Policies in Pakistan’s multiple sectors are well researched, many compiled with donor funding which enables international and national sector experts to take account of international best practices as well existing domestic conditions.
Unfortunately, the number of reports gathering dust in relevant ministries is significant while the status quo, read sustained appalling performance, continues.
A policy is best defined as a set of ideas or a time-bound action plan of how to proceed in any specific sector or what to do in any particular emergency situation agreed within a macro or micro group - be it the cabinet, the Economic Coordination Committee of the Cabinet, the key players within a ministry/organisation/entity, a political party, a board of directors in the public/ private sector or management.
However, to implement a policy requires three basic elements: necessary infrastructure, capacity of those tasked to implement it, and political will.
Power and tax sectors epitomize a wide gap between policy and implementation in this country - the two worst performing sectors legitimately a source of concern for donors who, with the passage of time, are now insisting on more rigid, upfront and politically challenging conditions for their loans.
One major reason for the sustained poor performance of the power sector is policy input from three distinct sources that accounts for a steady rise in circular debt – a high of 2.5 trillion rupees today - with a major debilitating impact on the country’s total debt today: (i) donor agencies’ insistence on unbundling and privatization of sector components as a means to resolve performance related issues.
While in economic theory this thrust is supported yet in Pakistan’s context it failed to take account of domestic factors as K-Electric’s privatization indicates that privatization is not the best answer if tariff equalization subsidies (thereby fuelling the budget deficit) as well as purchase from the national grid, persist; (ii) executive led decision making based on political considerations and divorced from sector experts’ opinions.
This accounts for the decision to focus on generation under the China Pakistan Economic Corridor initiative as a means to end the load shedding crisis beginning in 2014 rather than to formulate a long-term policy that takes account of the fact that previous contracts were flawed as they obviously favoured the Independent Power Producers (IPPs) over the hapless consumers (capacity payments as well as 100 percent dollar repatriation), identify major lacunas which reports indicate was the failure of the transmission system to vacate the available generation capacity and the negative impact on environment of a coal plant if established away from the source of coal; and (iii) sector experts when inducted were not vetted properly and their decisions reflected a clear conflict of interest.
Thus with donors insisting on full cost recovery and the government unwilling/unable to implement structural reforms to meet the sectoral deficit agree to pass on the onus of incompetence on to the consumers – a major contributor to the current economic crisis.
Tax Administration Reform Programme (TARP) funded by the World Bank (IDA) with DFID support began implementation in 2005 and focused on changes at the Federal Board of Revenue (FBR).
And as per World Bank/DFID supervision missions “implementation progress has been ‘moderately unsatisfactory’ – an assessment that is relevant to this day for three reasons: (i) the reliance on indirect taxes, a low-hanging fruit whose incidence on the poor is greater than on the rich, continues to this day.
And the claim in annual budgets that the contribution of direct taxes, based on the ability to pay principle, has increased is patently false and was noted in the latest Auditor General of Pakistan’s report given that 75 to 80 percent of all direct tax collections are sourced to a rise in withholding taxes levied in the sales tax mode.
Heavy reliance on sales tax in a country where poverty levels are rising (World Bank estimated the incidence of poverty at nearly 40 percent in 2018 – a level that has risen subsequent to the rise in inflation to over 30 percent in February 2023 as well as the devastating floods last year) places constant pressure on the government to raise the monthly disbursement of Benazir Income Support Programme (BISP) beneficiaries which at present is 7000 rupees every quarter.
The government priorities however are clearly to support the elite and not the poor as the incumbent finance minister Ishaq Dar deemed it prudent to extend 110 billion rupees electricity subsidy to exporters but only 40 billion rupees additional allocation in the budgeted 360 billion rupees BISP; (ii) wholesalers/traders remain exempt from income tax that in effect places ever rising burden on existing tax payers (income) and sales tax; and (iii) in an attempt not to share revenue with provinces as per the 2010 National Finance Commission award (a consensus document) the reliance on petroleum levy has risen which directly contributes to inflationary pressures.
What is completely baffling is that while sectoral policies are available, macroeconomic policies (monetary and fiscal) have not changed from administration to administration – be it a military dictatorship, a PPP, a PML-N or an Imran Khan-led government.
The three tenets of macroeconomic policies have been to keep raising current expenditure to appease all major stakeholders impacting on politics (the austerity measures announced by Prime Minister Shehbaz Sharif are not likely to generate more than 20 to 30 billion rupees in one year as no measure targets the major recipient of current expenditure), in the event of a shortfall in revenue (an annual occurrence) to borrow domestically and from abroad that accounts for an ever rising allocation for mark up-and repayment of principal as and when due - 41.3 percent of total current expenditure and 37.8 percent of total 2022-23 budget, and sustained poor governance in all sectors including the state owned entities.
To add to these flawed policies are individual quirks in terms of preferred decisions with disastrous consequences on the economy by finance ministers appointed again and again notwithstanding their previous failures: the PPP continues to support the use of state-owned entities as recruitment centres and is held responsible for overstaffing of such entities that have pushed many into the red necessitating ever rising budget support; Ishaq Dar of the PML-N is guilty of damaging the economy due to his penchant for controlling the rupee/dollar parity - in 2014-17 through market intervention from borrowed dollars/debt equity thereby raising the country’s indebtedness and more recently without the foreign exchange reserves that led to a grey market with a consequent impact on remittance inflows; and the Khan administration followed identical policies and additionally not only extended the expiry date of the amnesty scheme announced during the last weeks of the Shahid Khaqan Abbasi administration but announced two additional amnesty schemes in less than four years of government (the last one specific to the construction sector) – a policy that penalizes the honest tax payers.
To conclude, there is an urgent need for an economic team that has the capacity to think out of the box, reverse these quirky finance minister specific flawed policies that continue to impact on the state of the economy and improve governance.
Copyright Business Recorder, 2023