pakistan to take loans for their burgeoning expenditure and development projects.

Delivery of quality health care and education are other factors adding to the woes of the country. The schools imparting no knowledge to students and hospitals not serving the ailing humanity give a good picture of mismanagement in our education and health system.

The highhandedness of police force, the delay in the justice system tells us about the deterioration of our moral values with provision of justice for all a distant dream.

Amidst all these ills, our society respects men with money. It matters not how that money was accumulated and whether the means of earning that money were fair or unfair.

In such circumstances, an honest grade 19 government servant living within his means draws no attention in the society, but a junior employee of grade 10 amassing fortune through rent seeking and corruption is respected and honoured by all and sundry.

These and numerous flaws in our society are the reason behind the current turmoil Pakistan is facing. The writ of the government is very weak.

Unlawful acts like tax evasion, smuggling are tolerated. Our justice system is so lopsided that a poor person, who steals Rs100 is prosecuted, but a smuggler who cheats the national exchequer of millions of rupees every month is not touched.

The poor person lives in constant fear of prosecution on societal level as well, while the smuggler thrives.

We need to address all these ills to take Pakistan to the next level. Smugglers marginalise domestic industries if they bring goods that are produced in the country. In case the goods are not produced locally they deprive the exchequer of tax revenue.

Those that indulge in under-invoicing are smugglers of lower order as they also put pressure on local industries and steal taxes. Those involved in under-reporting their production also come under the same category.

It is not possible to control under-invoicing and under-reporting without taking strict action against officials involved. These two are a major source of customs duty and tax leakages in the absence of effective measures to curb or minimise these malpractices.

Due to growing mis-declaration of commercial imports, it was proposed four years back to link the Pakistan Customs with China Customs. Some initial work was undertaken by the customs department but nothing happened.

Controlling these unlawful acts is not rocket science. These ills can be controlled through technology and technology-based surveillance. However, this will hurt most of the vested interests in the country, some of which are revered by the society.

IPSOS, a global leader in market research, in its study on tax evasion in the tobacco, tyres and auto lubricants, pharmaceuticals, and real estate sectors, stated that six percent of Pakistan’s GDP was stolen, while the shadow economy accounts for about 40 percent of GDP. The annual volume of tax evasion in these sectors was put at around Rs310 billion. This includes tax evasion of Rs35 billion in illicit tea trade, Rs80 billion from tobacco, Rs90 billion from tyres and lubricants, Rs45 billion from medicines, and Rs60 billion annually from the real estate sector.

The state has to muster the courage to confront them. But the point to note is that there might be some elements that are part of the government. If the state spares them, there will be no chance of improvement. Half of the fiscal deficit would vanish if these businesses were apprehended.

Some fear that if under-invoicing or smuggling are curbed, the prices would rise. This is not true. Those indulged in under-invoicing or smuggling buy the items at the same price at which an honest importer buys.

They simply avoid the government levies. Smugglers and importers that indulge in under-invoicing, market their products at almost the same price at which honest businessmen sell their products. Apprehending unethical businesses would increase revenues, increase local production, and increase employment.

At the same time, the federal government must further reduce its expenses by flat 20 percent. It should improve governance to a reasonable level that would reduce the expenditure by another 20 percent. It must reduce the fiscal deficit by Rs1 trillion this year through these measures and increase the targeted revenues by 10 percent.

– The writer is a staff member