The International Monetary Fund (IMF) as well as other multilaterals has come under considerable criticism in recent months with respect to their harsh upfront monetary and fiscal policy conditions that have eroded Pakistan’s growth rate, raised unemployment levels, fuelled inflation through administered pricing of utilities and has contributed to a sustained erosion of the rupee against the dollar.
Two observations are critical. First, Pakistan is currently on its 23rd IMF programme, with each programme typically of three-year duration, which implies the country has been on a Fund programme for around 69 years out of its 74-year history. True, many of the programmes were abandoned midway into the programme as and when the balance of payments issue was resolved; however, the fact that this resolution was of short-term duration is reflected by the country going back on a Fund programme soon thereafter. To blame being a perennial borrower of the IMF on the economy’s reliance on imported machinery and semi-finished products and/or the rise in the international price of our major essential import items (including petroleum and products/cooking oil) reflects rather poorly on our long-term planning capacity to proactively identify and strictly adhere to import substitution policies that were implemented so successfully by India soon after independence.
And secondly, successive Pakistani governments have not acknowledged one overarching failing that continues to this day: the inability to implement the identified and agreed (with donors) necessary structural reforms specifically in the prevailing tax structure (which remains inequitable, unfair and anomalous to this day) and energy sector (with the circular debt rising to as high as 2.4 trillion rupees). The donors argue in favour of full cost recovery, which if implemented, would have mitigated the need to generate taxes from low hanging fruit and raising utility charges that not only impacts negatively on national output as energy is a major input in most productive activities but also compromises the value of each rupee earned by a household.
The Federal Board of Revenue (FBR) has prepared a money bill seeking the end of exemptions, defined as the levy of 17 percent standard sales tax on more than a hundred items, targeted to generate 330 billion rupees — a decision taken to meet the prior condition of the sixth IMF review. While in the West sales tax, over and above an income tax levied on all sources of income, is imposed on nearly all items yet income levels make this an appropriate tax. Those unemployed reliant on social security payments also receive an amount that allows them to sustain their quality of life. In Pakistan, reliance on sales tax as a revenue source is very high (43 percent of total taxes collected) — an indirect tax whose incidence on the poor is greater than on the rich. In addition, withholding taxes in the sales tax mode are collected by withholding agents instead of by FBR officials and account for more than 70 percent of all direct tax collections projected at 2.182 trillion rupees in the current year. To then make cash disbursements under the Benazir Income Support Programme, whose rise is not keeping pace with the rate of inflation due again to lack of fiscal space, followed by extending subsidies on specific items which in turn is exacerbating inflation rather than providing a buffer against it.
The government has pledged to implement tax reforms which include registration of high net worth individuals through Nadra, tax profiling and third-party audit, however, apart from the audit (and one would assume that there will be charges of nepotism in the selection of audit firms) the previous two administrations dwelt precisely on these reforms but failed to implement them. One would, however, wish success to the present government in implementation of these reforms.
The energy sector too has identified reforms that include preparation of a national electricity plan, improved indicative generation capacity expansion plan to increase the share of cheaper and renewable energy, Competitive Trading Bilateral Contract Market and made deals with independent power producers established pre-1994, 1994, and 2002 power policies (likely to reduce tariffs by 43 paisas per unit) though not with those established under the China Pakistan Economic Corridor umbrella. Again, salutary plans but meanwhile the government is raising base tariffs over and above the fuel adjustment charges and the Quarterly Adjustment Tariffs – major contributors to the inflationary spiral.
There is, therefore, no doubt that structural reforms are critical if the country is to stop passing on the onus of poor sector performance onto the end consumers. Instead of implementing easily reversible policies agreed with the IMF and other lenders/donors, including a high discount rate, withdrawal of exemptions and full cost recovery, one would hope that the government begins implementing structural reforms to ensure that the factors that constrain sector performance cease to be valid.
