Feb 8, 2011

Blind alley

The government may have to take some unpopular economic decisions in the days to come

By Mehtab Haider

The government seems to be in a fix over the issue of pursuing economic reform plan. The economic managers have apprised the government that in case of failure to deliver on this front could push us towards brink of economic collapse where economic activities would be further choked and inflation could rise to unimaginative levels, ultimately brining down the government. The government considers that the imposition of RGST, other taxation measures, withdrawal of subsidy on the power sector, and raising prices of POL products could land them in trouble.

Economic managers say there is no other option but to take additional measures to raise revenue in February as well as reducing the ballooning expenditures to cut down deficit in the range of 5.5 percent to 6 percent of the GDP, which is equivalent to Rs1000 billion. If the step is not taken, the budget deficit could increase to over 8 percent of the GDP and that will translate into Rs1300 billion gap between revenues and expenditures.

In case appropriate measures are not taken, inflationary pressure would further aggravate as the latest State Bank of Pakistan (SBP) projection shows it would be hovering around an average rate of 16 percent for the ongoing fiscal year against the initial target of 9.5 percent. It means that with scarce resources the government will be forced to ask SBP to printing money on a daily basis in order to meet day-to-day expenditure that would fuel inflationary pressure.

Can the government take unpopular decisions? Former Special Secretary Finance and Dean NUST Business School, Dr Ashfaque Hassan Khan, says the government has not performed well on the economic front. He says instead of discussing the 10-point agenda at this point in time, “only one point agenda should be the mainstay of ongoing negotiation between PPP and PML (N) and that is reviving the economy”.

Khan says it is a good opportunity for the government to impose agriculture tax as it would help broaden tax base as well as equally burdening other segments of society. “It is first time in Pakistan’s history that the IMF team is directly interacting with political parties to convince them on Reformed General Sales Tax (RGST) and other taxation measures because the government remained unable to muster the required support in this regard.”

The IMF officials understand that political parties are not ready to accept RGST until a comprehensive plan is put in place by imposing tax on agriculture income exceeding Rs3, 00,000 per annum by making legislation to this effect as well as bringing real estate under the tax net.

The IMF team is of the view that Pakistan needs short term and medium term measures to come out from the economic crisis as it would not be viable not to pass on the POL prices, which touched $100 per barrel in the international market. The government can lose 40 billion if it keeps prices at constant level. It will not be able to generate petroleum levy of around Rs8 billion with the existing price level.

With the help of the US and G-7 countries, the government is striving hard to convince the IMF for gaining more time for implementing RGST. The RGST amendments could be made part of the Finance Bill 2011-12 by withdrawing exemptions. The IMF has given conditional consent to delay the imposition of RGST if Pakistan takes additional revenue measures in the remaining five months (February-June) of the current fiscal year. The IMF officials say medium and long term measures both on revenue mobilization and expenditure curtailment could pave the way for achieving macro-economic stability.

In case there is a consensus among political parties and the government on taking additional revenue measures as well as reducing expenditures by 10 to 15 percent, including downsizing the federal cabinet, the IMF will send its team by the end of this month to revise macro-economic framework of the current fiscal year.

Deputy Chairman Planning Commission, Dr Nadeem Ul Haq, talking to TNS, says negotiations are on with the IMF and consensus would be achieved if all political parties show maturity on this count for achieving higher growth rate with an average of over 8 percent for the next 20 years.

Conceding the slow pace of power sector reforms, Haq says “Pakistan’s economy requires minimising the role of government which is involved in activities such as construction and import of sugar and other commodities. It should be the role of the private sector, instead of public sector-owned entities.

Vice Chancellor Pakistan Institute of Development Economics (PIDE), a subsidiary of Planning Commission, Dr Rashid Amjad is of the view that it would not be a viable option to not increase POL prices as the fiscal position does not allow unbridled subsidies. He says the “government is feeling pressure for taking certain economic decisions after witnessing mass protests in Egypt and other parts of the Arab world.

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