A vicious cycle indeed!
Pakistan’s consent of raising additional Rs40 billion in tax revenue makes the common man cringe. Of course, there is hardly anything that Pakistan can do without IMF programs, but how do we advocate the continuity of such an aid program when we have failed to meet the targets set by IMF yet again.
With fiscal deficit alarmingly high, there are two options Pakistan has; to decrease the expenditure or to increase revenue. For ease of understanding of the readers, the options Pakistan has in this regard are expanded listed below:
- Decrease the expenditure. Yes non-developmental ones can be curtailed but there is no prospect of such a measure;
- Increase value-addition in exports. Well, that can’t be achieved overnight for obvious reasons. So revenue has to be raised in some other way;
- Broaden the tax net. Anyone who has had a look at the Income Tax Ordinance 2001 would know that with scores of exemptions and deductions this is hardly possible;
- Impose additional taxes on those who are already regular taxpayers. Well, the only feasible choice. So let us do it.
Now, the magnitude of the amount that is to be raised is huge — by any standards. However, the failure to inculcate economic equitability can cost PML-N its predominant position. The next general election is not too far.
Dr Salman Shah, former caretaker finance minister of Pakistan and an expert in his domain, thinks that inability to carry on reforms in this regard has pushed Pakistan downhill.
“You have not been able to do any reforms,” he said. “You have not been able to reform the energy sector, and you have not been able to reform the taxation system.”
So there we are. When will we stop living on foreign aid granted by IMF and other agencies? What exactly are we doing wrong? Where we heading and what are the prospects? Let us explore these questions.
Why just blame the IMF?
Portuguese writer José Saramago once opined that the world was governed by institutions that were highly undemocratic in nature. He named IMF in the list. There is a perception that living on IMF money destroys countries, and Pakistan has been so used to living off aid rather than trade that the future looks bleak.
When will we stop living on foreign aid granted by IMF and other agencies? What exactly are we doing wrong?
However, we have examples not very far geographically who have wriggled out of IMF programs. Examples include Malaysia and Korea. But then again we have countries declaring bankruptcy – Greece, for example!
But blaming our financial failure on IMF is not the best way.
Dr Shah thinks that IMF becomes inevitable once a country’s economy is under dark clouds.
“There are hardly any option other than IMF for countries in trouble and non-performing economies,” he said.
“It serves as the lender of last resort. The contribution is in the form of balance of payments support, macroeconomic stability and in prospering private sector.”
This is exactly what Pakistan is in need of. However, as the famous economist Gregory Mankiw declared in his ten principles of economics, the cost of something is what we give up to get it. In our context, the cost of IMF aid is giving the financial irresponsibility that we are so accustomed to. However, we have been ignoring it for years. This is what Dr Shah also pointed out.
“The aid from IMF comes along with certain targets,” he highlighted, “for instance, reducing the budget deficit and increasing the tax revenue.”
And missing targets definitely would have repercussions, no?
“When you miss out the targets given by IMF, naturally they will ask you to raise money through tax revenue,” he added.
Dr Kaiser Bengali, another distinguished economist and advisor to the Baloch government, also talked about this trend.
“Targets do get missed continuously,” he said. “It’s the second year now in this case. And when there are meetings with IMF, it does grant waivers, and gives additional loans.”
However, this is more than generosity. This is a dangerous trend and raises red flags for Pakistan. Dr Bengali quoted the example of Greece.
“Now this is a dangerous trend,” he explained.
“This was the case with Greece as well. When it was totally unable and could not repay, then conditions were attached and privatisation was ordered, where other countries bought the assets of the public institutions at very low prices by other countries. So there is a red flag concerning it as well.”
Definitely this is not the fate that we would want for Pakistan. However, living off the IMF programs and then not fulfilling the targets is a sorry tale of economic inefficiency and lack of enough thought.
“When you are on an IMF program, it sends signals to the world that you are getting back on track,” Dr Shah said.
“However, if you are unable to satisfy the conditions attached, then a negative signal is sent instead.”
So well – while it is easy to attribute all of our economic difficulties to the IMF, we need to be responsible and realise that much of it is our own doing! Had we taken our economy somewhat seriously, the condition might have been different.
Taxation inefficiencies – the real culprit
The main channel of raising state money throughout the world is through taxes. We do have taxes in Pakistan too of course. But the problem is only those pay taxes in Pakistan who are forced to pay. For one thing, people do not see any return paid on their money, and secondly the inequality in this regard puts most people off. Consequently, tax evasion is the new normal.
And what does the government do? Rather than broadening the tax net, it makes sure that the system becomes harsher on those already paying taxes.
Dr Bengali highlighted this trend.
“IMF asks us to decrease the budget deficit. There are two ways to attain this. One is through curtailing the expenses and the second is through increasing revenues. A large chunk of our expenditure is non-developmental. We do not curtail it and the only option left is increasing additional taxes.”
This inequality is not limited to taxes. There is discrepancy in sectors as well. Some sectors are more prized, whereas others are treated as step-children.
“Ok so talking about taxation, let us look at various sectors,” Dr Bengali began his analysis. “The tax to GDP ratio is nine per cent overall. However it varies across sectors. It is 0.5 per cent for agriculture, six per cent for services and 29 per cent for manufacturing. Now, the manufacturing is the sector that can provide additional employment and also increase exports. We are seeing no considerable change in employment and exports are dwindling. One reason behind it is burdening of manufacturing sector with taxes.”
How smart we are? Right now, we should rely heavily on manufacturing to ensure some economic growth. And all we are doing is burdening it unnecessarily.
Umar Masood, en eminent name in the business world, also talked about the tax net issues.
“Our main issue is our tax net,” he commented.
“We need to cover additional people and businessmen, for instance, those who are sitting at Shah Almi do earn a lot and also import stuff. But such people are not under the tax net.”
Therefore, it is the need of the hour that there are serious considerations given to improving our taxation system. However, the imminent need to rise additional money does not give us enough space. What can easily be forecast is a very harsh and inequitable tax regime.
Economic activity – says who?
Mankiw also had the temerity to declare that governments can sometimes improve market outcomes. Although all seasoned economists and gurus — the likes of Adam Smith are in favour of economic liberalisation and free markets — Mankiw still thinks that government intervention is important sometimes. If that is the case, then this is the time when the Pakistani government needs to intervene for the better.
Masood thinks that a start has been made already.
Dr Bengali talked about prioritising the developmental expenses and getting rid of the rest
“Some development activity has started already,” he said.
Dr Shah, however, is disappointed. “Our government, which is totally political in nature, has not been able to reform the taxation system, owing to lack of competence,” he declared clearly. “If you look at our cabinet, it does not have the capacity to do so.”
So, with this problem lingering on, there is hardly a way of improving the economy. He further talked about various factors that have crippled our economy.
“There are various reasons behind our economy not performing well. The energy crisis is one reason. If you look at the issues of the textile sector they stem from the energy crisis. There is inefficiency in the system and there are losses. There is no competitiveness and reforms are needed. Again privatisation was not done of the institutions needing it. And the tax net has not been broadened. FBR reforms are not done.”
So, right now, we need some reforms, and we need to think about it seriously.
Where to head now
The next important dimension of this dilemma is the direction that we would want to take now in order to improve our economic condition.
Salman Shah is of the opinion that charity begins at the centre, and reforms need to be implemented, starting from the government itself.
“Governmental reforms are important, starting from the cabinet itself,” he said.
Masood thinks we need to look around the world and see successful examples in this regard.
“When Dr Mahathir emerged in Malaysia, it had a lot of debt. However he got rid of it. When questioned on how he was able to do so, he replied that he had two ambitions; to get rid of IMF and to make a nation. This is what we need.”
However, to make a strong nation, some sort of sacrifice is imperative, as he pointed out.
“Some sacrifice has to be made in the beginning. Those above the poverty line should be classified into sections as per their ability to pay, and then should be made accountable if they do not pay taxes. There should be special tax courts for this purpose. The government needs to give some tax rebate to salaried people. “
Dr Bengali thinks there needs to be equitability among various sectors.
“Agriculture enjoys exemption from tax,” he pointed out.
“And that is through the Income Tax Ordinance itself. This however needs to change. There is capacity in agriculture and services to bear more burdens of taxes, and we do need to give some relaxation to manufacturing so that it can lead to enhancement of employment opportunities and an increase in exports.”
Again, there is more to the picture than taxes alone. Economic growth is also important in this regard.
“There is a need for pouring in of FDI. And the payoff on it is important.” Masood said.”The economy needs to be self-sustainable. The more we borrow, the more we get into the trap. Fiscal deficit needs to be covered.”
It is also important to see where we spend our money. Dr Bengali talked about prioritising the developmental expenses and getting rid of the rest.
“The solution is there. Get rid of the non-developmental expenses for now, and get rid of the budget deficit.”
One ends up wondering why such simple things are not so simple for Pakistan. However, it is high time that we start looking beyond IMF now. Trade, not aid, should be our focus. Coming to Mankiw again, a country’s standard of living depends on its ability to produce goods and services. We need to realise this.
And, most importantly, we need to get wiser about our taxation system, otherwise the cost would be beyond economic – it could be political.
