Tactless selectivity

The FBR has created history by doing what was overdue since 1947; to facilitate taxpayers in filing tax returns, it has established 206 Tax Facilitation Kiosks throughout the country in major business centres and offices of trade associations, where taxpayers will be assisted by competent FBR officials in properly assessing their tax liabilities and filing their tax returns.
This commendable initiative (whose credibility will be established by the quality of its service) was repeatedly sought by taxpayers, but what is important is that this voluntary assistance is institutionalised and its continued availability is assured, which is possible only by legislating over the issue and making the facility's availability incumbent on the state. But this praiseworthy initiative also manifests that the government's prime focus (courtesy IMF pressure?) is on cutting the fiscal deficit; everything else has secondary importance.
This portrays a tactless selectivity because collecting more tax revenue while sidelining the sources of its generation - higher economic activity - will eventually turn it into a failed effort. A trend that regained strength during the term of the last PPP regime was the flight of capital to better governed East Asian and Middle Eastern states. Now frustration with the way Pakistan is being governed has reached a point where trade associations are asking their members to relocate their businesses to other countries and Pakistan's TV channels are promoting investment in real estate abroad.
Flight of capital isn't new for Pakistan; beginning 1969, an unending era of policy instability steadily weakened investor confidence and, as a back-up, the rich and powerful began accumulating wealth abroad. If I recall correctly, a report in a September 1994 issue of The Economist claimed that Pakistanis had accumulated abroad anywhere between $80 to $120 billion.
The most visible flight of capital took place in May 1998 after Pakistan conducted nuclear tests when the PML-N was in office. Now, when the PML-N is again in power, the reasons for capital flight are the socio-economic chaos left behind by the PPP regime, and the visible helplessness (or is it sheer incompetence?) of the PML-N to tackle it by prioritising economic revival.
Last week, a letter addressed by Pakistan Hosiery Manufacturers & Exporters Association to its members said that due to the government's continued indifference towards protecting the export sector, a committee headed by the association's chairman had started negotiating terms with other countries for shifting Pakistan's export-oriented industries to those countries.
That committee is working on a strategy to relocate abroad the factories of its members who are tired of bad governance in Pakistan - power loadshedding, hikes in electricity and gas tariffs, social disorder, and economy crippling strikes. The letter claimed that several countries had offered the apparel sector to shift its factories to their economic zones.
But the eye-opening comment in that letter was about the severest-ever liquidity crunch due to huge amounts of exporters' unpaid sales tax and customs rebate claims, DLTL claims, high costs of doing business, and the ongoing transporters' strike preventing timely exports have eroded every possibility of improvement in the business environment - a clear manifestation of loss of confidence.
The letter went on to say that "all this is just because of the incumbent government's apathy and complete lack of dynamism towards exports which is the lifeline and backbone of our nation's economy in these crucial times when our country has become burdened with debt, and sorely needs foreign exchange," and asked its members to respond if they intend to shift their businesses abroad.
These are dangerous signs suggesting that the government - headed by a "businessman" Prime Minister - lacks the ability to visualise the consequences of its tactless selectivity in administrative options. That flight of capital is going on is an undeniable reality (as admitted by the SBP), and it is being worsened by government's tactless political point-scoring rather than improving governance.
The latest SBP monetary policy again points to the external sector as the key challenge to macroeconomic stability because low SBP reserves (now just $4.2 billion) and continued pressure for retiring maturing external debt leave no room for stabilising the rupee's exchange rate, and thus inflation.
Galloping inflation now prevents any realistic business planning and is encouraging disinvestment. According to SBP, consumer inflation would remain at an elevated level (10.5 to 11.5 percent). This may discourage saving, increase consumption and demand, and dampen investment ie the productive capacity of the economy. Besides, with fragile external inflows, negative real returns on savings and investment could encourage outflow of foreign exchange and escalate the slide of the Rupee.
Exchange and interest rate volatility - fruits of free markets (in fact, of flawed regulation that renders them "free-for-all" markets) - ails economies everywhere, but in Pakistan the bigger issue is the instability injected by flawed and unstable state policies and government's refusal to at least repair the physical infrastructure (if not expand it) instead of hiking up utility service tariffs.
SBP also believes that while revision of power tariffs can help curtail subsidies and create fiscal space for other expenditures, such measures have their inflationary consequences. Adjustments in administered prices are directly reflected in higher inflation and raise inflationary expectations, as evident from the current speculative (though officially denied) trends in consumer inflation.
The rational way of reviving the messed-up economy was to seek a $10 billion facility from the IMF to quickly remedy line losses and flaws in generation capacity of the power sector, and stabilise the Rupee while other reforms - post-restructuring privatisation of state-owned entities, revamp of the taxation system and containing smuggling - were undertaken in a confidence-building manner.
The Rupee's slide needed checking due to its grave socio-economic impact because if this distortion is not remedied, the PML-N regime, and its blind partnership in IMF's flawed behind-the-scene mismanagement of the economy would be blamed for a total economic collapse, which it could eventually lead to despite all the rosy promises being made by Ishaq Dar.
The fact that flight of capital - a disastrous trend - is now a reality proves that people are now capable of making comparisons between available alternatives, and drawbacks or benefits of the alternatives chosen by the government; they also find out under what compulsions the government chose a particular alternative. As such, they are now fairly good judges of administrative performance.
Policymakers would do themselves a great deal of good by remembering this each time they propose the adoption of a specific alternative from among the available choices. Given their experience of having been taken for a ride by a whole lot of failed government experiments, people are more inquisitive, careful, and selective in believing in government policies.