The federal cabinet under the chairmanship of Prime Minister Nawaz Sharif approved the budget strategy paper presented by the Federal Finance Minister Ishaq Dar. The press release issued subsequent to the meeting is silent on details of this critical approval strengthening the general perception that it was granted without any debate. It appears that the approval of this important document was merely on the sidelines of the overarching objective of the cabinet meeting that was called after seven months: to give a resounding vote of confidence in the leadership of the Prime Minister. This is baffling as that could have been taken as a given, as each cabinet member owes his/her seat in the cabinet and some would argue even in parliament to the Prime Minister and serves at his pleasure.
Be that as it may, it is extremely disturbing that the closeness between the Prime Minister and the Finance Minister has stifled any debate within the cabinet on the state of the economy and the best way forward. Given the imminent end of the International Monetary Fund (IMF) programme by September this year one would have hoped that the more enterprising and well-informed ministers would have presented alternate strategies/theories or amendment(s) that would have enabled the Sharif administration to better achieve its economic objectives notably shifting the focus from deficit reduction to growth.
The strategy paper, reports indicate, was full of what is now acknowledged by independent economists as routine self-congratulation and economic platitudes. For example, the Finance Minister stated that the government would pursue major policy initiatives aimed at consolidating economic gains achieved so far and spurring inclusive and sustainable growth, creation of job opportunities and a reduction in poverty. The gains that have been achieved so far and formed the litany of all Finance Ministry's claims are growth in Gross Domestic Product (GDP), growth in taxes of around 19 percent and growth in foreign exchange reserves.
In this context, it is unfortunate that no one in the cabinet has had the temerity to question the Finance Minister on his data, with recent reports indicating that even some officials in the Statistics Division, that is under the administrative control of Finance Ministry, have bravely expressed concern over the integrity of macroeconomic data released by the Pakistan Bureau of Statistics. The government's claim that 5 percent growth would be achieved in the current year is being openly challenged by the IMF which has downgraded it to 4.5 percent while well-known independent economists are maintaining that the rate would be around 3.5 percent.
Even if one assumes the 5 percent growth rate, for the government to then claim that it has achieved 19 percent growth in taxes requires a reassessment of our tax system on two counts. First, with a rise in GDP of 5 percent a 19 percent growth in taxes is unsustainable and would slow down the wheels of industry and may well encourage capital outflow which incidentally is evident from the massive real estate procured by Pakistani nationals in Dubai during the ongoing tenure of the Sharif administration. Secondly, if as no doubt the government would claim, the rise in tax collections is from those who were previously outside the tax net then it is appropriate to determine what taxes have increased. Direct taxes have risen dramatically during the current tenure, a good thing, however more than 60 percent of the direct taxes are now in the form of withholding taxes which are in the sales tax mode or on products and services rather than on different forms of income like rent and dividends. A major chunk of tax collections continue to be from petroleum and products and the rise in their collections can be attributed to the massive decline in the international price of oil as the government increased the tax rates. Once the price of oil rises, as it is expected to, then tax collections would decline. Thus there has been little or no attempt to change the tax system in order to render it more fair, equitable and, non-anomalous or indeed sustainable.
There is no doubt that foreign exchange reserves have registered a substantial increase since the PML-N took over power in June 2013. The question is how? Harald Finger, the mission leader for the ongoing $6.64 billion IMF programme, maintained during a 12th January 2016 conference call that most of these reserves are "debt enhancing."
The government claims that it is focused on reducing poverty and on inclusive growth - a reference one would assume to Benazir Income Support Programme (BISP) which is being further expanded. This is a good programme, though there needs to be a further streamlining of the beneficiaries to rid it of conmen; however BISP, as its name reflects, was launched during the tenure of the PPP coalition government.
Two elements, clearly pluses for the Pakistan economy, are the 46 billion dollar China-Pakistan Economic Corridor (CPEC) as well as the high inflow of remittances - both not attributed to the government's macroeconomic policies and both unlikely to suffer reversals in years to come. The CPEC would continue to be implemented if the demand for sovereign guarantees by Chinese private sector companies are met, though this may dry up donor inflows opposing extending such guarantees to the private sector, and remittances may decline as demand declines reflected by a decline in remittances in India and Bangladesh.
To conclude, a cabinet is collectively held responsible for decisions, good or otherwise, and one can only hope that in future there is more informed debate on critical issues particularly with respect to strategy papers and economic policies.
Copyright Business Recorder, 2016
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