Daily printing of Rs 2,000 million notes: grave challenges and positive responses

Currently the government is solely dependent on the State Bank of Pakistan for running its day to day affairs. If the SBP refuses to print and provide loan of Rs 2,000 million daily, the government machinery will come to a halt. In December 2010, Governor, SBP for the first time in history, publicly complained that the government was forcing it to print notes at an alarming rate.
He said that between June 2010 and November 2010, the government borrowing increased from Rs 1,200 billion to 1,500 billion or 300 in 150 days. If you divide Rs 2,000 million by 170 million people of Pakistan, it translates to Rs 11.70. This is the amount of money, which is being taken away from every Pakistani's pocket every day.
When we entered the IMF programme in November 2008, the government's borrowing from SBP was Rs 700 billion. We promised to bring it down to nil within a year. By March 2009, it reduced to Rs 350 billion. However, to everyone surprise the borrowing increased to Rs 1,200 billion by June 2010. Both the embarrassed Governor of State Bank and Finance Minister quietly left the government. They failed in their public duty to warn of the dire consequences of this development on poor people of Pakistan. It is under this background the current SBP Governor has spoken out. This is a very encouraging development and from now on wards people should follow State Bank activities closely as done else where in the world.
For the first time, a high ranking government official acknowledged the close link between currency in circulation and inflation. He said that rising inflation was mainly due to rising currency in circulation. As an excuse, he mentioned that if the SBP refuses to give such loan, the government will borrow from commercial banks and that would still cause inflation. As an economist, he knows that this is not true and he has said this to cover up. Borrowing from commercial banks is against deposits, thus not inflationary while borrowing from the SBP, which does not have any deposit, is by printing fresh notes and thus inflationary. In the first case, there is a transfer of purchasing power from depositor to government, while in the second case, new purchasing power is introduced in the market leading to general increase in all prices and goods and services remain the same while the number of currency goes up.
The SBP Governor's attempt to gain public support is most welcome and we should let him that support on the same line as we did to boost the authority of the Chief Justice. Rallies and marches in his favour should be brought out and he should be encouraged to refuse to print more notes. He should be asked to exercise the power which has been given to it by parliament in 2010. The SBP is now fully independent constitutionally and now it is a matter of using this power by its Governor.
With the matter in Public and given the strong stand taken by the IMF in coming days, it will become difficult for the government to borrow more from the SBP. This combined with current political turmoil the prospect looks bleak. Given the PML-N deadline and agenda a shake up is imminent.
For the benefit of the new set-up, which may emerge, I detail below my recommendations which can be implemented immediately with the current financial constrains. What is required is love of the people of Pakistan and clear sense of purpose.
Possible responses by govt
Desperate situation demands desperate measures and I suggest the following:
-- Increase tax collection from Rs 1trn to 5trn:
Based on tax collection record during British rule when huge surpluses were earned and sent to UK, it is easy to see that our tax collection has dropped substantially since independence. This was mainly due weak moral base of our Tax Officers and checks and balances as it existed in pre independence time. If there is no hope of find honest officers locally and foreigners would not like to come under the given circumstances. The only option left to increase the tax collection substantially is by tendering out the Tax Collection system to private cos. That is giving out Tax collection to a private Group on a fixed amount of say Rs 3 to 5 trillion compared to current collection of Rs 1.3 trillion.
-- Cut Civil and Military salaries and perks by 50%
A revolutionary cut in government expenses is imperative. Sighting the low collection and incoming restriction on further borrowing from the SBP, the government must either reduce the number of ministers and government employees including that of armed forces, by say half or reduce their salaries and perks by half. This should also apply to MNA and MPAs. If they do not like their new salaries; they may resign. The country can not pay them well by starving the common people.
- Redistribute land to give relief to poor in rural areas
The MQM has come up with a Land Reform Bill calling for maximum ceiling of 36 acres irrigated and 54 non-irrigated per immediate family. The ANP's manifesto calls for maximum ceiling for 50 acres per extended family as defined by NADRA. The PPP carried land reforms in 1972 to bring down ceiling to 150 acres irrigated. It further attempted reform in 1977 to reduce ceiling to 100 acres, however, it has not been implemented yet.
The PPP, MQM and ANP should join force and agree to a compromise level, say 50 acres irrigated per extended family and redistribute land to end poverty in rural areas of Pakistan. This will mean end to 60% poverty in the country and would cost noting rather improve tax collection as new lease may be given at a higher rate. It will also boost production as current unused land will be brought under cultivation and more attention will be paid by small landholders as compared to large ones.
-- Remove 'indirect taxes' on items used by common man:
-- Remove all sales tax on electricity and gas.
-- Remove oil and gas development surcharges on petrol, gas, diesel and furnace oil.
-- Remove all customs duty on: Edible oils (between 9,000 to 16,800 per metric ton), Sugar 10%, salt-20%, pencilline-25%, bandages 20%, cigarates-35%, wine and beer-90% and all other items used by the common man. All sales Tax and Excises duties on these items can also be removed. This will immediately bring down prices of these items and provide relief to the poor.
Tax the rich heavily
The lost revenue could be recovered by imposing 'Wealth Tax' of say 2% on all wealth over Rs 5 crore can bring in Rs 65 billion, thus removing the need for RGST. An 'Inheritance Tax' at the rate of 40% as applicable in Iran can bring in over Rs 1000 billion a year and help us remove all 'In direct taxes' listed above. This will also rapidly reduce the huge gap between rich and the poor in the country and much sought after social justice objective. The exception on agricultural income should also be removed to improve the direct tax collection. Equitable tax on large houses according to size, shops according to size, cars and motorcycles, depending on CC, heavy taxes on all luxury goods etc.
Sell all armed forces land in cities
Like rest of the world, military installation should always be away from civilian areas for political as well as security reasons. Therefore, we propose that all military installations in cites may be moved to remote areas. All military land in the cities be auctioned through a transparent manner as in practice in Hong Kong and Singapore. This can generate estimated Rs 50 trillion. This can solve all current financial problems of the country.
Out of this, Rs 10 trillion can settle all our internal and external debt removing for ever 1/3rd expenditure of our current budget. A sum of Rs 10 trillion can take care of the need to create state of the art military installations, Rs 10 trillion, if kept on deposit of 10% per annum can generate Rs 1,000 billion pa which more than double of current military expenditure of Rs 450 billion. It will also mean elimination of further 1/3rd expenditure of the budget for ever.
The remaining Rs 20 trillion may be used to uplift the society in general and remove poverty rapidly. As a priority we may agree to the following national duties:
-- Provide clean drinking water to all Pakistanis to reduce diseases by 40%.
-- Make sure every Pakistani gets 2,200 calories everyday.
-- Make sure every Pakistani is educated up to class VIII to be familiar with basic science, English, maths, besides religious education to become part of world workforce.
-- Make sure that every Pakistani child receives all immunisation and every mother gets proper care before and after birth of the child.
Make peace with India and open all old trade routes
Make peace with India; with some adjustment in Kashmir borders, to concentrate energy on poverty alleviation and developing our part of Kashmir. Opening of two trade routes in Kashmir is the model, which is needed to be adopted in Punjab and Sindh as well. In Punjab, Sialkot and Kasur trade route need to be opened as soon as possible. More may be considered. Similarly in Sindh, three to four trade routes should be opened to alleviate poverty in area like Tharparker where Nager Parker was an important trading post. After Pakistan trade continued on lower scale up to 1965, but after it died down and added to the poverty of the people in the area. Such opening will provide major relief to the people of Sindh as they will be able to travel to India inexpensively. Given the large Rajasthani and Gujarati communities in Sindh, this will give a big boost to Thar as people will transverse it for travel to India.
Other points, which may be considered, are Musafir Khana, Rahim ki Bazar, Gadro and Vira Wah. These were natural trading post in the past.
Fast track Safta implementation
Safta agreement under Saarc calls for free trade between members by 2013. However, Pakistan happens to be the main hurdle in its implementation. The new step may change this and remove all hurdles to its implementation in the interest of people. Any pressure from vested interest may be brushed aside.
Energize and expand Saarc movement To gradually build a common market from Afghanistan to Myanmar (Burma). With such ease of movement that borders will not mean much to be followed by a common currency. This will create the largest market of the world, comprising 1.4 billion people. This will usher in an era of prosperity in the region not seen since 1750s.
Remove all barriers to the working of market forces of demand and supply Adopt a small government attitude and let market forces play their role. Only ensure that no group is able to control and market to make extraordinary profit and all market participants are provided level-playing field.
Introduce death penalty for taking bribe as is practiced in China Introduce very harsh property confiscation law for people found guilty of taking bribe or involved in making money by illegal means. The law should cover property in the name of all dependents like wife and children.
Create two free economic zones in each province Such zones should have their own simplified laws and provide one window service to investors. Like China, these zones would become powerful economic engines of the country and absorb surplus labour and alleviate poverty.
Create additional provinces Also relocate the Federal capital to a more central location. The new provincial capitals should also be in central locations.
Restore 5% locals' rights This right was granted by the act of 1935. Such right is still available in India and Bangladesh. The denial of this right after discovery of gas in Sui is the rootcause of Balochistan problem.
Absorb FATA and PATA into Pakistan After 9/11, Pakistan is left with no choice but to absorb FATA and PATA into Pakistan and apply the same security arrangement as in existence in Balochistan. Create a federal mortgages agency Agency to refinance property development. Such an agency transformed in the US after its creation in 1954. The present standard of living in the US would be unthinkable without such agencies. Such Agencies can raise unlimited funds from the international market.
Start a mandatory saving scheme for overseas Pakistanis Linked with passport renewal, such a scheme can generate some 4 billion dollars annually and provide support to Pakistan. It can also secure the future of overseas Pakistanis, who otherwise end up spending all their savings on consumption items.
Let Iranian oil come Look other way and let the cheap Iranian oil flow into the country unhindered, to save foreign exchange and reduce inflation.
(The writer is President, Overseas Pakistani Investors Forum.)