EDITORIAL: Never before has a finance bill after its presentation in parliament been revised, nay re-written, and that too so extensively before being voted upon as the present bill for fiscal year 2022-23 but then, never before was the country’s economy beset with such compelling and daunting problems so as to make the prospect of a default probable unless the International Monetary Fund (IMF) is fully on board with its programme to ensure the imperative corrections to the economy.
To secure this and the consequent inflows from friendly countries and other multilaterals, a host of measures have been taken to tax the wealthy amongst the existing taxpayers through levies of a one-time supertax on 13 sectors of the Large Scale Manufacturing and services.
Moreover, people having annual income of 150 million rupees would be required to pay 1 percent more tax whereas those with incomes of 200 million rupees, 250 million rupees and 300 million rupees would have to pay additional taxes of 2 percent, 3 percent and 4 percent, respectively, to help the government alleviate poverty in the country.
There is little or no doubt that it is a wealth tax in the garb of deemed income tax to circumvent the provisions of the constitution, Capital Value Tax (CVT) on assets held abroad by residents and revision to status quo ante virtually of income tax provisions for the salaried class. As bulk of the entities in the 13 sectors proposed to be subjected to the supertax are listed companies on the stock market; the announcement of the supertax led to a virtual collapse of the stock market that saw the index nose-diving by over 2000 points to later recover about 300 points and end the day with an overall decline of over 1600 points.
Although some of these measures may be challenged in the court of law, the fact that the thrust of these measures is on collecting taxes on incomes rather than indirect imposts and that too from the people with the ability to pay is indeed a welcome approach. In what appears now to be the latest version of the finance bill, unless of course the IMF still does not agree and come up with further conditions or objections, as stated by prime minister Shehbaz Sharif, the government feels that it has fully complied with the demands of the Fund and the three magical words “staff-level agreement” would soon be announced from Washington.
The International Monetary Fund (IMF) has a trust-deficit with Pakistan, so acknowledged Prime Minister Shehbaz Sharif while addressing his party’s senators — a statement whose veracity has been patently evident in the sustained reported refusal of the Fund staff (to both Shaukat Tarin and Miftah Ismail) to agree to stagger harsh upfront politically challenging conditions subsequent to reaching the staff-level agreement on the Extended Fund Facility (EFF) programme on 12 May 2019. The jury is of course still out on how much of the blame for these harsh conditions rests with the Fund staff and how much on the then Pakistan’s economic team leaders that signed the agreement with the Fund, given the fact that the then finance secretary was dismissed from attending the negotiations as he reportedly expressed his serious concerns.
It is important to note that the trust-deficit evolved due to sustained failure of Pakistani administrations to implement agreed conditions as evident in the previous 21 programmes, amply reflected in the steady worsening of key sectoral performance, particularly energy (with a circular debt nearing the 3 trillion rupee mark today) and tax (the country is still struggling to widen the tax net to make the structure fair and non-anomalous). This no doubt prompted the IMF to note our disturbing history for the first time in its ongoing programme documents and in the last successful mandatory quarterly review of the ongoing programme (sixth) the Fund further notes that “policy slippages remain a risk….amplified by weak capacity and powerful vested interests. Socio-political pressures could also weigh on policy reform and implementation.”
While one cannot question the veracity of these rather damning observations the fact is that the IMF as an institution also bears responsibility for serious flaws in its programme designs for Pakistan. Take the EFF 2013-16 design which tacitly supported the then Finance Minister Ishaq Dar to deliberately overvalue the rupee with devastating effects on our exports and external indebtedness. Dar’s objective: to borrow irresponsibly from abroad by arguing that borrowing costs were almost double in Pakistan relative to the prevalent rates abroad thereby understating the country’s external debt — a cost that continues to be paid by the hapless public.
At repeated concerns raised by Business Recorder in particular and the media in general the Fund came up with an unsatisfactory calculation of the real effective exchange rate (REER) which it cited in a footnote to one of the mandatory quarterly reports as between 5 to 20 percent, a range too wide that should raise questions about the Fund staff’s competence.
Criticism of the Fund’s programme designs is quite extensive, and includes respected global economists, though one would have to acknowledge that its handling of the global pandemic was exemplary. Nobel laureate Joe Stiglitz was extremely critical of the IMF policies particularly fiscal and interest rate policies during the East Asian financial crisis, arguing that contractionary policies recommended by the Fund made the recession worse — policies that Pakistan has been contending against during the ongoing EFF programme.
Copyright Business Recorder, 2022