License to misgovern
The actions of this government on the economic front continue to baffle. New taxes to the tune of around rupees 40 billion were slapped on people and businesses last week, all in the name of aiding balance of payments and pleasing the IMF. The ethical justification being that tax has only been levied on imported luxury goods, except one, and therefore the new levies will neither stoke inflation nor burden the common man. All very well in developed and mature economies, but what Mr Dar is forgetting is that by most reliable accounts more than 50 percent of Pakistan’s economy today is undocumented and even worse the legitimate manufacturing that remains in the organised sector stands seriously crippled owing to rather un-visionary policies over the last two and half years. The domestic supply side, with its competitiveness eroded, either stands on the brink of closure or due to an absence of required operational reinvestment is slowly drifting towards the dangerous emerging trend of residual sector al monopolies.
In such a scenario these new taxes will at best act as protective duties for local monopolies or near monopolies to raise prices on items that otherwise faced competition through imports and for importers as a simple excuse to raise prices of their imported goods. Also, smuggling, something that is seriously hurting the economy and revenue collection, will turn more attractive. As for the FBR’s claim that it will not allow prices of affected essential items to go up in the local market: a) price-control does not fall in their domain; and b) the less said of its management the better. The fact is that good or bad, a revenue collection mechanism is presently in place in the country, and in case these 40 billion rupees are indeed required on such urgent basis, a sensible way would have been to instead announce measures that facilitate and expand legitimate market transactions (and not distort them) to collect this extra amount from within the existing collection framework.
In corporate management we say that every organisation has an embedded culture and unless a corporation is completely overhauled, that culture is difficult to weed out. Our CBR, that is now FBR, also has a culture and merely changing its name or shuffling its personnel will not change its rather entrenched underlying culture — a culture of preferring entrapment and coerciveness over inducement, something, which now from its internal workplace is spilling over to the larger national canvas. Instead of incentivising tax payers it favours the non-filers. Naturally, such a mindset has overtime given rise to FBR’s own operational inefficiencies and corruption, and an unhealthy-cum-narrow concentration of revenue generation base within the economy. For example, only three large tax paying units (LTU) in Karachi, Lahore and Islamabad generate as much as 90 percent of total revenue coming through tax-return assessments, whereas for the rest of the country the cost to collect tax far exceeds the actual collection. The picture looks even more alarming when looked through the prism of slab-thresholds, which shows that only a handful of corporations pay 65 percent of the 90 percent in the three LTU. According to a third party report on tax reforms, ironically, 95 percent of total income tax can continue to be collected even after closing down the FBR.
Evidently, this spillover phenomenon is mainly reflected in its policy formation where we invariably see an inclination to opt for indirect taxation (the easy option) instead of striving to widen the tax base. The problem with this lopsided approach is that a) instead of equitable distribution of liability it puts undue burden on the common man; and b) it undermines the very sustainability of revenue generation in an economy by undermining fair economic activity. Regrettably, this recent effort to raise 40 billion rupees comes across as being no different.
Perception and stability are the hallmarks of good economic governance. Given that Pakistani exports are already struggling to sustain themselves it was quite surprising to see a public banter between the Finance Ministry and the State Bank over the rupee to dollar parity. A brief manipulation last week to artificially strengthen the rupee (albeit for a short period) against the dollar was even more surprising and achieved nothing but fuel speculations and innuendos. Not that one advocates a weak rupee, because history tells us that nations succeed in posting higher export growth rates through ensuring stable currency periods and not through devaluations, but everything has to be a part of an overall strategic plan.
While it was heartening to see Mr Dar’s resolve in his recent statement that the government will see to it that our exports are put back on track, but the questions is: How, Dar sahib? Surely imposing an additional five percent duty on furnace oil – further eroding our manufacturing’s competitiveness – or nurturing a desire to tax anything and everything that goes down in price in the international market cannot be the right way forward. More critically, in exports timing is of essence. Markets once lost cannot be gained back easily. Meaning, mere resolve won’t do and the government needs to act quickly because the reality is that our regional competition takes its industry very seriously. For them the people come first and employment per se is paramount. For example, in India, where industry closures is like a governance taboo, state governments go that extra mile with textile mills – an industry with the highest capital-employment ratio – to see to it that they do not downsise. In Tamil Nadu the government picks up a part of the wage bill plus accompanying levies to avoid redundancies or retrenchments; Gujarat has a scheme that pays back a portion of the power bills; and in Maharashtra the high employment industries are facilitated through direct fiscal incentives.
Further, economic management is also all about confidence and trust. And this is why one feels the government is wrong in its approach on PIA (Pakistan International Airlines). Some national institutions need to be looked beyond simple accounting statistics and through the lens of national pride and ‘unity’. No one is averse to seeking alliances and collaborations within the global airline industry to stoke operational synergies, but the solutions should be led by homegrown management professionals who devise a turnaround strategy without compromising on public ownership structures of such flagship institutions and without shaking our national confidence and pride. If Air Italia and Air India, with liabilities far worse than PIA, can find competent sons of the soil to spearhead them out of trouble and that too without ownership changing hands, why can’t we?
Lastly, I will end with a strange management statement recently ushered by the Finance Minister, saying that he wishes for the political parties to reach a ‘charter of economy’, as if the charter of democracy has not already raised enough eyebrows. Sir, one can understand a broad consensus on an economic system or an economic model a country should pursue so that long-term economic policies can be envisioned, but yet another signed off charter — now on the economy — would be like giving a license to the politicians to misgovern endlessly.
