This is arguably going to be one of the toughest budgets in decades. There are austerity measures to be taken both by government machinery and military by not increasing salaries and pensions. The more important elements are that the long used and abused tax exemptions and other relaxations are going to be abolished.
It is going to be an experiment which can take the economy either way. The argument of food security, foreign exchange earnings and investment, and job creation has been effectively used by lobbyist (read rent seekers) whenever there are talks on taking away relaxations from numerous industries and traders who are now entrenched in all the political parties directly or indirectly. These lobbies have kept the establishment happy as well.
The ideas are simple, but executed in a complicated way, through creating information asymmetry, for benefit of a few, without letting sufferers to know the cause of pain. Take the relaxations for promoting exports, for objective of farmers having input at low price, for localization and value addition at home, for substituting imports and job creation. By doing, so companies/industries margins ballooned, and mostly they kept on sub-optimally producing at high prices and share the chunk of rent (expropriation of profits) with policymakers and other stakeholders to keep them numb.
If we were a closed economy, keeping morals aside, the problem could have been less severe. The wealth would have changed hands and eventually, it would have resulted in an expanded economic pie, albeit with higher income inequality. The problem exacerbates, when the rent sought was allowed to be sent out of the country to tax heavens or to first world countries for securing nationalities.
That is the case in Pakistan. The abnormal profits are generated through tax breaks and even returns from the industries that are supposed to be competitive are wrapped up in relaxation and exemptions- such as showing returns from other industries in agriculture, showing up domestic sales as exports, or import dutiable goods under duty exemption heads, importing raw material/intermediate goods at high rates by MNCs to transfer pricier to parent companies/shell structures and the list goes on.
Then the money is sent abroad through illegal grey channels. And that is remitted back with no questions asked. A system has been carefully designed in decades to evade tax, to make abnormal returns and subsequently launder the money. With the system working like this for decades, the exploiters became the influencers and the influencers became the exploiters.
This all converges into one big pool of elite where a handful few are benefiting at the cost of tens of millions of poorer households. The pie has been shrunk in the process, and now the limit is approaching. That system worked for decades on aid and remittances. The western aid conduit seems to be drying up, and the brain has been drained and the hard working expats are sending money back home to net off the expropriated (looted) money being sent abroad.
It is time for elite club to wake up and smell the coffee, as the juice they have been extracting is drying up, and the economy they have been exploiting can cripple on them. The IMF is showing no mercy this time around, and the management has been shifted towards the pro-IMF team and the show is to begin next week.
The incumbents are keen on crushing the previous political and perhaps part of the business elite too. Resistance is imminent. The economic structural reforms and crackdown on the political giants is planned to happen side by side. But the question is whether the crackdown is happening on those who are on the right side of the incumbents. This might not be the case, and some fear that it may end up creating a new political and business elite by throwing out the existing elite.
That could be dangerous and counterproductive. Is the ploy of the 1990s used by PML-N and PPP back in play? Is PTI doing the same? If it is the case, the only difference is that the top of the party is not willfully involved in it, and that gives a ray of hope of improvement at some point. It is interesting how the events will unfold in next six months or so, and based on that the success of structural reforms is also hinged upon. The capability is questioned and the will at the ground level to do reforms remains unclear.
The end of exemptions may end up only slowing down the economy further. The exports may fall further, and unemployment may increase. Apart from that, higher GST, no further reduction in corporate income tax and moving back to FY18 levels of individual income tax may result in slowdown in aggregate demand, and hamper the targeted tax collection.
The backlash could result in taking back a few measures. Slowdown in economy and inability to crackdown on tax evaders, may put the fiscal house in further pressure. The IMF could ask for further taxes and price hikes, and the government may end up saying no to the Fund after a tranche or two. The pendulum can swing either way.
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