The State Bank of Pakistan has made a disturbing observation yet again that should be a source of serious concern to the Ministry of Finance: get the fiscal house in order.
Five Finance Ministers, including one Musharraf-era Finance Minister and an Acting PPP Finance Minister, who formed the bridge between the time Ishaq Dar resigned and Shaukat Tarin was appointed, and more than five finance secretaries later, the call remains the same reflecting the obvious: the government has been unable to deliver on a fiscal reform package identified as critical to macroeconomic stability by multilateral donors including the International Monetary Fund and the World Bank as well as local economists.
The last tax-related, World Bank supported project titled Tax Administration Reform Project (TARP) was approved by the Bank's board of directors on 7 December 2004 at a cost of $149 million, out of which $78.5 million was to be procured as credit from the International Development Association (IDA), a $24.4 million loan from the International Bank for Reconstruction and Development (IBRD), a $23 million grant from the UK's Department for International Development (DFID), and 23 million dollars from the Government of Pakistan. The objective of TARP, the World Bank website notes "was to fundamentally reform the Federal Board of Revenue (FBR) into a more efficient and effective revenue administration system. This included measures to increase tax collection, promote voluntary compliance, and guarantee fairer and more equitable application of tax laws."
Members of the Officers of Customs and Excise Group Association claimed they were disadvantaged because of TARP's condition to administratively merge Customs and Excise Group and the Income Tax Group into one cadre to be called Inland Revenue Service (IRS) and invoked the Bank's Inspection Panel. This panel's terms of reference are limited to determining whether a World Bank supported project is complying with the Bank's policies and procedures designed to ensure social and environmental benefits and avoid harm to people and the environment.
The Inspection Panel concluded that "an investigation of whether the World Bank has complied with its operational policies and procedures with respect to the allegations contained in the Request is not warranted. Although noting the importance of the issues raised in the Request, the Panel holds the view that the proposal to create the IRS was not a departure from the original project objectives of TARP." But more disturbing was the panel's conclusion that "the implementation of TARP could have benefited from more extensive consultations by the World Bank team with relevant stakeholders. Recognising the importance of communication and consultation for all significant institutional reforms, the World Bank Management has proposed to offer additional support to the Federal Bureau of Revenue (FBR) on human resource development and change management through TARP".
So what has been TARPs outcome, which cost the nation 103 million dollars of fresh borrowing albeit at concessional terms? The self-assessment scheme was a success to some extent however there is a consensus amongst tax experts that it would remain a source of abuse until and unless the FBR is granted the right to carry out audits as agreed to by the government in the last Letter of Intent (LOI) it submitted to the IMF as a prerequisite to the approval of the 7.6 billion dollars Stand By Arrangement in November 20, 2008. The letter reiterated the government's commitment to a reform package as agreed under the SBA and submitted a final request to the then Managing Director of the IMF Strauss Khan and signed on behalf of Pakistan by Dr Sheikh and Shahid Kardar: "In pursuit of our program objectives, we have submitted to the National Assembly the federal part of the legislative package for the reformed General Sales Tax and the provincial part of the package will be submitted to the provincial assemblies shortly. We have also made progress in devising a plan to ensure financial viability of the electricity sector, which-together with the package of other measures-will enable us to achieve the budget deficit target of 4.7 percent of GDP, revised from the original target of 4.0 percent of GDP to accommodate additional flood-related spending. The Government and State Bank of Pakistan believe that extending the arrangement through September 30, 2011 will support confidence and help restore macroeconomic stability at a time when our economy is still recovering from the recent devastating floods. We remain committed to implementing a Fund-supported program..."
In response to the LOI submitted in December 2010 the IMF Executive Board "approved-on a lapse-of-time basis a nine-month extension of Pakistan's Stand-By Arrangement (SBA), to September 30, 2011". The extension's objective in the words of the IMF was to provide time to the Pakistani authorities to complete the reform of the General Sales Tax, implement measures to correct the course of fiscal policy, and amend the legislative framework for the financial sector.
The budget deficit for 2010-11 was 6.6 percent, GST reforms are yet to be implemented, and the electricity sector reforms, with particular reference to inter-circular debt, remain a serious issue. It is little wonder that the IMF program lapsed clearly indicating that IMF patience with the government's commitments and failure to implement the agreed reforms was at an end.
Be that as it may, a World Bank report appears to focus on TARP gains. The report states that "important measures were implemented to control the underground/cash economy...the withholding system was expanded...there was improvement in tax payer registration, control of stop filing, control of tax arrears, audit, refund and taxpayer services." The report did not focus on the obvious: the decline in the tax to Gross Domestic Product ratio in 2010-11. The reason is evident: multilaterals extend assistance to state institutions and the need to sustain relationships with their counterparts in the government is of paramount importance to them. Multilateral assessment of a programme is therefore compromised for two reasons: (i) reports have to be vetted by the borrower and needless to add the borrower can and does exert pressure to tone down an unfavourable progress report; and (ii) the natural bias of the lending department within the multilateral not to be overly critical of its own inability to stipulate doable or enforceable conditions or take account of the risks inherent in the borrower's capacity to implement the agreed conditions.
One would have to wait for the evaluation wing of the World Bank, independent from the management of the Bank, before taking the reports seriously. Be that as it may the World Bank website notes that "though important to a well-functioning tax administration, these outputs have not yet translated into the critically important outcome of demonstrably higher tax revenues."
There is no doubt that the FBR has performed poorly in the past and continues to do so. However during the Chairmanship of Salman Siddique the FBR embarrassed itself in an unprecedented manner by admitting that collection figures for 2010-11, as revealed during a hastily called press briefing a few hours before the end of the fiscal year by the Chairman, were gross and not net. Considering that Mr Siddique boasted during the press conference that collections were in excess of estimates/targets (an amount that led him to maintain that the IMF Stand By conditions were met and would lead to the release of the remaining two tranches) leads many to hope that he would not be granted an extension beyond next month when he is scheduled to retire.
Apart from the FBR, parliamentarians must also be held accountable for poor tax collections as they remain unconvinced of the relevance of these reforms, notably the reform to withdraw all tax exemptions that benefit powerful influential pressure groups. Whoever claims that our parliament has a history of reflecting the will of the people and the needs of the macro-economy are deluding themselves with respect to our tax reforms; irrespective, the Parliament must be strengthened for in that way alone would the country be able to get out of the existing mire of an economic impasse.