Flipping Coins – President’s Ordinance to Suspend Section 111 of the Income Tax Ordinance

After learning a valuable lesson following the Parliamentary Debate on the Accountability Bill, which has been categorically pigeonholed after three years of futile debate, the government decided to avoid stalling tactics such as taking a bill to the Parliament floor and passing it via presidential promulgation instead. The most recent of which is the suspension of article 111 of the Income Tax Ordinance which allows officials to tax income, assets and investment of a person whose nature and source are unexplained. This translates into a motion whereby the Federal Board of Revenue will not ask investors about the source of capital they trade with on the Stock Market for 120 days, making it possible for Pakistan’s 34 billion dollar black market to whiten itself overnight. Thus no question raised, investors will be allowed to trade with all they have for motives thus detailed.

In an attempt to address the State Owned Enterprise morass that is only festering by the day, the President and the government are aiming to privatize SOE’s via Stock Markets. This move needs to be carried out in a transparent and impartial way so that the government cannot be blamed for granting political favors; therefore the stock markets appear to be a viable means to ensure widespread ownership. However the current economic slump offers a major impediment to this enterprise; what with the rampant stagflation and increasing rate of unemployment, low productivity due to the energy crisis and increasing oil prices chances of ensuring funds for SOE privatization and widespread ownership seem bleak. Opening doors for black money to be circulated in an economy short of legal funds will be a pragmatic move at this point.

However, the process of SOE share valuation and bring their shares on the market lies in the currently unforeseen future. Lifting section 111 will only bring black money into circulation and leave the rest to hope that it is later invested in SOEs. This is hoping against hope as there is no one to ensure that the money won’t be directed towards other markets for example real estate.

Legalizing corruption this way, might be a fortuitous way to re-plug in Pakistan’s parallel economy the size of 1/5th of its formal economy, but could be a politically fatal move as well.

Other options for whitening black money included investment in infrastructure funds and treasury bonds instead of the stock market. This would help in documentation of the economy compared to money floating on the stock market where the investors can ensure their money’s legality then exit with no questions asked.

On the up side this move will in the short run create a temporary bubble which will help bring in FDI and create the illusion of economic well being. This might be sustainable if the government supplements this plan via other investment opportunities and schemes and shelves this shady method. The following 120 days will decide whether this move spells political suicide for PPP or helps bolster the crippled economy.

Spearhead Analysis – 26.04.12

By Sara Eleazar
Research Analyst
Spearhead Research