Rising inflation

Prime Minister Imran Khan has directed the Ministry of Interior, federal and provincial law enforcement agencies, and Federal Board of Revenue (FBR) to launch a joint operation to stop smuggling of essential commodities. There is no doubt that smuggling has become endemic to this country and is responsible for not only periodic domestic shortages of staple items, including wheat and sugar, that jack up the price but also an inflow of foreign products, primarily under the Afghan Transit Trade, from our large porous borders that negatively impact on domestic demand for domestic manufacturing products, including home appliances and tobacco products.

There is no doubt that the Prime Minister is increasingly concerned and rightly so, at the rise in prices of food items as well as the stifling of economic activity in recent months. He has held meetings with relevant ministers and directed them to provide modular proposals to bring down inflation, generate economic activity with a direct bearing on demand and supply and creating an environment to boost investment.

Disturbingly, smuggling in Pakistan is not limited to across the border which not only compromises local manufacturing but also reduces tax collections.

Perhaps the most significant source of concern for the government today has been the failure to meet the revenue target agreed with the International Monetary Fund (IMF) with reports indicating that while the Fund is ready to further downgrade the target to 4.9 trillion rupees - from the original 5.5 trillion rupees to 5.2 trillion rupees after the first review - yet it is unwilling to set a target lower than 4.9 trillion rupees. This target envisages additional/higher taxes on existing taxpayers, or widening the tax net that reports indicate is a process unlikely to be achieved within the remaining period of the current fiscal year, or encouraging economic activity to ensure that collections rise as a natural outcome. Reports indicate that real estate activity, on the back of FBR's enhanced due diligence with respect to source of funds of the buyers - previously a sector where a major portion of black money was parked - remains suspended; however, it is proposed that the FBR begins to make a distinction between transfer of land and construction development activities.

The Ministry of Finance also informed the Prime Minister that import compression, as repeatedly noted by Chairman FBR, the ailing Shabbar Zaidi, as the reason for lower collections, is in dollar terms and not rupee terms which, it was argued, reflected the fact that lower collections were due to massive leakages in the customs department. While not understating the degree of leakages and corruption in the customs department yet some data released by the Pakistan Bureau of Statistics is relevant. Import compression was nearly 28 percent in July-January 2019-20 in dollar terms in comparison to the comparable period of the year before due to the rupee depreciation yet it is not insignificant in terms of rupees either - at 13.27 percent. Additionally, the imports that surged in rupee terms were: (i) petroleum and products (increase in rupee terms in January 2020 compared to January 2019 was positive 7.13 percent and negative 3.21 percent in dollars terms); (ii) agriculture and chemical groups (increase in rupee terms 3.82 percent and negative 6.89 percent in dollars terms); (iii) machinery group (positive 23.254 percent in rupee terms and 10.52 percent in dollars terms with the largest increase in mobiles at 164 percent in rupees and 141.65 percent in dollars terms); and (iv) food item imports witnessed a positive 3.23 percent import growth while in dollar terms it was negative 7.43 percent. In other words, barring agriculture inputs, with no doubt a negative impact on farm output, and food items, impacting on the consumers, where it was positive in rupee terms and negative in dollar terms the other import items did witness a similar movement in rupee and dollar terms though the impact of the former was given the depreciation higher than on the latter. This data therefore reinforces the conclusion that there is massive leakage of revenue as far as imports are concerned. Hopefully, this would enable the department/ministries charged with the responsibility to develop modular proposals to address the slide in revenue due to leakage.