The coalition partners know that they have lost the peoples' mandate and holding on to power is their only refuge. But the November 27 Senate session proved that the bill for imposing Reformed General Sales Tax (RGST) is now a ticking bomb, and the bill's rejection could force mid-term polls - which wasn't visualised by the IMF. The fear of being routed in a likely mid-term poll is inducing the coalition partners to think again.
But the turncoats in the opposition parties afford the PM the courage to deny the IMF pressure for levying the RGST, although levying this tax and withdrawing subsidies on fuel and power that would inflate the cost of everything and assure sustained high inflation, were the key IMF lending terms. By owning these draconian terms (relying on the turncoats in the opposition) he is pleasing the regime's foreign backers, not Pakistanis.
Undeniably, Pakistan needs to do a lot to increase its shameful tax to GDP ratio, but the IMF-imposed route to achieving that aim will add to economic and social instability - a process already on. Chances of GDP growth are zero, each day adds to unemployment, poverty and anarchy, and violent crime is rising dangerously. By ignoring all this, the regime manifests zero-concern for the state's 'social contract' with its citizens.
Prior to accepting IMF's conditionalities, a third of Pakistanis were below the poverty line though the official figure was 17.4 percent; now over 60 percent are below that line. This tragedy owes itself to the sliding Rupee, rising fuel and power tariffs, and market manipulation that is fuelling inflation and justifying interest rate hikes.
A flawed justification for RGST is that it will reduce tax incidence to 15 percent on all activities, tactlessly implying thereby the uniform profitability of all activities. Besides, it is illogical for a 'perpetually' developing state courtesy bad governance, to depend excessively on indirect taxes that impact the rich and the poor alike.
The RGST mechanism assumes a level of accounting skills that are absent in most SMEs - the majority. However, historically, both taxpayers and tax collectors have shown a remarkable knack for corrupting the systems for paying and collecting indirect taxes like Withholding Tax, General Sales Tax, etc, and filing false refund claims based on "flying invoices." All of this goes against imposing another indirect tax - the RGST.
Withdrawing subsidies rapidly at IMF's bidding is exacerbating inequalities. The PM can't visualise that this scenario will herald unmanageable social chaos - the cluelessness that confirms politicians' (especially the PPP brand) incapacity for managing the economy; a reflection thereof the PM witnessed on his last visit to Dadu.
Besides the crippling withdrawal of subsidies, the IMF wants a 10 percent surcharge on the Withholding Tax rather than give market players time, guidelines and targets, and install a monitoring system to verify that they are gearing up to revive growth. Instead, it has imposed conditionalities that will cause an economic slowdown.
Given its low current repayment capacity, Pakistan needs debt re-scheduling to gain time for implementing result-oriented economic restructuring. And after suffering the unprecedented flood tragedy it wasn't unfair either to seek waiver of a part of the debt. Besides, in a recession, revenue should be increased by taxing those with the ability to pay, not everyone.
But the finance minister worries that debt re-scheduling will hurt Pakistan's image and by not levying the RGST, "Pakistan will lose credibility before the IMF, WB and the ADB who are willing to lend more." He prefers borrowing to re-imposing the Wealth Tax, taxing agricultural income above a threshold level, and enhancing FBR's tax collection capability.
With peoples' purchasing power falling rapidly, they can't pay for steeply rising energy and fuel prices. Can this build-up (made worse by power load-shedding and frequent fuel rationing) permit the industry to operate at higher capacity, increase competitively priced output, retain workers, and pay higher taxes to jack up the tax to GDP ratio? The more likely outcome is greater social chaos.
Rising poverty is the 'mother' threat facing Pakistan. If investment continues to decline courtesy IMF-tailored 'structural adjustments', how can rising unemployment be contained to pull more citizens above the poverty line to contain social chaos? Sadly, the PM and his ministers brush aside these questions as irrelevant. Pakistan doesn't need fiddling with its existing tax rates. To begin with, it needs to collect those taxes fully and then systematically expand the direct tax net. Simultaneously, the regime must check its exuberance and the waste it presides over, courtesy its 'favourites' in the administration and public enterprises.
Amazingly, (to sustain this clueless regime?) the IMF doesn't require that the government does both. No wonder the renowned economist Joseph Stiglitz accuses the IMF of only ensuring that the G-7 lenders get repaid though that leaves the indebted developing states worse off economically as well as socially. Chaos in the Second and the Third World doesn't bother the IMF or the G-7, though the price thereof rises by the hour.
THE IMPACT OF IMF POLICIES The IMF may not have become the bill collector of the G-7, but it clearly worked hard (though not always successfully) to make sure that the G-7 lenders got repaid. There was an alternative to its massive interventions, an alternative that would have been better for the developing countries, and in the longer run, better for global stability. The IMF could have facilitated the workout process; it could have tried to engineer a standstill (temporary interruption of payment) that would have given the countries-and their firms-time to recoup, to restart their stalled economies....
The IMF worried that defaults breaking the sanctity of the contracts would undermine capitalism. In this they were wrong in several respects. Bankruptcy is an unwritten part of every credit contract; the law provides for what will happen if the debtor can't pay the creditor......But there is another equally important unwritten contract-that between citizens and society and their government that is sometimes called "the social contract." This contract requires the provision of basic social and economic protections, including reasonable opportunities for employment. While misguidedly working for what it saw as the sanctity of the credit contract, the IMF was willing to tear apart the even more important "social contract". In the end it was the IMF policies which undermined the market as well as long-run stability of the society.- Joseph Stiglitz, Globalisation and its discontents.