Pakistan’s private sector elite in industry and the farm sectors, major non-institutional recipients of budgeted expenditure and an influence behind the continued reliance on indirect taxes as a revenue source (to the tune of 75 to 80 percent), are currently clamouring for change in government policies agreed by the country’s two economic team leaders – Federal Finance Minister Aurangzeb and Governor State Bank of Pakistan Jameel Ahmed - with the International Monetary Fund (IMF) under the ongoing Extended Fund Facility (EFF) programme.
The obvious question is whether the major thrust of this rising clamour for change, in most cases a demand to revert to previous fiscal and monetary incentive packages, is because they are unaware of the agreements signed with the IMF, which as per practice are uploaded on the Fund website. Or perhaps they are unconcerned as previous administrations, barring none, reinstituted pro-private sector elite policies as and when the country either abandoned the Fund programme mid-way as the balance of payments position strengthened or, in a handful of the total of twenty-three previous programmes, reverted to these policies once the programme was completed.
Today, apart from external players, multilaterals/bilaterals, have indicated they will suspend approved programmes until and unless their politically challenging conditions are fully met (a suspension that was implemented in the previous two programmes leading to a cessation of bilateral assistance from the three friendly countries, China, Saudi Arabia and the UAE), there are two major domestic non-institutional players are calling for a change in policies with threats no longer implicit but explicit - the industrial elite, and the agriculture elite.
The elites in industry threaten factory closures, including relocation abroad and a decline in export revenue. They typically exercise influence through their powerful registered associations which legally operate in nearly all large scale manufacturing sectors, including those where collusion should not have been possible as the number of producers is large and the number of consumers even larger.
Their demands for tax concessions, electricity tariffs at par with regional competitors and cheap credit continue to this day though the Fund’s analysis on the subject is impeccable: “The state’s support of businesses through subsidies, favourable taxation arrangements, protection and governmental price setting has undermined the development of a dynamic and outward oriented economy.
Subsidies have taken the form of low-cost financing and other concessions, which, although varied across industries, left financing and taxes net of subsidies more favourable than in peer economies and less-favoured sectors.
The tax system has been extensively used to provide non-transparent support through exemptions for privileged sectors like real estate, agriculture, manufacturing, and energy, as well as, through the proliferation of Special Economic Zones.
The government’s intervention in price setting, including for fuel products, power, and gas (biannual), combined with high tariff and non-tariff protection, tilted the playing field in favour of selected groups or sectors. Despite all this support, the business sector has failed to become an engine of growth, and the incentives eventually weakened competition and trapped resources in chronically inefficient (including perpetually “infant” industries.
The elites in the agriculture sector, the rich landlords, are another source of power who have effectively negated past attempts to pay income tax at the same rate as their much poorer salaried compatriots and have sought subsidised inputs, including credit, payable by the taxpayers. To protect the poor farmers, the state has resorted to procuring staples as well as setting their prices, and in the event that the support price is not high enough the country has witnessed scenes of farmers participating in debilitating wheel jam strikes.
Here too the Fund has not minced words in dictating its conditions with relevant logic: “Long-standing government interventions in agricultural commodities have created distortions inhibiting the sector’s productivity and harming Pakistan’s medium-term potential.
Government price setting and procurement operations have made the agricultural sector unresponsive to changing consumer preferences, exacerbated price volatility and hoarding, undermined the incentives for innovation, misallocated resources, and placed a burden on fiscal sustainability.
Going forward, these interventions should be discontinued. Any purchases of agricultural commodities by SOEs or provincial food departments should be done solely for purposes of a narrowly defined national food security, and not as quasi-fiscal social policies, including boosting farmers’ income or provide untargeted subsidies for staples.”
However, what is baffling is that provincial chief ministers have implemented policies that are in violation of the agreement with the Fund on one count: failing to achieve the agreed provincial surplus. Punjab adjusted its books to show a surplus of 40 billion rupees instead of a deficit of 160 billion rupees only after the visiting Fund team (11 to 15 November 2024) expressed its concerns that the province had not met the target for the first quarter. The other three provinces have yet to show a surplus.
The budgeted provincial surplus is an unrealistic 1,217 billion rupees in the current year (up from 600 billion rupees budgeted last year though only 539 billion rupees was realized) with Punjab’s share at 630 billion rupees, Sindh’s 298 billion rupees, Khyber Pakhtunkhwa’s (KPK’s) 178 billion rupees and Balochistan’s at 110.6 billion rupees.
Punjab Chief Minister announced 400 billion-rupee worth of freebies at the taxpayers’ expense, which are largely untargeted as they are not channelled through the Benazir Income Support Programme (BISP) where beneficiaries have been identified and include: (i) electricity subsidy for two months (August/September) to those using below 500 units per month (including lower middle to middle income earners) to cost the taxpayers 45 billion rupees; Kissan card for provision of subsidised inputs to farmers, with loans of 150 billion rupees - 30,000 rupees per acre - to be provided to 750,000 small farmers on easy terms – a facility which in the past was hijacked by the rich; (iii) livestock card envisaging 2.5 lakh rupees interest free loans for animal feed; (iv) free solar modules to households consuming less than 200 units of electricity and those consuming between 200 and 500 units the government will cover 90 percent of the cost; (v) honahaar scholarship programme and launch of laptop scheme from next month.
Sindh government is planning agricultural interest-free loans to small growers’ dependent on moneylenders or aarthis for purchasing inputs (seed, fertilizer etc.); the Benazir Hari Card aims to provide interest-free loans to the middle class for installing solar systems.
And free bus transport on three strategic routes notably Surjani to Tower, Orangi Iqbal market to Tower. Bypassing BISP when it bears the name of the party’s assassinated leader and was initiated during the PPP-led government’s tenure in 2008 is baffling.
KPK has subsumed distribution of two kilowatt free solar systems among deserving families under the party’s signature Ehsaas (BISP) programme (inclusive of solar panels, inverters, wiring, fans and bulbs). And directed Directorate of Education to provide free education to workers’ children and provide free pick-up and drop, free uniform, free textbooks and notebooks which can be supported.
However, the cheque of one crore rupees given to the family of a 26 November fatality by Imran Khan’s spouse from what is believed to be the provincial exchequer requires an explanation.
It is also critical to note that power is a federal subject while the three provincial governments are promoting the establishment of solar systems for poor families. Even though their objective is supported notably favourably impacting on the disposable income of the poor as well as on the environment yet this measure does not consider the energy sector’s macro picture: lower demand would raise the capacity charges payable to Independent Power Producers on those who continue to rely on the national grid (the bulk of the consumers).
To conclude, a lesson that should be learned by the non-institutional players is to peruse the IMF documents and for the federal and provincial government to work in tandem: subjects which are within the domain of the federal government must be taken at the level of the Council of Common Interest (CCI) and decisions pertaining to those that are now devolved subjects notably education, health, BISP must be taken at the provincial level again after an agreement is reached during a CCI meeting.
Copyright Business Recorder, 2024
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