Chronic ‘debt dependence’
By Huzaima Bukhari & Dr Ikramul Haq
The IMF approved Pakistan’s request for a fresh bailout package on September 4, 2013 after Nawaz Sharif’s Government “fulfilled all prior requirements” — the IMF has already circulated amongst members the Letter of Intent (LoI) it received from Islamabad. This is yet another reflection of who are the real rulers of Pakistan.
Reportedly, though the IMF has agreed to provide $6.6 billion under the Extended Fund Facility (EFF), Islamabad is insisting on $7.3 billion confirming its insatiable ‘debt addiction’.
Finance Minister Ishaq Dar, who is proving to be a disaster in the making, in a news conference on August 26, 2013, revealed that “in the first year, the IMF will give $2.2 billion while we have to pay back over $3 billion.”
He conceded that Pakistan had no option but to borrow $12 billion “to retire its previous debts”. Dar said the “most vital precondition of the IMF for broadening of tax base was fulfilled as the FBR had already issued 15,000 notices to potential tax dodgers.”
The lingering and deepening economic crisis, especially bourgeoning fiscal deficit, has been eroding Pakistan’s capacity to repay huge external loans of over $60 billion with fast diminishing foreign reserves. The IMF, having enormous stakes in Pakistan before agreeing for fresh tranche, expressed anguish and dissatisfaction over the FBR’s performance — in particular what it calls fixing ‘ambitious targets’ and then missing the same with a wide margin every year. The dismal performance of the FBR — it collected only Rs. 1940 billion against the original target of Rs. 2381 billion for 2012-13 pushing the fiscal deficit to 8.8 per cent of GDP — worried the IMF about repayment of its outstanding debt of $6.4 billion. The fresh bailout is, thus, nothing but to thwart the obvious default.
The IMF’s compulsion to offer yet another EFF to Pakistan is inevitable as foreign exchange reserves are dwindling and agreed schedule for repayments of $7.6 billion till the end of 2014-15 by Pakistan is in jeopardy. Pakistan’s $11.3 billion Stand-by Arrangement (SBA) with the IMF expired on September 30, 2011 with last two tranches of $3.7 billion could not be paid following Islamabad’s failure to implement key reforms coupled with fudging of revenue figures.
Pakistan opted for $11.3 billion SBA in 2008 and got disbursements of about $7.6 billion, but failed to get the remaining $3.7 billion due to lapses in performance criteria, leading to suspension of the programme in May 2010, and final unsuccessful ending on September 30, 2011.
The IMF has warned of more than a dozen serious risks to Pakistan’s economy, including uncertainties arising out of superior judiciary’s intervention in economic and administrative issues and a weak support from three smaller provinces to political and economic decision making.
“Over the medium term, Pakistan’s economy will continue to under-perform and vulnerabilities will remain high unless comprehensive reforms are implemented,” said the IMF in its assessment of the country’s economic situation and recent reform measures following conclusion of $6.68 billion bailout package.
It said the IMF programme implementation risks were high given Pakistan’s track record, particularly political constraints and the limited technical capacity to implement reforms simultaneously across a wide range of activities.
The IMF, however, appreciated that the risks could be mitigated by critical upfront actions as well as the strong electoral mandate and the government’s commitment to reform and called for strong international technical support to help ease risks posed by weak technical capacity.
“The recent record of interventions by the Supreme Court in economic and administrative issues may be another source of uncertainty,” said the IMF. It noted that the governing party might lack political support in provinces other than Punjab, complicating provincial-federal financial agreements.
It said Pakistan also faced significant insurgency problems in the regions bordering Afghanistan “which could intensify with the drawdown of Nato forces there”.
Sectarian violence in Balochistan and other provinces is another source of unrest, and street crimes in Karachi adds to security concerns.
It said the vulnerability to oil price shocks had risen. While oil imports declined from 33 per cent of imports in 2001 to about 16pc in 2004, they have risen each year since and oil vulnerability index has risen.
Pakistan, it said, was also vulnerable to inward remittance spillover. While a decline in oil prices would lower import pressure, there might be adverse indirect effects on reduced remittances from workers in oil-exporting countries (60pc of Pakistan’s remittances come from the Middle East).
“Delays or shortfalls in financing from public or private sources are another programme risk.”
Public funding risks should be eased by strong commitments of support from the World Bank, Asian Development Bank and key bilateral partners while private financing risks could be reduced by government’s strong privatisation programme, the IMF said.
“Low and declining SBP reserves leave the country to a balance of payments crisis from even relatively minor external or domestic shocks. Domestic risks also emanate form the fiscal imbalance with the attendant high government debt rollover requirements of about 30% of GDP a year, severe energy crisis and security risks.”
On the fiscal side, it said, the baseline scenario projected continued weak revenue collection and high energy subsidies would generate a budget deficit of around 8.5pc of GDP, although lowered to 6.5pc because of new reforms.
With continued monetisation of fiscal deficits and further depreciation of the rupee, inflation would likely increase in the coming months and return to double digits, the IMF noted.
The current account deficit is projected to be around 1pc of GDP by end-June 2014, but baseline of payments is expected to remain under pressure given weak export growth and net capital inflows, with reserves declining to $3.5bn by end-June 2014.
“With low savings and investment, high fiscal deficits, weak private credit, unresolved energy problems, core inflation in double digits and ongoing security problems, baseline real GDP is likely to remain around 3pc with considerable potential volatility,” said the IMF. Credit to the private sector would continue to be crowded out, contributing to depressed private investment.
Moreover, a further global economic decline could also impair Pakistan’s exports. A further downturn in Europe could have negative effects, as one fourth of exports go to Europe and most non-Middle East remittances come from Europe. Slow growth in emerging markets could add to external risks.
The financial sector is currently stable but remains vulnerable to deterioration in the overall macroeconomic environment. The balance sheets of commercial banks are highly exposed to government securities, so a fiscal crisis could have a large impact.
In the current fiscal year, the FBR is assigned a target of Rs.2475 billion. Like previous years, the FBR is claiming to cross the target! Experts are doubtful in view of recession and weak enforcement capabilities of the FBR. The track record of the FBR shows that it has perpetually missed targets for the last five years. The performance of the FBR is puzzling for the IMF and other donors as in the past World Bank provided $100 million for five-year-long Tax Reforms Administration Program (TARP) and on conclusion tax-to-GDP ratio declined from 11 per cent to 8.2 per cent and tax gap increased from 75 per cent to 150 per cent.
Strangely, after wasting billons in the name of reforms, the FBR is showing helplessness to enforce tax laws. Every now and then the FBR’s big bosses claim “we possess data of all the rich persons who spend millions but have never filed tax declarations.” Why they do not take action against these tax cheats is best known to them. They admit in private that about 70 per cent of legislators are tax cheats.
Pakistani tax cheats have just to approach money exchange companies that fix fake remittances for a small premium and no question can be asked by tax authorities about the source — in the presence of such a facility, their claim is why we should pay tax at the rate of 25 per cent! Tax evasion has legal protection in Pakistan and legislators are to be blamed as well.
There are about 125 million mobile users in Pakistan, out of which at least one million, if not more, expend Rs.60,000 or above per annum but never bother to file tax returns. If they are taxed on their real incomes, total tax from them would not be less than Rs.5000 billion. The real tax potential of Pakistan is not less than Rs.8 trillion — direct taxes of Rs.5 trillion and indirect of Rs.3 trillion — but the government is begging for money both externally and internally. Nobody questions the enormous tax benefits available to Riasti Ashrafiya (State Oligarchy) — ‘Public parasites’, The News, July 21, 2013.
No doubt that the FBR should improve its enforcement capacity to detect tax losses, but it suffers from “helplessness” caused by obnoxious provisions like section 111(4) of the Income Tax Ordinance, 2001. The corrupt legislators through such provisions protect themselves — their main assets are banami [in fake names]. With such laws and innumerable Statutory Regulatory Orders [SROs] they serve the interests of mighty segments of society.
Ordinary people ask why they should file tax returns when their president, prime minister, ministers, governors and elected representatives give damn to it. The outgoing president, since his election on September 6, 2008, never bothered to inform the nation from where he got $60 million (unfrozen in Switzerland), let alone pay any tax on this colossal amount. Before taking oath of president, he did not declare his assets and liabilities and evidence of payment of taxes wherever due. The same is true with present rulers and many other politicians. We have written time and again in these columns that the tax culture in Pakistan will never take roots unless tax and asset declarations of all the mighty segments of society — politicians, high-ranking military and civilian officials, judges and all public office holders — are made public [Taxation challenges, The News, June 9, 2013].
There should be a public campaign that absentee landlords, most of whom are members of parliaments and their siblings are members of militro-judicial-civil complex, should reveal how much agricultural income tax was paid by them and their near and dear ones. All the judges, high-ranking public servants, including serving and retired generals, should also be required under the law to make public how many plots they received during service, what are total assets owned by them and their family members and how much tax was paid annually.
Any person who is a tax delinquent or has been beneficiary of any loan write-off should be debarred from contesting elections. All kinds of exemptions and concessions provided under various tax codes should be withdrawn.
The tendency to squeeze more and more from the existing taxpayers and giving a free hand to non-filers has eroded the tax system to an extent where voluntary compliance and tax enforcement have lost their relevance. The present tax system imposes greater and undue burden on the poor and middle-class people (e.g. 17 per cent GST takes larger portion of low-income groups compared to high income groups). The rich and mighty are not paying agricultural income tax and income tax on their non-agricultural income. Most of them are landowners-cum-industrialists-cum-politicians and are engaged in massive tax evasion — case of cartelisation and tax evasion bonanza in sugar industry is a classic example.
Adding insult to injury, the tax collected from the citizens is wasted on unprecedented privileges and perquisites meant for elites — militro-judicial-civil complex, landed aristocracy, industrialist-turned politicians and unscrupulous businessmen.
We will not come out of present mess unless control of resources vests with people instead of elites. Institutions like the FBR serve the interest of mighty classes. They would continue to do so till the time people of Pakistan exert pressure on provincial governments to devolve fiscal and administrative powers at grass root level to local self-governments. Fiscal decentralisation and municipal self-governance can end dependence on federal government that is epitome of bad governance.
All kinds of loopholes in tax laws should be plugged by proper legislation. No executive authority should have powers to amend tax laws through infamous SROs.
Through public debates and democratic processes, the Parliament should pass rationale and workable laws after taking inputs from all the stakeholders and experts in the field. There should be zero tolerance in respect of enforcement of tax obligations across the board without any fear or favour. Tax collected should be spent for the welfare of the masses and not for the luxuries of state oligarchy.