The lender is always right

LAHORE: International Monetary Fund’s (IMF) conditions make some sense as they relate to the specific fiscal deficit targets. It is another matter that instead of taxing the rich we try to achieve fiscal and monetary stability by overtaxing the poor.

We rush to the IMF when our economy is in dire straits and we do it quite often. We agree to its tough conditions knowing well that every government that sought IMF help lacked the political will to implement them. In earlier engagements with IMF, Pakistani planners satisfied the donor agency by slapping indirect taxes for some time but never mustered the courage to take steps for a sustainable revenue growth.

The sustained growth would come through proper documentation and by treating all incomes equally. It looks unfair to demand tax on the rent collected from a property but do not tax the rent collected from agricultural land. What is the difference between the two?

The people of Pakistan are now afraid of IMF packages because it brings misery for the majority of them. The increased revenues come from increasing petroleum levies, jacking up power and gas tariffs and increasing the sales tax rates. Now these avenues of revenue increase have reached their limit. Sales tax rates have gradually been increased from 12.5 percent to 17 percent. The gas tariff has been doubled. The power tariff has reached a stage where it has become intolerable for domestic consumers and has made our products uncompetitive globally.

No government dared to achieve these targets either by taking some difficult decisions that would hurt the elite class. They find it convenient to burden the public with higher taxes on petroleum or increasing power and gas tariff. Economic sovereignty of the country is compromised in the IMF packages mainly due to the absence of political will of the government to take difficult economic decisions. It is unfair to blame the IMF.

No country could survive on revenues collected from only one percent of the population. It is next to impossible to run a government where traders and transporters get away with paying nominal tax. How can the revenues increase when the salaried class is the next highest taxpayer after the tax deposited by 100 corporate entities?

The IMF packages create uncertainty as the total amount of loan sanctioned is released in quarterly installments. Release of each installment is subject to the fulfillment of specific targets in that quarter. If the IMF does not grant waiver on slippage on targets the installment is not released and sends a bad signal to the investors.

In recent instances we have been pleading with IMF for numerous waivers as the government has now realised it cannot squeeze the common man further. Our government is at fault. It cannot hide behind Covid-19. It had committed to the IMF to reform the power sector. It assured them that loss-making government entities would be privatised. It gave a roadmap for it before signing it.

It is unfair to blame the former finance minister for a bad deal. There was nothing wrong in the deal. The government including its Prime Minister and governor State Bank of Pakistan were fully on board about the viability of that programme. The commitments made to the IMF needed the support of all ministries and not finance only.

The Ministry of Water and Power failed in its duty to improve the efficiency of the power sector. The line losses increased and recoveries of bills declined. The Ministry of Natural Resources and Petroleum failed to check the gas theft that leaves a big hole in the revenues. The Ministry of Privatisation failed to privatise any public sector company. The Ministry of Industries was helpless in checking the ever growing losses in state-run companies. The Railways, PIA and all power generation companies are few examples in this regard.

Let us admit that IMF conditions do make some economic sense as they ask for fiscal and monetary discipline. For decades the World Bank, IMF, and the Asian Development bank have been advising governments in power to expand the tax base and get rid of non-documented economy.

They however were forced to make a compromise when the governments in power expressed their reluctance to tax exempted sectors.

During the last two decades almost all increase in revenues has been generated by increasing levies and duties on petrol, diesel, phone calls, electricity, and natural gas. This impacted the poor more than the rich.

The value added tax as proposed in 1987 could have brought a visible change in tax culture had it been imposed in true spirit.