Hoping against hope

On July 7, Asrar Rauf, Additional Secretary Revenue Division announced that FBR had overshot the FY11 revenue target of Rs 1.58 trillion, and what he reported on June 30 was the 'exact' revenue collected by all the three LTUs and 14 RTOs that achieved their ambitious revenue targets.
However, the use of the term 'exact' was premature; tax payments deposited in banks countrywide have yet to be reconciled with inflows in FBR's revenue accounts in the SBP. As per Rauf's own admission, the 'exact' tax collection figure could be confirmed only after a fortnight.
FBR also expects the tax revenue to touch Rs 1.6 trillion and the drivers thereof are the incentives for FY12 viz. amnesty schemes announced recently, 1 percent cut in the rate of Sales Tax, abolition of Special Excise Duties, tough monitoring of the Withholding Tax agents, and advance payment of the last quarter's tax due in July.
The big Withholding Tax agents include banks, oil companies and courier services (oddly, not the telecom companies) but if monitoring of the Withholding Tax agents has really improved, tax revenue target may indeed be exceeded in spite of the visible negative trends.
A sharp drop in GDP growth, reduced activity in a host of sectors due to crippling power shortages, banks' risk aversion, high mark-up rates, lower credit supply courtesy huge state borrowing, and worsening law and order situation (especially in Karachi) don't signal higher business incomes and higher tax payments.
Observers therefore think that the FBR's claim is aimed more at deluding the IMF than at reflecting the reality because official versions of most economic statistics are subsequently revised downwards. But if this is that rare instance when this won't happen, its effects must be reflected elsewhere too.
Higher tax revenue should lead to a reduction in domestic public debt, and consequent reduction in the high rates of mark-up, to leave more and cheap liquidity in the market for the private sector, which has been contracting due to a lack of bank credit for the past three years.
If the tax collection figures can indeed be ascertained credibly in a fortnight, reduction in domestic public debt should begin by end July; nothing could be more uplifting for business confidence, especially in the industrial and commercial sectors, whose share in GDP growth has been falling consistently.
Financial markets and SBP had repeatedly pleaded with the government to reduce its domestic debt, firstly, to reduce its overall debt-to-GDP ratio; secondly, to leave more liquidity in the markets for the private sector; and thirdly, to propel a reduction in mark-up rates.
In spite thereof, on June 30, 2010 domestic debt was Rs 4.65 trillion; in the following nine months ending March 31, it rose to Rs 5.46 trillion - up by Rs 809 billion or a monthly rise of Rs 90 billion - which pushed up the share of domestic debt to 30.2 percent of the estimated GDP for FY11.
During July-September 2011, T-Bills worth Rs 701 billion and PIBs worth Rs 40 billion are due for retirement. But, in June 2011, the government announced its intentions to borrow Rs 750 billion via T-Bills and Rs 50 billion via PIBs during the same period, impliedly add another Rs 59 billion to its existing borrowing.
Let us assume that when the government announced this intention, it wasn't sure of FBR's success in tax collection. But now that FBR is convinced about collecting Rs 1.6 trillion in taxes against market forecasts of Rs 1.54 trillion, the state can retire part of its debt rather than borrow more.
But the emerging scenario doesn't build such hopes. First, the fact that power supply of state offices is being disconnected due to non-payment of bills is just one indicator of the huge resource shortfall; the more worrying indicators thereof are the circular debt and the amounts blocked in commodity stocks.
Second, despite this gap, results of the state's much touted 'austerity' measures are invisible. Third, rising political instability, gang wars, and street violence are shifting state focus from implementing austerity measures and expanding the tax net. Four, we are again unprepared for facing up to the impending flood disaster.
These indicators don't reflect the financial stability imperative for the state to gradually shed its huge debt burden, and the most worrying aspect of this imbroglio is that, in 2011, besides the existing annual external debt servicing load ($5.7 billion in FY11), Pakistan will repay $3.2 billion to the IMF.
On top thereof, our 'strategic ally' has opted to withhold aid worth $800 million. All this mandates containing the current resource deficit to put the export-oriented sector on track for generating the foreign exchange surplus required to service a higher load of debt servicing if Pakistan does not default on its sovereign debt.
It is imperative that public borrowing contracts to allow funding the cash-starved export sector in generating this capacity, and government's visible actions cutting waste and corruption. But the absence thereof and the 1.5 percent rise in mark-up rates on SBP's export re-finance loans belie this hope.
The repeated reference to export growth in FY11 is self-deluding; it resulted from a rise in global cotton prices - a trend that has reversed. Now Pakistan can increase its exports over their FY11 level only if it can produce goods at globally competitive prices, not by exporting raw cotton as in FY11.
Unless the regime saves resources to drastically reduce the circular debt, fiscal stability won't return. If power shortages - industry's biggest dilemma - escalate further, and if dubious repairs to canal banks lead to their collapsing again during the coming monsoon, the chaos the economy faces now will only worsen.
If the regime can't cut the long hours of power loadshedding it should, at least, stop the gang wars and street violence to let the people go about producing whatever value they can. But the neglect of Karachi - country's biggest industrial city - in this context reflects sheer callousness on the part of the regime.
The regime's failure in every administrative area is now a reality; its resolve to re-install the commissionerate system proves that it can't manage the state, and re-imposition of the 1861 police administration act implies a return to the colonial era in the garb of democracy. Although, it amounts to hoping against hope, the fact is that change becomes imperative with each passing day. What is missing is this realisation among the powers that be.