By HUZAIMA BUKHARI AND DR IKRAMUL HAQ
While the elections 2018 are over and in a few days a new federal government will have to tackle the chronic economic issues of balance of payments, record fiscal deficit, depleting foreign reserves and a monstrous debt burden-just to mention a few-it is time to look into the inevitability of going to International Monetary Fund (IMF) as prescribed by the Caretakers and many others and its repercussions.
The brilliant economist and thinker, Dr Nadeem Ul Haque, who knows the IMF very well, has raised a fundamental question posed in this regard: “Pakistan is an IMF addict: we have had 12 to 13 IMF programmes in the last 30 years and have spent more than 22 years on a programme (more, if you count the monitoring stage). So, what will change with another programme? Will both Pakistan and the IMF repeat their past performance and prove their insanity, as per Einstein’s maxim”.
In his op-ed, ‘The cycle of mistakes’, Nadeem Ul Haque has posed many serious questions like: “The pundits/IMF talk about the economy as if the MOF [Ministry of Finance] can wave a magic wand to make the economy turn on a dime. Despite many pronouncements and repeated donor policy advice and financing, growth remains below potential; fiscal and BOP deficits remain out of control; and savings and investment remain low. So, what have all these programmes and donor interventions achieved? Yet, the cavalry in the form of the IMF will be here in September. They will provide temporary relief as always. Sadly, they are incapable of changing the fundamental weakness in the economy: poor policymaking in the country”.
It is a matter of record that Federal Board of Revenues (FBR), apex revenue authority, mercilessly wasted borrowed funds of millions of dollars given by the World Bank and other donors for implementation of a comprehensive Tax Administration Reform Project (TARP). FBR, at the end of TARP failed on all fronts-in meeting revenue targets, broadening of tax base, implementing sales tax, increasing share of direct taxes and improving tax-to-GDP ratio. At the end of TARP, our tax-to-GDP ratio nosedived to 8.8% from 9.4% in the year when the programme started! Despite having both money and expertise, FBR could not introduce an effective automated tax intelligence system to bridge the huge tax gap. This was admitted by the World Bank in its report, “Implementation, Completion and Result Report”, issued on the completion of TARP. It observed: “The current narrow-base of general sales tax (GST) in Pakistan remained almost entirely unchanged throughout 2005-2012, despite efforts to overhaul the indirect taxation structure by introducing a reformed GST featuring few exemptions and wide coverage of goods and services.”
It is thus fully justifiable on the part of Nadeem Ul Haque to pinpoint the real malady faced by Pakistan that is how to go for structural reforms and sound policy. He is right that the the “IMF will repeat the same medicine and increase revenues through mini-budgets and random taxes. It will reduce expenditures without analysis. In short, the IMF keeps giving us the ‘austerity’ treatment that Europe has reviled. But austerity has not fixed our problem for four decades. Instead, it has made it worse as haphazard taxation and expenditure cuts erode the capacity of the state and society’s trust in it”.
Government expenditures as well as borrowings, as Nadeem ul Haque highlights, “remain out of control and the IMF has no analysis of why. SROs, despite much effort, remain. Programmes and groupie economists always focus on the tax-to-GDP ratio as the centerpiece of the IMF programme. Tax reforms make a bigger mess. We have a punitive tax system that belies all principles. There are 60 or more withholding income taxes on various services that the poor pay to never get a refund. Around 70 percent of our revenue is now collected on withholding agents like mobile phones, banks and schools. And the FBR is getting bonuses thanks to DFID-funded research. This tax policy is a drag on the economy, hurting our exports and businesses. But the IMF will give us more”.
The warning by Nadeem is very apt: “So, be prepared for minibudgets, arbitrary taxes and more borrowing. Three years from now, the MOF will declare a victory and the IMF and World Bank will praise it. But by the next election, it will look for another crisis and a return to the IMF. The cycle will continue until we change the MOF and SBP, and how we make our economic policies. And the IMF has no way of doing that. Or, as per Einstein’s maxim, it will keep committing the insanity of repeating its past mistakes”.
Over the period of time, FBR has earned notoriety in all areas: from failure of reforms to mega scandals, from lack of will in taxing the elected members to leaking their data to Press, from misreporting figures to bungling of funds, from corruption to highhandedness and from inefficiency to worthlessness. It is thus not surprising that FBR is presently ranked as one of the most inefficient, ready-to-obey-any-command-from-political-masters, corrupt and incompetent organisations of Pakistan.
FBR annually collects less than the assigned revenue target. For the just ended fiscal year, 2017-18, the last government of PLM-N allocated the revenue target of Rs 4013 billion to FBR that was later revised downwards to Rs 3935 billion. FBR collected only Rs 3751 billion. It collected income tax of Rs 1441 billion against the target of Rs 1562 (deficit of Rs 121 billion). Sales tax collection at Rs 1488 billion against target of Rs 1541 billion witnessed Rs 53 billion less. FBR also faced a shortfall of Rs 16 billion under the head Federal Excise Duty as it collected Rs 216 billion whereas the target was Rs 232 billion. Only collection under customs exceeded the target by Rs 6 billion against the assigned target of Rs 600 billion. The overall shortfall of Rs 184 billion vis-à-vis the revised target of Rs 3935 billion and that of Rs 262 from original target pushed the fiscal deficit to a record Rs 2.5 trillion as on June 30, 2018. The expected windfall of nearly Rs 100 plus billion under amnesty schemes-domestic and foreign-till July 31, 2018, if not further extended, will not help much in easing our economic woes unless we take concrete measures to fix governance issues, enforce fiscal discipline, besides making paradigm shifts in bureaucratically-designed policies as suggested by Dr. Nadeem Ul Haque in his excellent book, Looking Back: How Pakistan Became an Asian Tiger by 2050 .
The new government must concentrate on concrete programmes on all fronts to make Pakistan a truly egalitarian state. From the 1960s, our rulers, civil and military alike, have done little to change the plight of the less privileged and provide universal pension for all citizens. After pushing the country into a deadly debt trap, our rulers express jubilation whenever they go to the IMF for bailouts. We know their prescription as highlighted by Dr. Nadeem, yet want to repeat the mistake again and again in the hope of different results. Great poet, Mir Taqi Mir, aptly said for this occasion: Mir kya sada hein beemar howe jis key sabab; usi attar key londey sey dawa letey hein (What a simple soul is Mir; he seeks medication from the healer’s boy who is the cause of his ailment).
The so-called experts of the IMF and World Bank have no idea about our real tax potential which is not less than Rs 8000 billion at federal level alone-see detail study Towards Flat, Low-rate, Broad and Predictable Taxes, available at http://primeinstitute.org/wp-content/uploads/2016/08/Towards-Flat-Low-rate-Broad-and-Predictable-Taxes.pdf .
We have written many a time about the sordid story of tax reforms in Pakistan. FBR has been serving the interests of rich and mighty in Pakistan. The privileged classes have been getting enormous tax benefits through Statutory Regulatory Orders (SROs) and frequent amnesties. Pakistan can never come out of existing fiscal mess unless SRO culture is abolished and FBR is replaced with National Tax Agency (NTA) that can effectively enforce tax laws both at federal and provincial levels. Had FBR been an effective body, it could have compelled all taxable persons-not less than 10 million-to file tax returns and pay due taxes. Equally incompetent and ineffective are provincial revenue authorities that have miserable failed to collect agricultural income tax imposed since 2000 as well as other taxes and levies.
The issue in Pakistan is not that of lack of revenue resources as wrongly portrayed by IMF and World Bank, but documentation of economy-ending the culture of tax evasion and fiscal frauds. The forces representing bazaar [different associations of traders], unscrupulous industrialists, absentee landlords and corrupt civil-military bureaucrats are the impediments. These segments are not ready to pay personal taxes on their colossal wealth and income-in most cases created from undeclared sources.
The prescriptions given by the IMF and/or World Bank will not solve our problems rather further compound them. The rich and mighty segments, identified above, will pass on the burden of sales tax and withholding taxes on the less-privileged and will avoid personal taxation. In 1990s, the IMF and World Bank caused a crushing death blow to our industry when on their advice we introduced exorbitant sales tax rate of 21 per cent-within a short span of 2 years we had hundreds of sick industrial units. Later on, the rate was reduced to 18%, then 15% -again raised to 16% in 2009 and then to 17%- but the fact remains that heavy indirect taxation has pushed 60 million Pakistanis below the poverty line. We have been warning about the devastating effects of high indirect taxation and excessive burden of withholding taxes. Yet the IMF and the government insisted on these even on low income levels and the result is now before us, there is decrease in voluntary tax compliance as evident from increase in withholding tax regime.
The successive governments have been emphasising the importance of increasing tax revenues, mainly on the dictates of the IMF, but flawed and irrational tax policy has destroyed our economy. In Pakistan, the financial system is for the rich or to lend money to the government, thus, small-and medium-size enterprises (SMEs) do not get credit for growth. In such circumstances, demanding the businesses to pay huge taxes in advance through various withholding provisions, ahead of time, before they even know what their income is going to be, is a sure recipe for economic disaster and this is what is going to be prescribed by the IMF, if the new government decides to go for yet another bailout. What is the alternate? This question was discussed in detail in our article, ‘Subjugation or self-reliance’, Business Recorder, January 12, 2018. this can be a starting point for framing economic policies for self-reliance, where going to IMF, World Bank or other lenders is not for only bridging trade or fiscal gaps but to get affordable, long-term-based funds for projects inevitable for rapid growth and employment generation.
(The writers, lawyers and partners in Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences)