IKnomics – walking the PTI talk

By
Syed Sayem Ali
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26
204

Imran Khan’s ‘tsunami’ has hit the coast of Karachi and Pakistan’s financial hub is buzzing with excitement. In a space of a couple of months, the Pakistan Teehrik-e-Insaf (PTI) has transformed from a party on the fringes to an All Star Galácticos – the Real Madrid CF of Pakistani politics. The influential business community is watching with great interest and intrigue.
PTI has played its cards smartly and over the last few months has won over confidence of the business community in a series of organised and strongly worded gestures. This includes putting forward a 100-day plan in July 2011 which focused primarily on corrective measures to pull the economy out of the downward spiral of record high inflation, rising unemployment, crippling energy crisis and unsustainable debt burden. The cornerstone of the 100 days strategy is to raise tax revenues, curtail expenditures and give confidence to expatriate community to invest more in the future of Pakistan.
In a nutshell, PTI aims to raise tax revenues to 20 per cent of GDP within five years from less than 10 per cent of GDP today and increase foreign investment to $10 billion annually within five years from $1.5 billion today. Even if partially successful these measures will boost growth to above six per cent of GDP and create over five million new job opportunities. Perhaps more importantly this growth will not come at the cost of record build up in price pressures.
A stable Pakistani rupee and reduction in money printing by the government will help to bring headline inflation below eight per cent, compared to 14 per cent in FY11.
This will reduce cost of doing business in Pakistan and encourage higher investments in the economy. PTI’s think-tank believes that if these investments are channelled into three key projects then the growth trajectory of the economy will rise to above 10 per cent over the medium term, creating nearly eight million new employment opportunities. These projects include developing the Reko Diq project, the 5th largest copper and gold deposits in the world. The second project targeted is to develop the Thar coal deposit to produce 5,000 MWs, or 1/5th of the total power generation, and curtail the dependence on oil imports. Last and perhaps most importantly the construction of the Diamer Basha dam to produce 4,500 MWs and support higher agriculture production.
The PTI economic reforms agenda largely reflected aspirations of the business community and international financial institutions including the International Monetary Fund. The proposals on economic reforms sent by the Pakistan Business Council to the government ahead of the FY12 budget shows strong convergence with the steps outlined in the PTI’s 100-day plan. Similarly, IMF has linked all future funding to Pakistan based on progress on tax reforms and energy sector reforms.
However, carrying out these reforms is a Herculean task even at the best of times and most experts will testify that if somehow PTI does form the next government in the 2013 elections, they will take over at a time when the economy will once again be on the verge of a bigger and more painful balance of payment crisis than in 2008. The crisis in 2008 led to a 28 per cent drop in value of the rupee and fuelled record high inflation. In many ways Pakistan is even more vulnerable to a crisis today than in 2008 due to extremely flawed energy policies, with dependence on imported oil rising sharply due to the deterioration in the energy mix.
No government in the last sixty years has been successful in implementing these politically difficult decisions and the reasons are obvious. No one wins elections on the promise to put more taxes and undertake austerity measures. It didn’t work out too well for the Italian Prime Minister Silvio Berlusconi, it appears to have hurt President Obama chances for a second term and Pakistan is no different. Hence all mainstream political parties have shied away from making tax reforms a part of their political manifesto.
PTI has taken a huge political risk by putting tax and austerity reforms at the centre of its political manifesto but this bold initiative has paid off handsomely for PTI. It has given them a de facto leadership role in representing the demands of the business community by bringing these demands to the centre of the mainstream political debate. It has also removed the myth that putting economics ahead of populist slogans is bad politics. This is obvious watching the swelling ranks of PTI and growing appeal of the PTI reforms agenda amongst the rural and urban youth of Pakistan.

The author is a former World Bank employee and currently works with a leading commercial bank

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26 COMMENTS

    • so your daddy establishment sent half million people to his public rally ? only stupid PML-N leadership and their minority supports think this way!

  5. The best strategy to increase the tax/GDP ratio would be to bring in these changes gradually, and simultaneously with improvements in public services.

  6. I found imran khan's views on economy and politics in general childish and uninformed to say the least. In one interview he said that pakistan should end its alliance with USA and meet its subsequent balance of payments crisis by developing a copper mine somewhere in pakistan. Well Hello, balance of payments refers to current account and developing mines is a capital expenditure wich will take years to materialize when pakistan may default on its current liabilities. Moreover if america imposes sanctions on pakistan after its withdrawl or pakistan defaults, no financial institution will finance these fancy copper and coal projects. His views on taliban and peace talks with them are even more childish and reflect the pakistani army's view that all is lost in tribal areas and it is best to hand over parts of tribal areas to taliban which will make them more ambitious. All in all it is the sheer hopeless situation of pakistan and pakistanis inability to accept that their state and its idea has failed that makes them desparately cling to a mirage called imran khan. In my opinion Nawaz Sharif would be a much better bet for pakistan.

    • Dear Financial analyst I presume you are an accountant and not an economist, otherwise you would know that the much emphasized US aid accounts for 2% of the GDP and inefficiency and corruption accounts for 7% (world bank stats darling) which too are predominantly to fund the military intervention in FATA, and the proposed 20% tax hike is the only realistic solution to budgetary problems as the IMF has been emphasizing for 20 years none of his policies is unique or outlandish it is a standard cure for inflation ridden under developed countries who can not securitize there debt ( and that too is a short term solution see Italy), As for the mines being a Capital expenditure, It would probably going to be leased out with streams of cash starting quite promptly. As for the sanction (why, what?) Its not just a word that world leaders through around, In the "real" world they only come up when someone commits an act of aggression! (Now shu off and get back to the 8th grade accounting book)

  7. Well, as the newspaper won't allow outside link, here are more thoughts:

    First, make clear, credible promises for improvements and increases in public goods and services: infrastructure, public transportation, education, health, social security. If people see improvements in their standard of living by paying taxes, they’ll be more inclined to pay.

    Governments should show people that if they pay more through taxation, then their expenses will be reduced by the state, in some way, through cheaper education or healthcare, for example. Hence, taxes won’t simply be reducing the disposable incomes of people, but also a way of increasing the disposable incomes, through a reduction in expenditures on private purchases of traditionally public goods and services. This is directly linked to the above point on higher, better provision of public goods and services.

    Second, governments should be more transparent about how much tax is collected, from whom it is collected (geography, profession-wise), and where it is eventually spent. This will instill greater confidence among the public in the government’s initiatives, such as the ones listed above. It can also be useful in ensuring greater equality in terms of the tax burden, so that one powerful group does not evade taxation easily, while the less resourceful continue to pay fully. This is in fact the situation right now.

    Third, ensure that filing in taxes is easy, and that help is available for those finding it difficult. Make tax evasion hard in the first place. This is can be done by ensuring cross-checks between various data between agencies, and different levels of administrative (local, provincial, federal, etc). Penalties for tax evasion must be swiftly implemented without fear or favour. An honest, competent bureaucracy, including the police service, would be a great help here.

    Currently, the penalty for not paying tax is not high. Some groups simply aren’t touched as they are seen as too close to those in power, and others as being too powerful in themselves (some professional groups with strong unions, for example). Otherwise, you simply pay a bribe to get out of paying taxes.

    Fourth, reduce the tax burden on the lower and middle classes. This can obviously be done by lowering the income tax rate, but also by shifting the focus of taxation from indirect, consumption taxes to wealth taxes. Such a reduction, from a pure tax collection perspective, can be beneficial by giving people a much greater incentive to pay tax, instead of trying to evade it. It’s very much possible that the government may collect more tax revenue at lower rates but higher compliance, as compared to higher tax rates, but higher evasion as well. If all imposed taxes are paid, the result will also be a more equitable situation, as the ‘resourceful’ won’t be able to dodge the taxes at the expense of the ‘poor’.

    Fifth, increase the tax net to include untaxed and low taxed activity, such as agriculture.

    Apart from the above measures, the government can sell these reforms by explaining to the people that the high rate of inflation is due to some fundamental issues in the agriculture market, some malfunction markets (cartels) and the state bank printing too much money. The last problem can be dealt with by reducing money printing through higher tax revenue and a reduction in borrowing needs. A major problem of the government and the public will be solved this way. This will provide yet another boost to the purses of ordinary Pakistanis.

    On a more purely political front, this initiative can be linked to ensuring that Pakistan is sovereign, that it can pursue its own interests domestically and internationally without fear that its arm can be twisted by countries providing any aid. These measures, if carefully, clearly and systematically implemented should most certainly ensure that Pakistan collects more tax and governments are truly able to serve the people. It is simply a matter of will. One simply requires optimism of the will.

  11. Look at those who still live in fool's paradise, claiming Nawaz Sharif to bring prosperity. Why didn't he do that in his previous 2 governments. Anyways, I don't consider him worthy of my time.
    Imran Khan is the best option we have. He is honest, sincere, hardworking, and with a great track record. Most importantly, he is "UNTESTED". All others have been tested in the past many a times and have failed miserably each time. That in itself should be a good enough reason to try Imran Khan, let alone all the great achievements he has done for his country, over many years. Way to go Imran Khan, the youth is with you. The future belongs to you and your party.

  20. Munaeem Sahib. I am not going to help you on that. Now you have to do the research your self. He did talk about how he intends to raise and expand the tax base. Please pay closer attention! :0)

  21. And BTW, don't mock the 'dosts' with money. Rise of both China and India in modern times was germinated by their diaspora in the West. Whats wrong with the Pakistani diaspora returning back with their 'Moolah'?

  22. Aoa!
    a great article and one that finally brings to light the economic policies and tax reforms of Pti.
    Imran Khan will inshaAllah bring our country back on its feet , socially and economically!
    And my advise to my like minded friends is ignore the "kachra" who support the bigger "kachraaa"… jin k dilo pe Allah Talah pardah daal dein , meri aur tumhari baat kahan inn ko samjh aani hai.
    Ah
    Pakistan Zindabad!
    Imran Khan ZIndabad!

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