Time for action

The rumours about suspect causes of destruction of the records of the Metro Rail and Nandipur projects, and disappearance of taxpayers' records from FBR's office in Faisalabad, will further strengthen doubts about the government's already endangered integrity.
Last week, the Monetary & Fiscal Policy Co-ordination Board's conclusion that economic indicators are moving in the 'right direction' wasn't surprising although, belatedly, the board regretted the 3-year long slide in exports. When questioned over the escalating economic distortions, the Prime Minister and the Finance Minister too quote the 'reality-denying' views of global rating agencies about Pakistan's 'flourishing' economy.
Remember the role of the rating agencies in building the current economic recession that defies reversal even by the developed economies? Yet the government cites the conclusions of these agencies instead of its own performance exposing the weak pitch it is playing on; its repeated failure to fulfil its rosy promises about the power sector alone are enough to discredit it.
Besides many other distortions - blatant partisanship, over-priced development projects, state revenue theft, capital flight, and resort to indirect taxation with adverse effects - that the Finance Minister routinely side-lines the quality of his vision is reflected by the frightening rise in public debt and continued fall in exports. Is this the route to becoming the world's 18th largest economy by 2050 as promised by the Finance Minister?
But can you expect anything different from him, given his over-commitment to political battling? Isn't it true that the Ministry of Commerce (MoC) has politely been pointing to the factors contributing to the rising trade deficit and consequent escalation in external debt, and seeking the Finance Ministry's reversal of its flawed export-squeezing taxation policies?
According to the latest SBP statistics, Pakistan's external debt and liabilities reached their highest-ever level of about $73bn due to the largest-ever increase therein (almost $8bn) in 2015-16, which was due to escalation in the debt owed to the IMF, banks, and direct investors, and high-cost of the Euro and Sukuk Bonds issued by the PML-N government.
By end-March 2016, Pakistan's public sector external debt reached $61.357bn (more than double of its 2000 level), and public sector enterprises obtained loans worth $2.75bn ($1.26bn secured by sovereign guarantees and $1.48bn non-guaranteed), and private sector borrowing touched $3.29 bn. In addition thereto are the outstanding sovereign guarantees that represent contingent liabilities.
While external debt kept rising, exports kept sliding not just due to power and energy shortages but also because taxes were increased tactlessly to plug (without success) the fiscal deficit to pleas the IMF and provide the often reality-blind global credit rating agencies the reason to paint a rosy picture of Pakistan's economy, though only for the present.
Beginning 2016-17, Pakistan's exchange reserves could decline significantly because, while remittances by Pakistanis working abroad are likely to decline due to the global economic slowdown (especially in Saudi Arabia with the largest share in this inflow), repayment of the Paris Club debt (rescheduled earlier) and IMF debt, will commence in September.
This scenario didn't develop overnight. Yet the Finance Minister's focus (a chartered account) remained 'book balancing', not preparing the economy for what is coming. Accumulating exchange reserves - largely borrowed funds - without building the capacity to service that debt is a policy whose consequences will unfold precisely when the government confronts serious political challenges.
As per World Economic Forum's "Global Competitiveness Index-2016", Pakistan is now ranked 126 out of 148 economies compared to 91 of the 134 economies that the forum covered in 2006, and on "Ease of Doing Business Index-2016" it now ranks 138 out of 189 economies - 62 ranks below its 2008 level - reflect on the performance of the regimes in power since 2008.
An example of how taxation hurt the economy's competitiveness is ever-higher taxation of fuel oils whose cost impacts every business - retail, wholesale, commercial or industrial. In 2015-16, federal revenue from these taxes rose 6.85 percent to Rs 321.1bn, besides the revenue earned from 17 to 50 percent sales tax on all petroleum products, and 20 percent-plus on natural gas.
The Finance Minister often praised his 'economic stabilisation strategy'. Should a 3-year long slide in exports, courtesy power load-shedding, non-refund of taxes to the export sector (to plug the fiscal deficit), and a decline in the output of the agricultural sector courtesy higher indirect taxes and import of sub-standard seeds and fertilizer be the outcome of this strategy?
Belatedly offering tax reliefs to five export sectors is commendable, but can exporters who lost their foothold in today's overly competitive foreign markets regain that foot-hold quickly enough to fulfil the minister's expectation about exports rising from $19bn in FY16 to $24.5bn in FY17? Can power load-shedding be eliminated even by FY19, as promised?
According to a Business Recorder report, now the MoC has proposed the constitution of an inter-ministerial group to rationalise tariffs and devise a simplified duty exemption (instead of duty refund) scheme for the export sector, and has sought the Monetary & Fiscal Policy co-ordination Board to remove the tariff distortions that caused continued slide in exports since 2013-14.
The tendency for higher taxation of the already taxed has eroded investor confidence. Proof: gross domestic investment-to-GDP ratio declined from roughly 19 percent in 2006-07 to around 15% percent in 2014-15, while the annual average in South Asia region is over 30 percent. The slide in surplus production for export it caused has reduced Pakistan's share in world trade.
MoC has pointed to the fact that since 2005, Pakistan's share in global exports declined by 1.45 percent every year while that of India, Bangladesh, China, and Vietnam increased by between 14.5 to 33 times; proof thereof is that, over the past decade, Pakistan's trade-to-GDP ratio has stagnated around 28 percent because instead of expanding the tax-net, existing taxpayers were loaded with higher taxes.
MoC has also quoted a WB report according to which, 40 percent of Pakistan's tax revenue is earned by taxing foreign trade, while its competitor economies earn less than 5 percent from this sector and, compared to global average of 24 percent, (despite reductions) corporate tax rate is still 31 percent. And, compared to 12 percent in its neighbouring countries, sales tax is charged at 17 percent.
MoC's stance on tariff rationalisation based on independent research instead of merely focusing on sustaining the revenue level makes sense because, besides hurting exports, this policy also made machinery and input import more expensive, which reduced the capacity for producing value-added goods at competitive rates for the much needed import substitution.
The tariff distortions highlighted by MoC demand immediate reversal, but will the Finance Ministry act quickly? That's the question begging an answer.