Our political elite and civil-military establishments have demonstrated time and again extreme apathy towards the problems faced by the poor - there is a consensus that Pakistan is meant only for privileged classes and their cronies that include the clergy. This apathy becomes criminal when the economic plight of millions is worsening with every passing day, but the privileged classes, instead of paying their taxes are bent upon enjoying life at the expense of the poor.
Not only have our economic managers miserably failed to bring the country out of the prevailing economic crisis, they have even given up all efforts to do so. They are also violating commitments to the international lenders made at the time of agreements, especially with the International Monetary Fund (IMF) in 2008. The grim economic challenges - monstrous external and domestic debts of over Rs 13 trillion, rising fiscal deficit of over Rs 1.5 billion, just 8.5% tax-to-GDP ratio, inflation of over 15%, record unemployment of over 20%, just to mention a few - are still looming but the government is least pushed to take concrete and urgent measures suggested by experts time and again. On the contrary, the government is resorting to many unwise policies that may push the country towards total collapse.
It is revealed in a Press report of 13 August 2011 titled the 'IMF Programme: we tried, we failed, we give up' that "having failed to honour yet another agreement with the International Monetary Fund (IMF), Pakistan has abandoned its efforts to seek a restoration of the $11.3 billion bailout programme, which had been suspended last year". The report further claimed that Islamabad would no longer request the IMF to send a review mission, a preliminary step that could ultimately have led to the revival of the programme, after recognising the "harsh ground realities."
The decision, if taken, would further tarnish the image of Pakistan - already considered as an irresponsible State having no respect for rule of law. If this image remains, in the future, it would become almost impossible for Pakistan to seek any bailout programme from the IMF. It may be recalled that on November 24, 2008, the International Monetary Fund (IMF) approved the US $7.6 billion 25-month Stand-By Arrangement (SBA) for Pakistan, which was later on enhanced to US $11.3 billion. On September 15, 2010, the IMF Board approved a further US $451 million disbursement under the Emergency Natural Disaster Assistance framework to help Pakistan manage the immediate effects of the massive and devastating floods, and protect the most vulnerable."
In a Press Release (10/417) dated November 3, 2010, issued by the IMF after the visit of its Staff Mission to Islamabad, it was conveyed that the "Fund remains committed to the ongoing dialogue with the Pakistani authorities, and discussions will continue, including those around the Pakistan Development Forum to support Pakistan's efforts to strengthen macroeconomic stability and growth and completing the fifth SBA review."
The IMF expressed positively in November 2010, even after the government failed the two agreed deadlines of introducing the Value Added Tax (VAT): the first was 1st July 2010, which was later extended to October 2010. The government failed to impose VAT even in the budget 2011, which obviously annoyed the IMF and it suspended any further tranche. Pakistan also failed to meet many other obligations agreed with the IMF. After the FBR's figure fudging drama - brilliantly exposed by the media - our authorities cannot face IMF. This is perhaps the main reason behind the reported decision not to pursue the IMF programme any further. It is simply tragic - a heavy price that the nation has to pay for the FBR's follies.
We need economic reforms on all fronts to come out of the existing crisis. Even if IMF is not there, the fact remains that economic discipline is necessary for achieving macroeconomic stability. In 2008, the IMF imposed a number of conditions for its "generous" lending to Pakistan. The foremost demand was to impose VAT with effect from 1 July 2010 - the government after getting the VAT Bill approved from the Senate abandoned the idea for reasons best known to it. Even in the Finance Bill 2011, there was no mention of introducing VAT though our Finance Minister promised the IMF that the VAT would be imposed from October 2010. He sought time from the IMF for enforcing VAT and what happened afterwards is history.
In 2008, while accepting the demand for VAT, the IMF was not told that in Pakistan at least 100 million mobile users were paying 10% income tax and 19% sales tax on the gross amount spent on this facility, but the rich and mighty enjoyed exemption on their collosal wealth and agricultural income. The demand to introduce VAT from July 1, 2010 was avoided by the government under one pretext or the other. It resulted in the blocking of the tranche of $1.7 billion by the IMF and now the government has reportedly decided not to pursue it any further. It may be mentioned that after October 2010, the Finance Minister gave yet another deadline for imposing the Reformed General Sales Tax (RGST) - another name for VAT - to get the deferred tranche. He failed to do so even in the 2011 budget and the IMF refused to release the last tranche.
"We are incorrigible" is the final message to the IMF and others. We are telling them: "Sorry, we cannot reform ourselves." This is simply insane! Our rulers are plundering money from all sources-collected through taxes or obtained as loans.
The IMF imposed the following terms and conditions for the US $11.3 billion loan:
1. A 30% reduction in defence budget (over 4 years).
2. Downsizing of government and semi-government departments from 350,000 to 120,000.
3. Change in tax structure to increase general sales tax by Rs 50 billion in 2009 and implementation of VAT from July 1, 2010.
4. Agriculture tax of 7% on wheat production and 3.5% on other crops.
5. IMF to have official control on monitoring revenue collection and making changes in tax system whenever it wants.
6. Six IMF directors and two World Bank directors to monitor preparation of the federal budget of Pakistan.
7. The Pakistani government bound to report to the IMF all other loans negotiated with other countries (including China) 48 hours before signing the funding agreements.
The above conditions were welcomed by many Pakistani experts, especially who had worked in the IMF and the World Bank. They were of the view that such conditions could not be termed "dictations" - usually invented by so-called independent analysts in Pakistan. These conditions, in fact, were "beneficial" aimed at creating fiscal discipline - our rulers are notorious for violating all the established norms and regulations. "In our long association with the IMF, going back some 60 years, we have never completed a programme (except once), thus the country has one of the poorest implementation records in the IMF," said Meekal Ahmed. He lamented that despite the fact that the FBR had received more technical assistance and advice than any other government department, it had accomplished nothing.
Almost every expert has pleaded that for wasting borrowed money, the fault lies with Pakistan's ruling classes and not with the IMF or the World Bank. Had these conditions been implemented, Pakistan could have improved its financial governance, but funds were ruthlessly squandered by the elite. On the one hand, this nation has become heavily indebted and on the other, all systems have been further destroyed with unabated corruption, inefficiency and incompetency.
During the Musharraf-Shaukat era, economic managers were constantly telling lies to the nation that the begging bowl had been broken and all ties with IMF and other foreign donors were severed, whereas in reality, new loans for reforming tax, banking and the justice systems - just to mention a few - were negotiated with unprecedented vigour. The democratically-elected government of the PPP also decided to follow the same path. Their justification was that with the IMF loan, financial discipline and transparency would come - the result after over three years is diametrically opposite. It is a shameful attitude of our rulers that they are not ready to live within their means, and are dependent on the IMF and the World Bank even for the purpose of bringing transparency and fiscal discipline.
The experts, pleading for more taxes, also ignore the fact that real problems are: non-taxation of the rich and wasteful spending by the rulers. Under the existing inequitable system, the burden of taxes is less on the rich and more on the poor. Taxes, in the nature of full and final discharge of liability, are withheld even from those who have incomes below the taxable threshold.
These taxes cannot be termed income tax. These are transaction taxes or taxes on consumption. Being regressive in nature, such levies take a large portion of the income of the poor and a negligible part of the hefty income of the rich. These taxes make the rich richer, and the poor poorer.
The rich property owners and interest income earners pay their highest tax @ 10 percent on millions; while a salaried person having an income exceeding Rs 4.55 million pays 20%. A widow who receives Rs 300,000 from investment in government scheme (Bahbood (welfare) Certificates) - the money invested from gratuity and benevolent funds on the death of husband - is paying Rs 30,000 as income tax although basic taxable income for a businessman is Rs 350,000.
Any businessman or salaried person having an income of Rs 300,000 presently pays no income tax. What is the justification of taxing the widow for income which is below taxable limit? These are just a few examples. The entire system represents a distorted and punctured tax base.
Those having collosal income pay no tax or meagre tax and the poor are subjected to unjust taxes - 16% GST on many items they consume to survive. The impact of indirect taxes on imported goods, commonly consumed by all, is not less than 35% after adding all sorts of duties, levies, withholding taxes, and finally on an added up amount of 16% GST. This is not 16% on import value but after so-called value addition and grossing up of all taxes.
(To be continued tomorrow.)
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