Bailout or deathblow

February 19, 2023

There is a pressing need to overhaul the inefficient tax machinery

Bailout or deathblow

In less than a month, Pakistan’s currency has lost more than a quarter of its value against the US dollar, and fuel prices have risen by almost a fifth as the government has implemented fiscal measures that were a prerequisite to unlocking funds from an International Monetary Fund bailout, said Reuters in a report titled Coffee trumps economic crisis as Tim Hortons opens in Pakistan.

The International Monetary Fund mission on the completion of its visit (January 31 to February 9) for discussions under the ninth review, observed, “Considerable progress was made… on policy measures to address domestic and external imbalances.” The end-of-mission press release, welcomed the “Prime minister’s commitment to implement policies needed to safeguard macroeconomic stability...”

The press release mentioned progress in key priority areas that “include strengthening the fiscal position with permanent revenue measures and reduction in untargeted subsidies, while scaling up social protection to help the most vulnerable and those affected by the floods.” The steps required and appreciated by the IMF include “allowing the exchange rate to be market determined to gradually eliminate the foreign exchange shortage and enhancing energy provision by preventing further accumulation of circular debt and ensuring the viability of the energy sector.”

The IMF mission stressed that “timely and decisive implementation” of these policies were “critical for Pakistan to successfully regain macroeconomic stability.” Responding to it, the alliance government of Pakistan Democratic Movement on February 14, imposed, through a notification issued by the Federal Board of Revenue, taxes worth Rs 115 billion, after the president’s refusal to sign an ordinance containing fiscal proposals of about Rs 500 billion (annual impact). The president’s refusal forced the government to convene a joint session of the parliament on February 15, for approval of all tax proposals.

According to a report, the PDM government on February 13, informed the IMF that it was going “to lay down the tax proposals before the federal cabinet” on February 14 “to get its final nod in order to fetch additional taxation of Rs 170 billion through a presidential ordinance.” The report added, “…the IMF wants permanent taxation measures, so the government will have to slap massive taxation having an annualised impact of Rs 500 billion…”

On February 13, the cabinet’s Economic Coordination Committee approved “raising of gas tariff for domestic, bulk, commercial, export-oriented industries and CNG sector in the range of 17 to 112 percent for different categories”. Increases in prices of electricity, diesel etc are on the cards. These will further push inflation and the cost of production.

Our rulers since 1960s have had an addiction for foreign loans, especially IMF bailouts – many call these death-blows. With every loan come certain conditions — ostensibly meant for economic revival/ reform. Every time these leave the common man in deeper economic misery. This undesirable trend has continued unabated during the regimes led by the Pakistan Peoples Party from 2008-13, the Pakistan Muslim League-Nawaz from 2013-18 and the Pakistan Tehreek-i-Insaf from 2018 to 2022 and by the PDM government since April 10, 2022.

The PPP signed an $11.3 billion stand-by arrangement with the IMF in 2008. It received disbursements of about $7.6 billion but failed to receive the remaining $3.7 billion due to performance lapses, leading to suspension of the programme in May 2010, culminating in an unsuccessful ending on September 30, 2011. The main responsibility for the failure was attributed to Dr Abdul Hafeez Shaikh, the then finance minister, who later held the same portfolio under the PTI government in 2019.

The PMLN government set new records for borrowing, internal and external. On September 4, 2013, the PML-N through its finance minister, Ishaq Dar, now holding the portfolio for the fourth time, signed a fresh loan agreement for $6.7 billion with the IMF. Jubilation over further indebtedness received a jolt when the IMF decided to disburse only $547 million as first tranche, much less than what Dar was expecting. For the release of the remaining amount, the government accepted tough conditions (like it did on February 9, 2023).

After the PPP and PMLN led governments had availed of the IMF programmes, our economic woes continued. The situation worsened under the PTI government as IMF’s Staff Report issued shortly after completion of the Sixth Review indicted it for failing to implement the programme. The PDM government completed the combined Seventh and Eighth Reviews and secured a disbursement of $1.1 billion, with more stringent conditions.

Independent critics say that our inept rulers fail to undertake fundamental structural reforms and implement the prescriptions of the IMF, the World Bank and other donors, who are least pushed about the inequitable character of our tax system, under which the burden of taxes is less on the rich and more on the poor. While the rich remain outside the tax net enjoying unprecedented exemptions, the poor are now subject to an exorbitant 18 percent sales tax, even on items of daily use.

We need to overhaul the inefficient tax machinery. If we manage to collect an additional Rs 8 trillion over the next three years, the country will not require fresh loans. Collection of taxes at this level can eliminate budget deficits and enable us to retire debts. For this, the FBR should be insulated from all kinds of political, financial and administrative pressures. At the same time, it should not assume the role of legislator and policymaker; which, under the constitution is the sole prerogative of the people of Pakistan through their elected representatives.

The appointment of chairman and members of the FBR should be through a public hearing by a joint select committee of the National Assembly and the Senate.

The federal government must reduce its monstrous size and earmark revenues for debt retirement, creation of employment zones and provision of social services. This will inspire the people to contribute to the national exchequer. This is the only way to mobilise revenues through voluntary compliance, making taxes simple and low-rate and at the lowest possible cost. Simultaneously, the provincial governments must slash their administrative expenses by at least 30 percent. All perquisites admissible to civil-military bureaucracy and the judiciary should be monetised.

State lands, lying unproductive or occupied by elites, should be leased out for industrial, business and commercial ventures. This will generate substantial revenues and help in rapid economic growth. On the other hand, imposition of more oppressive taxes is detrimental for inclusive development. The root cause of our major problems is inefficient and corrupt governments and huge spending on luxuries. The only solution is a dismantling of the elitist structures and state capture by vested interests through empowerment of masses at grass roots level by implementing Article 140A of the constitution in letter and spirit.

The writer, an advocate of the Supreme Court, is an adjunct faculty at the Lahore University of Management Sciences (LUMS) and a member of the Advisory Board and a Visiting Senior Fellow of the Pakistan Institute of Development Economics (PIDE) 

Bailout or deathblow