Burdened with the task of managing a war-like economy, Finance Minister Shaukat Tarin has his hands full. In this interview, Tarin speaks about the state of economy and what he has been doing in Islamabad: his plans regarding debt refinancing, the tax reforms, overhauling of public sector entities, the circular debt crisis, water shortage, the future of copper/gold mining at Reko Diq and much more.
The following are excerpts from the interview:
Business Recorder Research: What are your plans to fund debt repayments; is there a need for debt refinancing?
Shaukat Tarin: If you go for refinancing at this point our premium is 8.25 percent to 8.50 percent. So we have to be careful. My own sense is that timing is the essence and that we shouldn't rush unnecessarily because Dubai has also affected the premiums.
First we had thought, that we would issue Sukuk or euro bond in the first quarter (of 2010), but now, although, we have completed our homework, we might have to delay it a bit.
Business Recorder Research: Some defence analysts argue that delay in the release of USA's Coalition Support Fund is due to the lingering visa row. What's your stance on it?
Shaukat Tarin: It's not as if they have blocked the payment. It's just that certain officials have to come to Pakistan to verify some things and if those people aren't allowed to come in, then how will the process flow.
But we have resolved the issue and between now and June 30, we will get $1.3 to $1.4 billion. They have already approved $350 million which I think will be received by the end of this month. In fact, they say that the second tranche of $400 million is also available, and all we have to do is just complete the paperwork. So, essentially this $750 million should come within next 30 days.
Business Recorder Research: Non-IMF inflows such as the FoDP pledges haven't materialised as yet. In case they don't, would Pakistan need to go to IMF for bridge financing yet again?
Shaukat Tarin: We had allocated $2 billion from FoDP pledges for this fiscal year, of which our Friends have committed $1.591 billion - and they have not confirmed it to me, they confirmed directly to the IMF last month, before it transferred the tranche.
But you have to understand that delays in such new programmes are inevitable; there isn't anything to worry about. If you notice we have already received other bilateral inflows and that's because those streams previously existed. And that's why we went to the IMF for bridge-financing....you know this was good planning. The public should understand that we are already fighting on so many fronts and if there is a delay, it isn't something serious.
Business Recorder Research: What is the government's stance as regards the capital gains tax on the stock market?
Shaukat Tarin: We have a clear stance and that is the tax will be implemented. We will meet the stakeholders to discuss a progressive and productive strategy to start the capital gain tax regime, its rates, and thresholds, etc. Our principal objective is to favour long-term investment. We have to differentiate between daily trading profits and those arising from investment. We have to discuss as to what threshold should be labelled as long term investment.
Business Recorder Research: With corporate funds being parked at the NSS counter, don't you think it creates a distortion in the market.
Shaukat Tarin: That's true. And that's why we have disallowed corporate investors in the latest bond issue. We have allowed individuals, pensions and mutual funds. And even this, we will evaluate later whether we should keep pensions and mutual funds or not.
Business Recorder Research: We know that FBR is planning a campaign against tax evaders this month; what is the game plan?
Shaukat Tarin: The biggest problem is that our tax-to-GDP is below nine percent. We have budgeted to take it to 10.6 percent this year. But there are two issues: first, we have to bring those sectors into the tax net which are currently out of it. Second, we have to revamp the collection machinery.
We don't just have to set the mechanism right but also go for people who are not paying the taxes. We have already warned them and after January 25, we will go after them on a random basis, without considering whether the person is a sitting minister, a parliamentarian, a member of opposition, a government official, a businessman or whosoever.
These are the people who have taken NTN numbers but haven't filed the returns or those who don't have NTN numbers at all. And the list is huge, comprising about 2.5 million tax evaders including individuals and companies. People must understand that it is in the interests of Pakistan to increase the tax-to-GDP ratio to 20 percent in the next ten years; otherwise we would succumb to the boom-bust crises yet again.
Business Recorder Research: Where does VAT fit in?
Shaukat Tarin: We are moving towards VAT mode because our GST is an ineffective way of collecting sales tax. We are simply unable to connect the supply chain. Our sales tax-to-GDP is just 3.5 percent compared with 7.5 percent in Sri Lanka and 9.5 percent in Turkey. So if I can make it Turkey in the next four to five years, I will increase the same sales tax three times.
In addition, we will remove zero rating, which will only be allowed on exports, essential food items or critical medical supplies - otherwise there is no need for zero rating. It was because of our inefficiencies that we weren't able to give tax refunds and therefore it was decided to zero rate the whole of sectors.
Then we will bring those sectors which don't even try to come in the tax ambit - like these retailers. Did you know that except for CSD stores, retailers from across Pakistan pay only Rs 75 million in taxes, where as I can name at least 10 retailers just now, each of whom should pay Rs 75 million individually.
Business Recorder Research: Just days after you announced the austerity plan, the government spent huge swaths of money on a cabinet meeting in Gwadar? Do you think that both are consistent with each other?
Shaukat Tarin: Look, I think the nation has even forgotten how to celebrate. I think the 7th NFC Award was a major event in the history of the country. And if Rs 5 million is spent there - and that too on the request of Balochistan government which said the people of the province would appreciate if the agreement is signed there - it isn't a big deal.
Secondly, we must understand where is the bang for the buck. And that lies in Rs 250 billion currently being wasted due to inefficiencies and mismanagement of big government institutions. If we, including the media, focus more on those issues, such that we start performing better and save that Rs 225 billion so it will be much bigger than many Gwadar events. Thirdly, we should merge those overlapping ministries and divisions, which can help save an amount many times the cost of Gwadar.
Fourthly, we should focus more on the fact that our costs overrun our projects. Tell me one project that has been completed within its timeframe. On an average, almost every project costs 100 percent more than its projected amount because of bureaucratic delays. Those are the issues that have the real substance and that must be addressed.
Business Recorder Research: Balochistan government is currently planning to annul the contract for copper and gold mining at Reko Diq? Don't you think the move will deter foreign investments?
Shaukat Tarin: We have to have clear mindset that we mustn't sell our national interests. We have got to protect our national interests. The previous regime, in its own wisdom, had signed an MoU that we would export all the copper and gold reserves at Reko Diq in the form of ore. It's roughly about a 40 billion dollar contract for a period of thirty years, although I might be a bit off with exact numbers.
In contrast, if we smelt the same ore by setting up a smelter here in Pakistan and if we export that, we can fetch up to $500 billion dollars instead of $40 billion under the existing agreement. When I inquired the firm, if they had thought about setting up a smelter here in Pakistan, they said it's not in our contract and that we will only sell ore, because they don't do smelting works. So if we can't set up a smelter despite having fifth largest copper reserves in the world, then what's the point? The fact is this was a bad contract.
Business Recorder Research: So how to resolve the situation?
Shaukat Tarin: Resolving the situation doesn't mean that we say we would like to cancel the contract. I think we should review the contact, sit with them, negotiate with them and make them as one of the bidders, because we would like to attract other parties as well. Since, they are just miners, so either they make a joint venture with a smelting firm or we bring in firms which do both mining and smelting.
This is our national interest......I think we have sold our future. Any government, anywhere in the world, can renegotiate such contracts on the basis of national interests and we will do the same. In fact, we would also like to put a smelter in Saindak as well.
(This is a two-part interview. The second half would be published in the paper's special coverage of Pakistan's Industry Review 2009, due at the end of this month.)