A double whammy

EDITORIAL: Federal Finance Minister Shaukat Tarin in his wind-up speech to the National Assembly, a few hours before Financial Action Task Force (FATF) decided that Pakistan will remain on the grey list - a decision with implications on Pakistan's borrowing costs as well as on foreign investment inflows, sans China - presented a calm demeanour in marked contrast to his impassioned speech on Monday last. Undeterred he, however, repeated the accusations of inheriting an economy in doldrums in August 2018 - a historic high current account deficit of 20 billion dollars and an economy in debt (multilateral, bilateral, debt equity through issuance of sukuk/Eurobonds, with short-term commercial debt of around 8 to 10 billion dollars and a rise in domestic debt from 16.5 trillion rupees to nearly 25 trillion rupees today). Tarin appropriately announced the withdrawal of all taxes on food items, including wheat and tax on medical allowance as well as withdrawal of a raise in taxes on items which had caused a serious concern notably milk, poultry and cattle feed, textiles, and construction sector, adding that registered e-commerce would not be taxable though the unregistered would be required to pay tax, and mobile phone calls of more than 5 minutes duration would be taxable. He also announced ending of withholding tax on 12 items.

However, Tarin insisted that section 203 with reference to the arrest powers of the government for tax evaders would remain though he added that "due process" would be observed. The decision to arrest after third-party audit (around 4 to 5 percent) would rest with a three-member committee notably the Minister of Finance, the Special Assistant to the Prime Minister on Finance and Chairman Federal Board of Revenue though perhaps members of the Opposition may see this composition as tilted heavily in favour of the government with the potential of abuse. Enforcement measures have been budgeted to generate large sums in past years based on detailed personal data available with Nadra but have not met their ambitious targets. In 2021-22 the budget target under this head is 242 billion rupees but there are skeptics including the International Monetary Fund (IMF) which Tarin said wanted the government to raise 700 billion rupees in taxes with 150 billion rupees from income tax but the government refused.

The day before the wind-up speech, on Thursday, while briefing the National Assembly standing committee on finance and revenue Tarin had stated that the objective of both the IMF and the government was to remove structural defects from the revenue and power side and ensure sustainability of reforms. And, as widely speculated premised on his previous statements, Tarin confirmed that the Fund was presented with policy alternatives to those signed off in February 2021 leading to the successful conclusion of the second to fifth review meetings, uploaded on the Fund's website April 2021, adding that now the government would practically demonstrate the success of these alternatives. The finance minister further stated that he reckons by September the sixth and seventh reviews clubbed together would be successful.

This was validated by the IMF Washington DC Press Office, as expected given that the 6 billion dollar Extended Fund Facility programme has not been suspended though its sixth review remains pending, which stated that "we are in discussion with Pakistan on the next review and the discussions are constructive.....we stand ready to continue to support Pakistan in achieving its objectives of debt sustainability and strong growth. This will require continued discussions on the sustainable fiscal structural reforms particularly on the tax and energy sectors and social sector spending enhancement envisaged in authorities' reform programme that is supported by the IMF resources."

So what are these policy alternatives that have been proposed by Tarin to the IMF? High tax collections sourced to GDP growth of 5 percent and inflation of 8 percent while enforcement measures would generate another quarter of a billion rupees - objectives that one would hope are demonstrable by September this year.

Power sector reforms are still under discussion, and have not yet been firmed up, include deferring government debt to the sector to reduce the stock of circular debt, diverting around 200 to 250 billion rupees from the 900 billion rupee Public Sector Development Programme to reduce the circular debt as well as a rise in rates in September 2021 and not June as pledged previously. These proposals would have to be firmed up and agreed with the World Bank, the lead player in the sector, before the IMF is satisfied that alternate reforms demonstrated their success.

It was a double whammy for the government's spin on the FATF decision as well as on details of the alternate economic plan presented to the IMF, which led to deferral of the sixth review consensus, requires brainstorming to formulate a cohesive strategy for next year - the penultimate year in the administration's tenure. To rely on blaming previous administrations for the current state of affairs would be difficult for even diehard Tehreek-e-Insaf stalwarts to digest.

Copyright Business Recorder, 2021