Nov 14, 2010

Looking for an alternative

Do we have an option other than going to the IMF and World Bank every time we have a problem?

By Huzaima Bukhari and Dr. Ikramul Haq

On November 24, 2008, the International Monetary Fund (IMF) approved US $ 7.6 billion 25-month Stand-By Arrangement (SBA) for Pakistan, which was later on enhanced to US $ 11.3 billion. According to official website of IMF "on September 15, 2010, the Board approved further US $ 451 million disbursement under the Emergency Natural Disaster Assistance framework to help Pakistan manage the immediate effects of the massive and devastating floods, and protect the most vulnerable US $ 9.6 billion".

The latest Press Release (10/417) dated November 3, 2010, issued by IMF after the visit of its Staff Mission to Islamabad, says that the Fund "remains committed to the ongoing dialogue with the Pakistani authorities, and discussions will continue including around the Pakistan Development Forum to support Pakistan's efforts to strengthen macroeconomic stability and growth and completing the fifth SBA review."

A number of conditions were imposed by the IMF for its lending to Pakistan. The foremost demand was to impose indirect taxes, ignoring that already 80 million mobile users are paying hefty 10pc income tax and 19pc sales tax on gross amount spent, but the rich and mighty enjoy exemption on their collosal wealth and income.

The demand to introduce Value Added Tax (VAT) from July 1, 2010 was avoided by the government under one pretext or the other. It resulted into blocking of tranche of $1.7 billion by IMF. The government has now given a new deadline for imposing Reformed General Sales Tax (RGST) -- another name for VAT -- to get the deferred tranche. The IMF imposed the following terms and conditions for US $ 9.6 billion IMF loan:

1. 30pc reduction in defence budget (over 4 years).

2. Downsizing of government and semi-government departments from 350,000 to 120,000.

3. Change in tax structure to increase general sales tax by Rs 50 billion in 2009 and implementation of VAT from July 1, 2010.

4. Agriculture tax of 7pc on wheat production and 3.5pc on other crops.

5. IMF will have official control on monitoring revenue collection and making changes in tax system whenever it wants.

6. Six IMF directors and two World Bank directors will monitor preparation of the federal budget of Pakistan.

7. Pakistani government will be bound to report to the IMF all other loans negotiated with other countries (including China) 48 hours before signing the funding agreements.

Some experts are of the view that there is nothing wrong with conditions imposed by the IMF. According to them, these conditions cannot be termed as "dictations". These conditions, in fact, are beneficial aimed at creating fiscal discipline -- our rulers are notorious for violating all the established norms and regulations.

These experts plead that for wasting borrowed money, the fault lies with Pakistan's ruling classes and not with the IMF or World Bank. Had these conditions implemented, Pakistan could have improved its financial governance, but funds were ruthlessly squandered by the elite.

During Musharraf-Shaukat era, economic managers were telling lies to the nation that all ties with IMF and other foreign donors were severed, whereas in reality new loans for reforming tax, banking and justice systems -- just to mention a few -- were negotiated with unprecedented vigour.

The democratically-elected government also decided to follow the same path. Their justification was that with the IMF loan, financial discipline and transparency would come -- the result after three years is diametrically opposite.

The IMF experts, rulers and FBR stalwarts are all ignoring the inequitable character of our tax system, under which the burden of taxes is less on the rich and more on the poor -- RGST that is VAT will further force many to go below the poverty line. In the face of this stark reality, the IMF is suggesting more regressive taxation, such as enhanced GST and presumptive taxes in income tax law.

Over a period of time, our tax system has become oppressive and target-oriented. There is a dire need for discussing the philosophical framework, the principles of equity and justice, which should be the main concern of our tax policy; not mere achieving of revenue targets.

Our tax managers are meeting budgetary targets through oppressive taxes, shifting incidence on the poorer segments of society and exempting the rich. They are not tapping the real tax potential that is not less than Rs3 trillion. The great divide between the poor and the rich will further expand under the IMF's prescription of RGST.

The FBR may manage to collect more taxes, but this will not serve the real purpose of redistribution of wealth, which is at the core of any pro-people tax policy. On the one hand, we are not collecting taxes according to the principle of 'capacity to pay' and on the other, annual targets are fixed to further squeeze the already dried tax base -- there is no political will to tax the rich absentee landlords, big property owners and those who are engaged in wasteful expenditure .

The rich absentee landlords remain outside the tax net, while the poor are paying 16 percent GST on even a basic commodity like salt sold under brand names. When tax was imposed on salt in the colonial era, the visionary leaders of that time staged a revolt against such high-handedness. But in the post-independence period, our rulers are playing havoc with the economic life of the poorest by levying exorbitant tax on salt and many other everyday eatable commodities, besides enhancing the prices of utilities and POL prices beyond the capacity of pay of vast majority of the population.

There is no justification to raise the GST rate to 16pc in the Budget 2008-09 -- the IMF was not even in the picture at that time. The real tax potential of undeclared income/wealth in Pakistan is between Rs3 to 4 trillion, according to very conservative estimates. If we manage to collect annual tax revenue of Rs. 3 to 5 trillion in the coming three years, the government's reliance on domestic and foreign loans can decrease significantly. It is not possible unless FBR is converted into honest, competent and efficient body.

The collection of taxes to these levels can eliminate budget deficits. Resultantly, Pakistan can concentrate positively to retire debts in the shortest possible time. The successive governments have utterly failed to convince the Pakistani people for paying taxes due from them.

The common argument against paying taxes is that money so collected is spent for wasteful purposes and on unprecedented benefits enjoyed by high-placed civil-military bureaucrats and corrupt politicians. These classes will have to demonstrate by actions that taxes collected are not meant for their luxuries.

The State must earmark revenues for specific purposes and place the same in funds created for debt retirement, creation of employment zones, and provisions for social services like education, health, housing, etc. This would inspire the people to contribute generously towards the national exchequer. This is the only way that revenues can be generated through voluntary compliance and at the lowest possible cost.

The present policy of imposing irrational taxes, e.g. taxing even that portion of citizens' income that they spend on educational and medical needs, can never produce any positive results. These are bound to create more inequalities in the society leading to social unrest and lawlessness. The State is so indifferent towards the law and order situation and high charges of power and gas that no investor--domestic or foreign--is inclined to invest.

Today's Pakistan represents a State where a trio of corrupt civil-military bureaucrats, incompetent politicians and profit-hungry businessmen is very affluent, but the Government is poor and relying more and more on borrowed funds -- our total external debt has now touched the monstrous figure of US$ 55 billion and internal debt now stands at Rs6 trillion.

This state of affairs is the direct outcome of the policies of successive regimes -- military and civilian alike -- to allow a free hand to forces of loot and corruption. Our ruling classes will never want Pakistan to come out of debt enslavement as it would end their perpetual control over the State and means of production.

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