Advisor to the Prime Minister on Finance Dr Abdul Hafeez Sheikh in his maiden press briefing, after taking over the finance portfolio strongly hinted at an extremely disturbing scenario: Pakistan may be forced to borrow from the International Monetary Fund (IMF) to enable it to begin paying back the ongoing Stand-By Arrangement (with the IMF).
He termed such a possibility a policy option that he claimed was not uncommon. The Advisor did hasten to add that good international alignment, mature political situation and a successful stabilisation programme provided a launching pad for sustainable and broad-based economic growth, yet these positives are neither quantifiable nor verifiable.
No doubt, the Advisor may refer to perceptions as a critical factor in turning an economy around, yet in the context of the government's intent to borrow to pay back past loans, these perceptions can be dismissed as defensive rhetoric and, therefore, overstated at best.
The energy crisis and the consequent loss of productivity and jobs, the lack of success in converting pledges made by the Friends of Democratic Pakistan into inflows, the failure of the government to increase tax-to-GDP ratio and the high levels of corruption within the Federal Board of Revenue are just some of the factors that continue to compromise the government's ability to realise its revenue targets and consequently, its ability to pay back loans without incurring more loans.
To complicate matters further, IMF assistance, be it a tranche release or request for additional funding, is contingent on our compliance with respect to its ongoing programme. Pakistan has been unable to comply with some key conditions, including raising the power tariff according to an agreed schedule for political reasons.
This, the Advisor added, is costing the exchequer 8 billion rupees monthly, and accounts for his assurance to the IMF, during his press briefing, that power tariffs will be raised by 6 percent shortly. However, it is unclear whether the government would be able to sell a tariff rise to the people of this country. As is well reported, public angst against loadshedding on the one hand and increased bills on the other, continues to be visible on our streets.
The tax-to-GDP ratio, the Advisor correctly noted, continues to remain appallingly low. Successive Pakistani governments, including the incumbent, have attempted to raise the tax-to-GDP ratio but have been unsuccessful.
The rich and influential (inclusive of the agricultural landlords, white-collar or khaki-clad bureaucracy or businessmen) are simply unwilling to allow the government to end tax exemptions, or improve documentation of the economy through either effectively harmonizing income and sales tax administration or through the levy of value-added tax from the forthcoming fiscal year, against which the stakeholders have already launched a resistance campaign.
Failure to slash the non-development expenditure (agreed with the Fund for achieving the target) and substituting it with a mighty slashing of development expenditure despite the crumbling infrastructure and extremely poor social indicators, coupled with the ongoing ostentatious style of governance, is a sad comment on the performance of the government. That partly explains high inflationary pressures as government expernditure, not backed by a productivity increase has been allowed to rise.
In this context it is relevant to note that a technocrat like Dr Hafeez cannot possibly deliver what is required, ie an increase in revenue and/or a decrease in current expenditure. It is the politicians alone who can deliver and it is the Parliament, collectively, that must ensure that the necessary elements are not only part of the forthcoming budget but are also implemented.
Untaxed and lowly taxed areas of the economy need to be roped in effectively. Property tax rates need to be aligned with the market price of properties, sales tax needs to be extended to the retail sector without any threshold exemptions; charges for services, rendered on any transaction, be collected and across-the-board subsidies need to be replaced with targeted subsidy for the sick, weak, elderly and the poorest segment.
Be that as it may, what was the most disturbing aspect of the press briefing was Dr Hafeez's statement that he intends to raise salaries in line with the rate of inflation. His strength is as an economist and surely he must be aware that basic economic theory dictates that wage-push inflation in an overheated economy like ours would further aggravate the situation.
It appears that the Advisor on Finance is telling his bosses and fellow parliamentarians to do what is needed to reduce the fiscal deficit; otherwise the IMF, through its diktats, would force the Pakistani authorities to make the requisite changes.
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