Dr Hafeez Sheikh has just taken over the economic management of the country as the Finance Minister at a time when the country is facing monetary and financial crisis These crises gradually accelerated and strengthened over a period of time with the perception that the present elected government is least bothered to resolve economic issues facing the nation and is busy in loot and plunder of the country's economic wealth through bad governance and rampant corruption.
It has been said by many that there may be several reasons for this, including the issues of power shortages, rental power plants and appointment of cronies on top jobs, but the non-implementation of court decision relating to National Reconciliation Ordinance (NRO) has been the main issue that eroded the confidence of investors, business community and the "silent majority." Therefore, it follows that door for further corruption may remain open for quite some time, if unchecked. The finance minister has to do a lot of work to restore this confidence.
The country is under the grip of severe inflation. This has caused misery to the masses. As said by the Governor of the State Bank of Pakistan, one major reason is heavy borrowing by the present government to meet its day-to-day non-development expenditure. This governmental borrowing surpassed all the previous records that forced the central bank to raise its discount rates twice in the past. The increases in discount rates should have discouraged government's huge borrowing, but it did not. The measures taken by the central bank were meant to check the inflationary trends instead these created economic stagnation. There should have been public pressure against the government's excessive borrowing, its careless non-development public spending, and need to adopt austerity measures.
The finance minister's recent speech in the Parliament while summing up the budgetary proposals regarding those having six cars on public expense should be ashamed of themselves, reflected the true feeling of the masses and signified the concern he has to achieve the financial discipline. His remarks should be treated as part of the public pressure.
Donors would have raised funds for Pakistan provided they trusted those who spend these funds. That is why it is difficult for "Friends of Pakistan" to come forward to help us if we maintain an irresponsible behaviour. Let us expect that the newly appointed finance minister would devise financial discipline for the government spending to ensure austerity, simplicity and responsibility.
Pakistani rupee has depreciated substantially over the last two years. This has pushed cost of production substantially as our industry is mostly dependent on imported raw materials. We should explore ways and means to encourage industrial growth based on indigenous raw materials instead of imported ones. We should also seek to import essential raw materials from unconventional sources that are cheaper instead of importing these from conventional sources.
The possibility of imports from India should be reviewed on priority basis to save our foreign exchange to reduce production cost. The price of oil and other commodities have recently shown a downward trend internationally and it is expected that these recent developments should arrest some inflationary trend. Therefore, this should be the right time for the central bank to revisit once again to reduce discount rates. There is a strong case to reduce discount rate now for the revival of national economy.
It is the time to start a dialogue with the stakeholders to ensure how industrial and commercial sectors should play their role to create more jobs by expanding their manufacturing facilities, especially textile and other sectors, willing to export value-added goods. We hope that the finance minister would pay due attention to these issues by forming task forces to handle these issues professionally.
The capital markets of Pakistan remained frozen without any notable trading activity since new taxes of different sorts were introduced and the CFS facilities were withdrawn. In the absence of any new product to provide finance to the capital markets, there seems to be little hope of resumption of the same trading volumes. It appears that we have given no importance to the functioning of our capital markets. We are hesitant to confront the real issues. The SECP is non-existent as far as the issues are concerned. It is suggested that SECP should be restructured with capable people who are independent with the necessary powers to provide guidelines and policies to strengthen capital markets. In case, volumes do not pick up and investor's confidence is not restored, the government itself will be a loser.
It would be impossible for the government controlled entities to be sold to private parties at an attractive price. It would be the government, which will lose on capital gain tax collection. If there is no capital gain due to lacklustre behaviour of the capital markets, the government would miss its tax collection target. Imposition of capital gain tax would be regarded as a fruitless exercise. Therefore, there are so many compelling reasons to bring out the capital markets these issues professionally.
The capital markets of Pakistan remained frozen without any notable trading activity since new taxes of different sorts were introduced and the CFS facilities were withdrawn. In the absence of any new product to provide finance to the capital markets, there seems to be little hope of resumption of the same trading volumes. It appears that we have given no importance to the functioning of our capital markets. We are hesitant to confront the real issues. The SECP is non-existent as far as the issues are concerned. It is suggested that SECP should be restructured with capable people who are independent with the necessary powers to provide guidelines and policies to strengthen capital markets. In case, volumes do not pick up and investor's confidence is not restored, the government itself will be a loser.
It would be impossible for the government controlled entities to be sold to private parties at an attractive price. It would be the government, which will lose on capital gain tax collection. If there is no capital gain due to lacklustre behaviour of the capital markets, the government would miss its tax collection target. Imposition of capital gain tax would be regarded as a fruitless exercise. Therefore, there are so many compelling reasons to bring out the capital markets from depression. Hopefully, this should be a priority issue for the finance minister. The government may reap more financial gains by resolving the issues facing capital markets.
There have seen increasing reports in the media of financial irregularities, rampant corruption and complete disregard for good corporate governance by public sector corporations. The failure of corporate governance in public sector companies has not been taken seriously. It has an impact of over 250 billion rupees annually on our national exchequer, but no serious effort has been made to turn around the SMEs. This area needs utmost attention of the finance minister.
The Finance Act of 2010 has vested several discretionary powers to the Federal Board of Revenue (FBR) through its several regional officers. There is every possibility that these powers would be misused to extract money from the taxpayers. It is being feared that the present Finance Act has taken us back to pre-1990s era. The taxpayers should be trusted. Those paying taxes should be appreciated and encouraged to pay more if they earn more. Non-taxpayers should be found and they too should be encouraged to register themselves to pay taxes. Any future harassment of the registered taxpayers would result in reduced tax collection and increased corruption. It is suggested to appoint a high level policy committee, comprising experts, not affiliated with the FBR to devise tax collection system, approve the limit of use of arbitrary powers and to ensure transparent tax collection system. This should be based on the principles of minimum contact between tax collecting agencies and the taxpayers to avoid harassment.
The recent revelation that over 11000 containers that belonged to Esaaf, vanished without paying customs and other levies for which no record existed of their whereabouts. This resulted in an estimated loss of over 230 billion rupees to the national exchequer. Surprisingly, a senior staff member of the FBR issued a policy statement hurriedly that the FBR had no jurisdiction over these types of imports and, therefore, it was no omission on their part. The senior members of the FBR, Ministry of Finance and other Customs and Excise staff should have been busy in searching the culprits that caused this huge loss to the national exchequer, but that did not happen.
It is a laughable situation, when we hear that recently, a shareholder of a listed company received a letter from one of the regional offices of the FBR, asking him to disclose the source of his investment in a particular company's shares because he has received a dividend of over rupees nine thousand only from the company over which 10 percent tax had been withheld at source. It was because of this reason that his name appeared on the withheld taxpayers list that he was asked to explain the source. If the FBR staff involves themselves into this sort of investigation, then they should not have time to unfold evasions amounting to billion of rupees. There seems to an urgent need to set the priorities right.
The government is losing revenue under GST regime to the tune of around RS 100 billion rupees annually due to various types of exemptions and concessions granted through various Statutory Regulatory Orders (SROs). The government may extend its scope by bringing in services sectors into the tax net. Due to opposition from provinces and the exempted sectors, it was not possible to agree on the imposition of VAT. It is being suggested that the present GST should be reformed to include services sectors and by withdrawing exemptions granted through SROs. The reformed GST may be the solution for the short term to collect the desired revenue from this source. This "Reformed GST" may also be acceptable to the lending agencies. The Finance minister has to do a lot of home work before the decision is made to impose Value Added Tax (VAT).
There is a need that the Economic Co-ordination Committee (ECC) of the Cabinet is really effective in its decision making process. In the past, it has given an impression that it was mere a rubber stamp of the proposals prepared by the ministries. It is necessary that the proposals put before the committee are properly scrutinised and evaluated and once the decisions are made, these must be implemented also.
In the past, Shaukat Tarin had also showed dissatisfaction over the ECC's working and stated that full information was not given to ECC or its decisions were not followed. We hope that under the chairmanship of the present finance minister, more independent view would be taken during the decision-making process in order to ensure independent, transparent and good economic judgement. The change was witnessed recently when a proposal from Board of Investment (BOI) was rejected to provide duty incentives to cold rolled steel manufacturers.
(The writer is Fellow Member of Chartered Institute of Management Accountants from UK and LLM in Commercial Law from Northumbria University, UK)