EDITORIAL: Federal Finance Minister Muhammad Aurangzeb during his speech at a seminar organised jointly by the Federation of Pakistan Chambers of Commerce and Industry and Business Recorder identified three major policy reform measures that are urgently required: (i) improving tax-to-Gross Domestic Product ratio; (ii) fast privatisation of state-owned entities (SOEs); and (iii) the energy sector.
Economists, domestic and international, would, without any hesitation, fully agree with him; and needless to add have been urging previous administrations to initiate reforms in all these three poorly performing sectors of the economy, though to not avail.
Ironically, previous finance ministers, during the past decade and a half at least, fully supported these measures and if one looks at their statements on the eve of their appointments their rhetoric was not dissimilar. The question is two-fold: whether this time around there is a greater commitment to reform as Pakistan’s economy has become too fragile to withstand the inefficiencies in these sectors and a related query whether this is the appropriate time to undertake policy measures in all these three sectors.
The tax-to-GDP ratio is appallingly low; however, reforms do not, one hopes, focus on raising existing taxes, which in effect would imply a further rise in indirect taxes currently accounting for over 70 to 75 percent of all collections, whose incidence on the poor is greater than on the rich.
The current focus of the government is on registration of small traders, estimated at 3.2 million, though with only 75 traders having registered till the deadline of 30 April 2024, negotiations have been initiated. It is relevant to note in this context that the rise in the number of filers in the past has not led to any appreciable increase in revenue collection mainly because the increase in filers so far was by those groups exempt from paying taxes; notably, widows/pensioners/students but who opted to file their returns to pay a lower withholding tax on purchases.
The government needs to begin to levy a tax on builders and the real estate sector, and concurrently begins to negotiate with provincial governments to levy a tax on farm income at the same rate as that levied on the salaried class. The rise in revenue collections, which is being cited as a source of satisfaction, was due to raising existing indirect taxes, a major contributor to inflation, and inflation itself which accounted for around 200 to 250 billion rupees of additional collection in the current year.
Sadly, this inordinate focus on SOE (state-owned enterprise) privatisation as a means to reduce the budgeted outlay on continuing operations (or as in the case of Pakistan Steel to pay for salaries even though the mills have been non-operational since 2015) is a dated concept applicable in Thatcherite UK rather than today when many of the expected benefits of the privatisation during that era have been debunked.
It is critical for the decision-makers to first undertake a detailed cost benefit analysis of any proposed privatisation, including the stream of future income and the impact, if any, on the consumers, before blindly parroting a past fashionable policy that no longer holds traction in governments focused on minimising the impact of any further increase in poverty levels from the existing 40 percent.
In addition, there is overwhelming evidence that the climate for investment, domestically and internationally, is not favourable. True that friendly countries have exhibited a desire to invest in Pakistan; however, one would hope that the contracts are carefully vetted by experienced corporate lawyers; otherwise, the country maybe saddled with contracts that are simply not in the national interest.
Take the case of independent power plants (IPPs) set up during 2014 to 2017 in Pakistan under the umbrella of China Pakistan Economic Corridor (CPEC) that were designed to end the electricity crisis in this country. Instead, they have given rise to a financial crisis as the country does not have the foreign exchange to allow for import of fuel, failing which capacity payment charges escalate, or to allow repatriation of profits that were contractually agreed and which are causing considerable angst with the Chinese IPPs.
Disturbingly, the government is considering sale of distribution companies, and has been for the past four to five administrations; however, it is hoped that the realisation that without ending the flawed tariff equalization subsidy, over 500 billion rupees every year, the burden on the exchequer is not likely to ease.
Business Recorder has been urging the present as well as previous governments to abandon the attempt to increase leverage with donor agencies by undertaking measures that are the same as those under consideration for decades but which could not be implemented due to political considerations. What would put our economy on the rails towards prosperity is thinking out of the box.
A short- to medium-term approach would be to slash current expenditure, particularly that which is allocated to the elite that would require voluntary sacrifice in terms of procurement and salaries, implement state sector pension reforms, paid for by the taxpayers’, by making employee contribution mandatory as in other countries which, in turn, would automatically reduce the need to borrow domestic or internationally thereby reducing the annual mark-up. One can only hope that the incumbent Finance Minister takes the bull by the horns instead of toeing the donor line, which will has serious implications on poverty levels.
Copyright Business Recorder, 2024
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