“Equality is a lie. A myth to appease the masses. Simply look around and you will see the lie for what it is! There are those with power, those with the strength and will to lead. And there are those meant to follow — those incapable of anything but servitude and a meager, worthless existence” — Darth Bane.
At least the entertainment world calls a spade a spade! On the other hand, in real life, those with power are under compulsion to make all efforts to maintain the lie of equality, simply to preserve their dominion over those meant for servitude. If there are any doubts pertaining to the truthfulness of the aforestated assertion, macroscopically review all political and economic systems in vogue in modern history and the truth will speak out. Taking a swipe at the supporters of democracy is surely becoming a pleasurable distraction for the devil’s advocate.
After Loki in the Avengers, specifically his perfectly articulated dialogue “Kneel”, Darth Bane blatantly exposes the lie for what it is. For the record, this Bane, although a villain, is not from the Batman franchise. As any Star Wars fan will passionately explain, Darth Bane is the Dark Lord who restores the Sith to Glory in later parts of the franchise, so wait for the movie.
The lie, however, is in danger of collapsing in Pakistan at least, for there is a limit to how much suffering the masses can continually endure; hope is not immortal. Admittedly, four months are insufficient to carry out any performance appraisal of the government, albeit the way the situation is progressing, by the time the impact of their actions or inactions kick in, it may be too little too late.
The recently negotiated agreement with Pakistan’s favourite — by necessity — international creditor, provides an insight into what the future has in store, and it is indeed alarming. Perhaps the current team had no choice, perhaps the follies of previous governments have come to the fore, and perhaps the creditor was unreasonable, but whatever the reason, abatement of the current economic slide appears dubious. All the conditions agreed to with the lender, as detailed in their country report, point towards further contraction in the economy and it is unclear how growth, if even on the agenda, will be stimulated.
Starting from the power tariff, a weighted average increase of 30 percent, with effect from October 1, 2013 has already been notified. It has also been agreed that all subsidies will be phased out for users above 200 kWh and reduced for all but the lowest in the 0-200 kWh range within two to three years. And that is not all; a gas price rationalisation plan, which is perhaps a polite phrase to suggest increasing rates substantially, is set to be announced by December 31, 2013. Increasing prices to eliminate subsidies is never a rocket science and was always on the table; the related complications were the hindrance. The 30 percent increase in energy costs will have a significantly adverse linear impact on inflation and consequently disposable income of the already struggling populace; the question is how far they can be pushed.
On taxation, the IMF report admits that the first-best option to raise tax revenue is a full value added tax, which opinion should silence most supporters of progressive taxation. The report also finds that low numbers of taxpayers in the country reflects the long-standing failure of the Federal Board of Revenue (FBR) to administer the system; the government’s acquiescence to this particular assertion is rather interesting. Nonetheless, given these findings, how is increasing direct taxes on those who are already within the tax ambit a solution? If the FBR could not administer the system before, what has changed that will ensure that existing taxpayers, faced with higher taxes, don’t opt for evasion as well?
Wonder why the rupee is depreciating? Well, according to the IMF report, it was kept roughly constant in the first half of 2013, during the run-up to the election, by the State Bank of Pakistan (SBP) intervention. To find out why please revert to the beginning of the article. Now the SBP has been instructed to focus on rebuilding foreign reserves and purchase foreign exchange from the market. The SBP sold $ 3.5 billion to maintain stability; how much the rupee can depreciate by repurchase of an equivalent amount is left to the reader’s imagination. Curiously, policy initiatives are silent about the key culprit behind the rupee’s slide, a burgeoning trade deficit. Why lenders do not support import curtailment is an interesting anomaly, which the leadership needs to reflect upon.
Inflation reduction has been identified as a top priority of the SBP with instructions to refrain from further lending to the government and limit liquidity injection in the economy. Unless the vision is to have no government in Pakistan, the former verges on fantasy. As regards the latter, considering the inflation begetting steps highlighted above, in order to reduce inflation, the SBP will have go beyond simply surrendering its magical ability to create money, it will have to destroy money.
Continuing with the proposed, albeit disguised, austerity drive, the government has been asked to perform another miraculous act: balance the budget. On top of that the fiscal deficit is to be curtailed. It is unclear whether such conditionalities were included to simply add a touch of humour in an otherwise worrisome report, but if an austerity drive is on the cards, what will happen to the development budget? And after sapping the economy through inflation, rupee depreciation and taxation, how will savings grow and where will investment come from?
Structural reforms are the suggested panacea. One has always remained sceptical about such reforms. How steps such as SBP autonomy, deposit protection and one-stop shop and the like increase investment has always been befuddling. If that was ever the case, emerging markets and oil-rich monarchies should never have become a fad. The truth is that investment pursues resources and markets irrespective of the related control environment; however, to Pakistan’s detriment, money is allergic to security risk.
Surprisingly but heartily, the report finds that while data provision has some shortcomings it is broadly adequate for surveillance. This, however, appears to be a contradiction; adequacy of data suggests absence of a sizeable undocumented economy, hence fully taxable. Nonetheless, moneylenders, formal or informal, have a right to monitor progress to ensure that things move in a direction conducive to recover their debt. One is reminded of an outburst by a businessman friend, perturbed by the ever-increasing requirements of his lenders, appropriately censored for profanity, “Why do they think I set up the business in the first place, to work hard and make sure that they make a profit?”
Truly words of wisdom. The nation, nay only the meagre and worthless, will work all year around to generate a surplus and then hand it all to the lenders, and if that is not enough, will be forced to sell their assets, and when there are no remaining assets, the lender will probably insist upon selling land!
While all the time the masses crushed by inflation will scream for mercy.
“Those who ask for mercy are too weak to deserve it,” stated Darth Bane.
Wondering when lender conditionalities will insist upon structural reforms in golf!
Shudder!
The writer is a chartered accountant based in Islamabad. He can be reached at [email protected] and on twitter @leaccountant