Shakespearian saying, "uneasy lies
the head that wears the crown", proved very true for Mian Nawaz Sharif who is
trying to handle triple "E-crisis" (i.e., energy, economy, and extremism) since
his party won the general elections.
The severity of crisis forced PML-N
government to utilise three vital lifelines within first month of coming into
power. The first lifeline was Saudi Arabia. There were reports about Saudi oil,
up to the tune of US$ 15 billion, on deferred payment basis. However, this
lifeline did not work and the government had to resort to second and third
options, i.e., seeking a bailout package from IMF and rushing for Chinese
support mainly in energy sector.
Before the Premier’s current visit to
China, Pakistan had signed 400 MOUs with China, including a Free Trade
Agreement (FTA). However, more than 350 of such MOUs were just photo-shoot
opportunities and could never get materialize. The effectiveness of this
lifeline would not depend on the number of MOUs signed during Premier’s visit
but on the fact that how many of those would turn into legally binding
agreements.
Chinese investment in Pakistani energy
sector is quite a viable option provided we can offer an "easy entry and easy
exit" policy to foreign direct investors. The biggest bottleneck for FDI in
Pakistan is not physical security threats, but the policies and procedures that
turn both entry and exit of any investor extremely difficult and painful
process. So one has to wait and see if this lifeline brings any relief for
current Government.
The third lifeline, IMF is comparatively
safer bet than the other two. However, the staff level agreement of providing
Pakistan an Extended Fund Facility (EFF, a long term support for economic
reforms and to improve balance of Payment) needs to be vetted by IMF’s
Executive Board in September 2013, before any transaction can be made to
Pakistan.
This vetting would depend on "front
loading" by September 2013 of “home grown solutions” committed by Ishaq Dar’s
team. Before discussing the pros and cons of this home grown solutions, let me
talk you through on how IMF engages with its member countries.
A country decides to go to IMF when its
economy is not performing well and outflows exceed inflows. This situation
leads to a balance of payment crisis and that is where IMF comes handy. The
major component of Pakistan’s outflows in 2013 is debt servicing to IMF. We
have just made a hefty payment to the fund in June 2013 and need to pay another
US$ 3 billion within next few months. As we don’t have enough forex reserves to
make this payment, hence we have to borrow more.
EFF is an engagement for next 10 years. The
mark up would be 5.75 per cent ( 3 percent add on US Federal treasury markup
which is around 2.75 per cent) and its repayment would start after 4 years.
This implies that PML-N would be paying off the major portion of this EFF in
its next tenure only if it gets another turn in 2018 elections; alternatively
its successors would accuse PML-N of financial mismanagement and may have to
resort to another loan to clear this debt.
The cycle where the successive governments
have to take tough decisions for its predecessor’s "economic wrong doings"
results in lack of political ownership of IMF agreements.
IMF’s prescription is to reform the economy
through reducing fiscal deficit. The member country seeking help from IMF has
to present a plan on how it would curtail expenditures and increase revenue.
This plan is usually known as "home grown solution". The expenditures of Government of Pakistan consist of debt
servicing, defense & security, day to day administration, and development.
The former three are inflexible and more or
less sacred so there cannot be any reduction here. It means any home grown
solution to reduce expenditures would mainly hit the development expenditures
and to some extent (ritually) day to day administration expenditures. This
would hit the poor, lower middle class, and middle class the most.
On the other hand, the government of
Pakistan's major revenue sources are non-tax revenue, indirect taxes, and
direct taxes. Indirect taxes are applicable on everyone, whereas direct taxes
are applicable on taxable class only. While we know Pakistan’s tax to GDP ratio
is extremely low, we also know that majority of Pakistanis, irrespective of their
social status, are paying some sort of indirect tax. The implementation of
taxation policy is highly tilted in favour of elites.
The Finance Minister was adamant that he
would not impose new (direct) taxes, and would not abandon the SRO (statutory
regulatory order) regime which provides exemption from taxes and duties to
selected few. It is true that certain SROs are legitimate and necessary (such
as duty free import of medical equipment/ambulances by a charity hospital).
However, most of the SROs are a source of tax evasion.
Lack of political will for increasing the
direct taxes would lead the government to increase its revenue through indirect
taxes and non-tax revenue. Both of which again hit the poor, lower middle
class, and middle class the most.
The federal budget 2013, prepared in hurry
to present something tangible to the IMF mission who were to start its visit on
17th June, included the above mentioned
cost saving and revenue enhancement measures.
One agrees that the economy should be
documented; non targeted subsidies should be abandoned; loss making public
sector enterprises should be revamped; power sector should be reformed; and
austerity measures should be adopted. However, one also expects that on revenue
enhancement side, more people should be brought in tax net and direct taxes
should be levied. Income above a certain threshold should be taxed irrespective
of the fact that it is generated through industry, services, or agriculture.
Developing countries’ experiences with IMF
are neither very pleasant nor very helpful. However, unless any other lifeline
works, IMF is a quick fix solution. While availing this solution, it is
governments’ duty to ensure that majority of Pakistanis who fall in low income
group are protected from side effects of front loading of home grown solution.
Life of people belonging to middle and lower income groups is already
miserable. They should not get the undue share of uneasiness for the crown they
never wore.
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