Economic reforms

EDITORIAL: The latest salvo to the country’s leadership urging them to tax the rich and provide subsidies only to those who need it was hurled by the Managing Director of the International Monetary Fund (IMF) Kristalina Georgieva during her interaction with German news agency Deutsche Welle.

In 2010, thirteen years ago, the then US Secretary of State, Hillary Clinton, went on record to state that “Pakistan cannot have a tax rate of 9 percent of GDP when land owners and all the other elites do not pay anything or pay so little it’s laughable, and then when there’s a problem everybody expects the United States and others to come in and help.”

The others, notably China, Saudi Arabia and the United Arab Emirates, have emerged as the country’s major lenders while reliance on external funding has continued unabated reflective of the psyche of all subsequent governments.

This is evident from the following data: total external debt was 55.9 billion dollars in 2010 as per the government publication Economic Survey 2011-12 and at present is 126 billion dollars, as per data uploaded on the State Bank of Pakistan website.

It is this profligacy (reflected by a steady rise in current as opposed to development expenditure that includes subsidies to the elite either out-rightly in terms of export subsidies or subsidies on utilities) coupled with a tax structure heavily reliant on indirect taxes (be it on utilities, fuel or other items, which as per data released by the Federal Board of Revenue (FBR) accounts for over 75 percent of all tax collections today) that may finally be the last straw before legitimate public discontent spills out on the streets.

Disturbingly, the latest example of such flawed and inhumane policies is the ‘mini-budget’ that was tabled by the Shahbaz Sharif-led government on 15 February which envisages more of the same – higher tariffs, higher fuel charges, higher indirect taxes.

The fact that Georgieva made her damning comments a few days after the ‘mini-budget’ was tabled in parliament, is perhaps indicative of the fact that the Fund rightly does not consider these measures appropriate or indeed able to set the country on the path to the urgently needed reforms that alone would not only arrest but also reverse the prevailing economic impasse.

Bilawal Bhutto-Zardari is on record as having stated that the government must ensure that lower income groups employed in the private sector are protected.

There is a need to urgently revisit the ‘mini-budget’, which seeks to pass the onus of poor performance of the FBR (through raising reliance on the low-hanging fruit which effectively has implied higher sales tax or withholding tax in the sales tax mode) and the appallingly run power sector (reflected by the circular debt of 2.5 trillion rupees) on to the general public through higher tariffs.

This must change and one would hope that a committee be set up that would review the ‘mini-budget’. It is relevant to do some out of the box thinking and for this it is not necessary to induct more analysts or economists into the policy formulating exercise but to look at all the reports containing specific recommendations that are gathering dust in all relevant ministries, including the FBR and the power sector.

The elite in Pakistan can be defined as (i) rich landowners sitting in our assemblies supporting the continuation of policies that benefit them personally; (ii) those operating in the private sector, or those businesses operating under the protection of powerful stakeholders, who influence policy either directly through their long-standing contacts with those in power or through threat of strike action via powerful trade associations that are evident in nearly all areas of economic activity in the country including cement, textiles etc; and (iii) the elite in civilian and security establishments as well as some members of the judiciary who have amassed fortunes during their service partly due to the policy to provide them with plots of land at a fraction of their market cost on retirement, partly due to other abuses, including abuse in procurements.

There is, therefore, a need for the government to not only end all perks and privileges, including the policy of giving plots on retirement, but also to demand that the elite begin to pay their due share.

Georgieva further stated what “we are asking for are steps that Pakistan needs to take to be able to function as a country and not to get into a dangerous place where its debt needs to be restructured” – a statement that is at odds with the ongoing discussion in the country that subsequent to the success of the ninth review the government would initiate talks on debt restructuring.

Pakistan needs to slash current expenditure (including all perks and privileges to the elite and launch the pension reform plan) by at least 2 trillion rupees and channel all subsidies through the Benazir Income Support Programme (BISP), a decision that would increase our leverage with the Fund and other donors.

Without these drastic and urgently required measures neither the international lending agencies/bilateral donors nor the general public are willing to provide any further breathing space to the government.

Copyright Business Recorder, 2023