Refund payments

The inauguration of the module for direct electronic transfer of refunds by Federal Finance Minister Ishaq Dar at Federal Board of Revenue (FBR) headquarters has fuelled expectations that the government is serious about removing one of the major impediments to declining exports. Refunds, the minister stated, would be paid through the State Bank of Pakistan's (SBP) Real Time Gross Settlement Systems (RTGS) which, in turn, will "not only ensure credit of refunds in 24 hours, sometimes even the same day, but will also eliminate the human interaction through online payments". It is relevant to note that the RTGS were developed under an International Development Association (IDA) funded technical assistance to the SBP in 2003. The RTGS are mechanisms that enable banks to make large-value payments to one another in real-time using online communication facilities as well as state-of-the-art computer systems. The payments are settled on gross basis in real time thus minimising the system risks that are inherent in large-value net settlement systems.
However, the speed of successful delivery of any computer-developed system necessarily depends on the computer operator. Or in other words, a computer operator would have to ensure that hundreds of claimants of fake refunds are successfully weeded out by the system - a process that hitherto had taken an inordinate amount of time as, according to the FBR, fake claimants of refunds, with or without the complicity of the FBR officials, were significant in number. What was extremely unfortunate is that the genuine claimants too were subjected to a lengthy scrutiny process that seriously compromised their productive capacity and resultantly raised their costs of production as the liquidity issues due to piling refunds were met by borrowing from the commercial banking sector.
The obvious solution lies in the government earmarking a reasonable time for scrutiny of all claimants and in the event that a claim has not been processed, say in 60 days of submission and the FBR has not requested any more supporting documents during this period indicative of the fact that processing of the claim has not begun, then a penalty must be payable by the FBR to the claimant. Given that the government does not hesitate to penalise those who pay taxes later than the stipulated deadline therefore, in the case where it delays the repayment of refunds the penalty, in all fairness, must be paid by the government.
Be that as it may, there is a consensus amongst independent economists that one of the reasons for delay in refunds is associated with the government's attempt to overstate revenue and thereby show a budget deficit that is higher than what is claimed. This is particularly so during times when the country is on an International Monetary Fund (IMF) programme as the standard normal loan conditions include a move towards a sustainable budget deficit. Pakistan is a country that has a record of being almost perennially on an IMF programme and the three-year 6.64 billion dollar Extended Fund Facility (EFF) was only completed end-September 2016; the allegation that the refunds were allowed to rise to over 200 billion rupees as per exporters groups to show higher revenue collections, therefore, has some merit.
At present, exports are declining as are remittances and hence the decline in the two most coveted sources of foreign exchange earnings should be a source of concern to the government as this would compel it to increase borrowing - from external and domestic sources. Refund delays are of course a major impediment; however, the other major impediment is the government's refusal to allow the rupee to settle at its market value. According to the IMF's last review report under the EFF, the rupee is overvalued by around 20 percent, a fact which makes our products uncompetitive in the global market. This factor needs to be dealt with on an emergent basis as well.