Institutions must be strengthened to achieve budget targets

LAHORE: Budget targets are no doubt ambitious, but to expect these targets can be achieved through weak institutions is overly ambitious.

Strong institutions are vital in implementing the policies of the state in letter and spirit. Pakistan has never embarked on a sustainable growth path despite having a liberalised trade regime in the region mainly due to weak institutions. To achieve its revenue targets the government will need prudent cooperation from almost all institutions.

To arrest tax evaders, smugglers and hoarders, the Federal Board of Revenue (FBR) will need the help and full cooperation of law enforcing agencies. The police are such that the person to be arrested can get warned beforehand, allowing him to escape.

Similarly, to apprehend power and gas thieves, a strong and willing police force is needed. Have we strengthened the police in all provinces? Would the police working in provinces, ruled by the opposition cooperate with the tax collectors?

We have already seen that the provincial administration in Sindh frustrated the efforts of the federal investigation agencies to gather evidence in fake accounts case. The federal government was ultimately forced to get that case transferred to Islamabad.

The FBR in itself is also a very weak institution. Corruption is a norm in most of its offices. Moreover its strings are always controlled by the ruling party. The laws are formulated and FBR is legally empowered for raids and other actions against tax defaulters and evaders, but its wings are clipped through executive orders that forbid the FBR officials to use these powers freely.

FBR officials for instance were authorised to raid the residences to unearth hidden wealth and foreign currency; but now they have been asked not to raid residences as it violates the privacy of citizens.

The FBR is also subject to political pressures. Its action against the sister of prime minister on accumulation of huge foreign assets left much to be desired. To achieve the ambitious revenue target, the tax collectors will have to nab anyone involved in concealing wealth without sparing anyone.

The courts would have to be proactive and prompt in disposing of all cases pertaining to financial matters. If stays have to be given they should not be for more than a week. There should be no adjournments to ensure prompt verdicts. Any delays in deciding the cases on one pretext or the other benefit the defaulters and culprits.

Take for instance the case of Ittefaq Foundry that was handed over to the state to recover around Rs2 billion bank defaults of the owners. The case lingered for over 15 years. By that time the value of the real estate of the mills increased six-fold. The defaulters were the winners, as after handing over the defaulted amount plus nominal penalty, the owners got five times more than the amount they defaulted on.

Does the government have the confidence in its investigators to come up with concrete evidence before filing cases against ill gotten money makers? Judges would neither give adjournment to the government or the accused in order to decide the cases promptly. Will the government be able to convince the judiciary?

Institutional capacities depend to a large extent on the ability of institutions to deliver according to the mandate provided by the state. Performance of many economies reveals that not only democratic governments, but authoritarian regimes with strong rule of law can develop efficient institutions that ensure sustainable economic growth.

It is not simple to measure the efficiency of state and non-state institutions. The level of documentation in a country provides a clue about the performance of state institutions. In case of Pakistan, the collapse of the institutions is observable in the dramatic increase of the share of the shadow economy. This is clear from the decline of government revenues as a proportion of GDP.

Another sign of weak institutions is the inability of the state to deliver basic public goods and appropriate regulatory framework; the accumulation of tax, trade, wage and bank arrears are also signs of weak institutions.

Successive governments have been afraid of restructuring due to already present market imperfections, which could results in temporary loss of output. This government has the courage to bear temporary decline in production, but to move ahead it needs to strengthen the institutions.