The trickle-down theory supported by the PML-N leadership appears to be stagnating - and not entirely because of external factors as the Dar-led Finance Ministry would have us believe but due to prevalent economic policies.
The International Monetary Fund (IMF) in its eighth mandated quarterly review under the 6.64 billion dollar Extended Fund Facility (EFF) maintained that "external vulnerabilities include a protracted period of slower growth in key advanced and emerging market economies (including possibly a sharp slowdown in China) which could weaken exports and hurt remittances (including from Gulf Co-operation Countries). A persistent US dollar appreciation in the context of recent global exchange rate movements, with limited variation in the rupee's exchange rate, could further erode export competitiveness; increased volatility in oil prices could affect efforts to reform the energy sector." These external factors cited by the Fund are impeding domestic productivity of the big guns defined as the rich and influential in both the industrial and agriculture sectors, including exporters. In addition, there has been a decline in commodity prices in the international market (our major exports) coupled with continuing recession in the West.
It is unfortunate that the positive aspects of external factors have largely been retained by the government to create "fiscal space" and therefore not passed entirely onto the productive sectors and consumers. More specifically the international oil price, a major import item, declined massively during the past year or so but it has only partly been passed on to the consumers which accounts for tax on petroleum and products ranging from as ridiculously high as 45 percent on some items to 17 percent on others.
But all the current economic vulnerabilities cannot be laid at the doorstep of external factors beyond the control of our economic team. In this context it is relevant to note that the PML-N government has compromised productivity through a range of measures that include: (i) as noted by the Fund an overvalued rupee, estimated at around 20 percent by independent economists that allows Dar to understate external indebtedness but at the cost of lower exports; (ii) sustained heavy load shedding that is impeding productivity in the industrial and farm sectors attributed to the failure to improve governance in the power sector which accounts for the re-emergence of circular debt estimated most recently at over 663 billion rupees; the Prime Minister's recent claim that load shedding has been reduced by half is not supported by the performance of the productive sectors as well as exports; (iii) continued heavy reliance on domestic borrowing by the government given the IMF's insistence not to borrow from the State Bank of Pakistan, thereby crowding out private sector borrowing with a consequent impact on productivity; and (iv) inordinately long delays in releasing refunds to exporters to show inflated revenue figures.
There is evidence to suggest that all ministries/departments/state owned entities have a plethora of research papers that identify the areas where reforms are required as well as a detailed phased implementation strategy. Thus it comes as no surprise that the IMF eighth review notes that "based on the review of the filing process for sales and income tax, the authorities identified 39 processes that required elimination and streamlining. They have developed 8 IT based modules and launched integrated end to end IT solution." Impressive no doubt but the question is whether these IT modules are actually being effectively implemented - a question that arises as several of the Federal Board of Revenue (FBR) reforms remain unimplemented. For example IRIS is not generating Payment Slip ID to new filers using CNIC in place of national tax number (NTN) - a facility that was announced amidst much fanfare by the FBR. In this context the FBR has been summoned by the Federal Tax Ombudsman (FTO) to clarify as to why salaried taxpayers are unable to use CNIC in place of NTN for filing income tax returns for tax year 2015. Tariff simplification process too is ongoing but that has little impact on shrinking the trade balance.
The Sharif administration, like its predecessors, is proficient in formulating strategy/plans that can be fully supported however implementation remains weak. From the manifestoes that claim to change the socio-economic fabric of our country in five years (the exception to this is Ahsan Iqbal with his visions that span several tenures) to specific sectoral strategies implementation remains extremely weak to non- existent. The eighth IMF review in the Memorandum of Economic and Financial Policies notes that "private investment and growth are hampered by impediments in the legal framework for creditors' rights and contract enforcement, barriers to new business start ups, complex legal, taxation and border trade requirements, and limited access to finance." This in spite of the fact that these impediments were identified decades ago and the so-called business friendly Sharif government has been in power for more than two and a half years and yet these bottlenecks remain.
The Sharif administration however claimed in the Letter of Intent submitted to the Fund on 15 September as a prerequisite for Board approval for the ninth tranche release under the EFF that: (i) FBR, SECP and EOBI set up virtual one stop shop in Lahore end December 2014 and two procedures taking 2 days have been reduced and the plan is to reduce another 8 days of procedures; even if this is achieved these gains appear to be extremely modest; and (ii) a study was completed in March 2014 to identify necessary changes to the bankruptcy regime that would support rehabilitation work of weak and viable companies. The Corporate Rehabilitation Act envisaging setting private corporate restructuring companies was placed in parliament in April 2015; and alternate dispute resolution mechanisms was established in Karachi and Lahore to be extended to the twin cities by end September. Implementation as always remains a concern.
The government also committed to the Fund that it would ease out the culture of statutory regulatory orders that grant concessions to specific industries however the decision to phase this out implies many operating in the productive sectors may feel disadvantaged as these exemptions are withdrawn as they have come to regard them as components of cost.
Governance remains appallingly poor backed by the continuation of a culture of nepotism in senior appointments - though unlike the PPP the PML-N does not engage in over staffing at lower levels - a fact that can be gleaned from the appalling performance of PIA and PSM. The focus on announcing special packages, much opposed by the IMF, continues though they are allowed to die when media attention wanes and are not fully implemented. The Fund opposed the special hundred million rupee fund for loans to the youth, the farm package that Dar reportedly though inexplicably clarified to the IMF consists of budgetary proposals and would not raise expenditure, and last but not least the textile package that too has apparently been held hostage to IMF concerns. In addition, the claim that the government is promoting trade with regional countries again is limited to rhetoric.
The rich farmers, consisting largely of those sitting in the country's assemblies, are also suffering, not because Dar had the courage to at least try to form a consensus to change the constitution that would allow the same tax rate to be applicable on farmers with the same income as that of a salaried individual but because of a steady rise in input costs and the decline in international commodity prices. Needless to add subsidies (on exports as well as in terms of support price) seem to have insulated the profits of this group better than that of others.
To conclude, the productive sectors or the haves are also suffering under the flawed policies of Ishaq Dar with little if any prospect of trickle down. With the proven capacity of organised productive sectors for closures through strike action Dar has been compelled to capitulate on some tax measures though only for a limited time period - limited by the quarterly mandated reviews under 6.64 billion dollar IMF programme. The silver lining is alas not in supporting domestic economic policies designed to fuel productivity but on the China Pakistan Economic Corridor and remittances to steer the country towards growth. And in the meanwhile heavier than ever borrowing from wherever available appears to be the guiding principle of the Dar-led Finance Ministry.
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