New economic team

GDP at current market prices for 2017-18 on State Bank of Pakistan’s website Rs34,396,491 in million.

Many a time, people become a victim of their own propaganda. Mr Khan’s financial team also got carried away and believed that an honest Prime Minister has decided to go at war with corruption and bring back the $200 billion stashed abroad by Pakistanis through money laundering.

Asad Umar was named as a shadow finance minister by PM Khan much before coming into power. He should have kept himself abreast with the ground realities. Each economy has its own ecology which can only be changed gradually depending on whether the political party has a clear vision on what it wants to do long-term and change it from what to what.

So Umar immediately, after being sworn in, was challenged by the big gaping hole in the current account deficit. It was eminent that they would have to go to IMF and beg for foreign aid from other lenders which Mr Khan has frowned upon in his rhetorical speeches as an opposition leader. Even after coming into power, he had said that he would rather commit suicide than go with a begging bowl to others for the country. Personal pride is good but as the prime minister of a country which has always relied on foreign aid, such remarks just made him the laughing stock of the country.

Asad Umar perhaps thought that if we coax and get temporary relief from Saudi Arabia, UAE and China, he would be able to bridge the gap in the current account deficit or at least he would be going to IMF for a smaller amount and so, less conditionalities would come with it. What he did not realise is that IMF has another role also, which is that it keeps a close tab on the economic situation of the borrowing country. This gives kind of a comfort to other lenders and investors that the economy of the country where they are investing or lending is being closely watched. It also gives kind of a sense of stability to the local markets.

Delaying to go to the IMF did not help the economy and created instability in the market and business climate. Businesses usually also want to know the conditionalities of the IMF because that helps understand the future trends of the market.

The economic instability panicked PM Imran Khan’s selectors because they are the ones who consume almost 25% of the revenues collected by the government. To increase their budgetary allocations for defence, they are also trying to somehow reduce the share of provinces in the divisible pool so that the centre has a large piece of the pie and their share increases accordingly. The selectors pressurised Mr. Khan to change his economic team. Thus, the entry of Dr Abdul Hafeez Sheikh was made possible.

Imran Khan had never met the gentleman so he had no understanding of his capabilities, but his performance during Musharraf’s time as the Sindh finance minister and then as the federal privatisation minister and during three years of the PPP government where he was the third choice after Ishaq Dar and Naveed Qamar had impressed Imran Khan’s selectors.

I knew him as the Sindh finance minister and found him quite right and capable of thinking of out of the box solutions. I invited him to make a presentation on a privatisation seminar held for journalists in Islamabad to explain to them what privatisation means. He impressed the Islamabad journalists with his presentation and they said that you should be in the centre.

In a given Pakistan situation, no finance minister has elbow room to do much with the budget. The IMF has already laid out its conditions for the next three years

In a given Pakistan situation, no finance minister has elbow room to do much with the budget. The IMF has already laid out its conditions for the next three years. According to a news report which was not denied, they have told Pakistan that it should raise its provincial and federal taxes by over 1% of the GDP every year during the period of the programme which continues till FY22 – it covers much of the tenure left for PM Imran Khan.

So what IMF wants is for the federal and provincial governments to raise their tax-to-GDP ratio by over 3% during the programme. That is a big task as without any innovative or new taxes there is a possibility that Pakistan once again will fall in the category of one tranche country. It is also likely that IMF’s recommendation that Pakistan should have market-based foreign exchange rates would further fuel the inflation in the country.

There is a lot of confusion about the proposed investment of China in CPEC. We don’t know where the investment is reflecting in the FDI coming to Pakistan. So far, it is nowhere to be seen. We also don’t know at what rate the Chinese bank is lending to their own companies for projects in Pakistan and for what duration. Their repayment will become a burden on the already strained current account deficit. Now what can Hafeez Sheikh and the provincial governments do to increase their revenue as conditioned by the IMF?

The present system cannotprovide them with increased revenue. The existing taxpayers have little elasticity to be stretched more. Therefore, new taxpayers have to be formed by plugging the holes in the formal economy where they are evaded.

For instance, most of the textile products used by Pakistanis at the lower-end don’t reflect on the balance sheets of textile mills. They pay their taxes on exports where it is minimum, but what they sell to the domestic markets is all part of the cash economy where no taxes are paid. Some honest chartered accountants can work out how much cotton was purchased by these mills, what was the average production and from where the domestic markets needs are met. It can also be worked out backward that how much cloth the average Pakistani uses in a year and where it comes from.

For the provincial governments, it is easy to increase taxes on the cash crops because it is very low at present. This can be collected by making it mandatory for the ginning, rice and sugar mills and wheat procurement agencies to cut the advanced income tax on these products while paying from the farmer’s income. But care has to be taken not to levy high rates without impugning much on the income of farmers.

The writer is the author of What’s wrong with Pakistan? And can be reached at ayazbaber@gmail.com

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