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April 26, 2019

Growth vs inflation: New finance manager in old catch-22


April 26, 2019

LAHORE: Advisor to Prime Minister on Finance Dr Abdul Hafeez Shiekh is an ardent supporter of equitable taxation and he had publically assured in his previous stint as finance minister that every effort should be made to bring the evaders into tax net.

He had expressed this resolve in a speech at a pre-budget seminar on May 22, 2011 held at Lahore. Eight years down the line equitable taxation is still a dream. Under current circumstances he would be forced to make taxation more inequitable.

Eight years back he said changing the current governance pattern in Pakistan is difficult; however a steady progress in this regard is going on. Now he will realise that status quo has been stubbornly maintained. The state apparatus still dominates the society in Pakistan and the cumbersome rules that give the bureaucracy an upper hand are still there. Dismantling the hold of bureaucracy on rules needs active participation of civil society that has unfortunately not been provided.

During his tenure as finance minister he used to lament that agriculture tax was a provincial matter; however, the federal government can collect this tax on behalf of the provinces if they so desire and authorise it to collect and deposit it in their accounts. Eight years later it has been confirmed that provinces want their taxes to be collected through their revenue authorities. The other alternative was to amend the constitution giving the federal government the authority to collect income tax on agricultural income. No government dared transfer the provincial authority to the federation through legislation. So there are no chances of increasing revenues through agriculture tax.

Nothing has changed in the last decade. The country was at war or in preparation of war throughout its history having grave consequences for economy and for allocation of resources for other sectors. In his words budget is not made in vacuum as planners have to strike a balance and look in the eyes of powerful to deny their demands. Moreover taxpaying culture has not yet developed in Pakistan. The advisor can understand the state of economy within no time as nothing has changed in principle, things have only worsened.

Political instability accompanied with unstable economic policies has denied the country an opportunity for sustained growth not only in the past but even today. When he was the finance manager in Pakistan People’s Party (PPP) era, the share of the provinces in the federal tax revenues was much lower even then he complained that budget making has become more difficult for the government after parting with provincial share. Now the share of provinces in federal tax income is much higher.

With the balance that is left with the federal government cannot cover even the debt servicing and defense expenses. The solution lies in increasing the tax revenue but even if he succeeds in levying new taxes amounting to Rs600 billion, the 59 percent of it would go to the provinces and the federation would be left with hardly Rs250 billion. The terms of trade have changed as many sectors of economy having tax potential are under the domain of provinces. However the federal government has to bear the brunt of expenses that have increased like in defense spending, debt servicing and subsidies of power and food.

This problem needs solution which can only be possible through cooperation of all provinces. As of today the federal government is at loss on how to give additional resources to Khyber Pakhtunkhwa after Federally Administered Tribal Areas merger. Sindh is not prepared to part with its share. Political polarisation in Pakistan is at its peak and consensus in this regard seems impossible. It would be worth seeing how the new financial wizard tackles this issue.

Last time around he had claimed that the Federal Board of Revenue had been given full autonomy to nab evaders irrespective of their status. He had also said the then FBR chairman had transferred 100 influential officials and no pressure was exerted on him to cancel even one transfer. That autonomy did not work then and would not work now until a transparent system of accountability of tax officials was in place.

He may be able to stabilise the rupee after the International Monetary Fund (IMF) program, but inflation will remain a major concern for the federal government. The expected harsh conditions of the lender of the last resort would inflate the prices pushing the inflation rate to may be unprecedented highs. Now the question is: would he be able to check inflation without further slowing down growth?

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