EDITORIAL: We have yet again failed to complete an IMF programme, which perhaps was the toughest one for the authorities in terms of compliance.
Now the country is going to be in a Stand-by Arrangement (SBA) of $3 billion for 9 months. It is important to note that in the last programme, or around two dozens programmes prior to that, structural reforms were conspicuous by their absence in the real sense of the word.
The then government got a new life in the early 2000s when external debt was restructured; that along with the flurry of foreign inflows (read geopolitical rents) had put the economy back on the growth curve. However, that boom pushed the domestic economic demand up without doing structural tax reforms with the result the debt has again become unsustainable,
However, this time around, the axe can also fall on the domestic debt, which might not be sustainable anymore. Meanwhile, there are no signs of any event that would yield geopolitical rent that could breathe another life into the ailing economy. The only option is to earnestly undertake and complete the direly needed structural reforms.
The responsibility lies on both: the government and the IMF to do the needful. Unfortunately, however, the two governments (during the last programme) and the IMF made no serious effort towards implementing real reforms.
Despite successive governments’ reluctance to implement fundamental structural reforms, the IMF continued to support fiscal indiscipline and policy inaction to broaden the tax base. This has created a moral hazard wherein the compliant taxpayers have to bear the greatest cost for non-performance by those responsible for managing the economy.
There must be an end to this madness. The economy and a woefully narrow tax base cannot bear any further burden in an unprecedented inflationary environment. For the past three decades, on numerous occasions, various governments declared their intent to broaden the tax base by bringing those who don’t pay their fair share of taxes into the net.
This happened in the 1990s under Nawaz Sharif administration, then in the 2000s under Gen Musharraf’s dispensation, again by Nawaz Sharif in the 2010s, and the last effort was made by the PTI (Pakistan Tehreek-e-Insaf) administration in the early 2020s.
However, invariably, all of them failed to do so. No government was able to withstand the pressure of traders, feudal lords and real estate tycoons.
The situation has worsened in the last two decades as after the real estate and retailing boom in the early 2000s (continued thereafter) the income of non-taxpayers grew disproportionally, and so did their share in domestic consumption. That has worsened the twin deficits (fiscal and current account) problems.
In the meanwhile, the informal economy has kept on growing while the effective tax-base has been shrinking. Now, with the imposition of higher taxes on the salaried class and formal corporate sector, many companies and individuals have been literally forced to under-report their taxable income by fragmenting their business activities.
Needless to say, this negative trend is growing. Leakages in the public-sector entities have kept on growing, worsening the fiscal situation. And after the passage of the 18th Amendment, there is significant increase in the workforce — both in provincial and federal governments — without attaining meaningful efficiencies in service delivery. This is further aggravating the plight of the compliant taxpayers who ultimately have to foot the bill.
The problem with energy sectors, especially the power sector, is identical, so to speak. Here, successive governments kept on adding the power generation plants to the national system without taking into consideration the question how the project cost, which is pegged in USD, will be paid back. Here, the only solution being offered to curb the circular debt is to increase the power tariffs and further burden the consumer.
This is resulting in falling consumption from the national grid because of the fact that the households and commercial concerns that are known for making prompt payments are moving towards alternatives such as solar while the industrial bulk consumers are looking into the possibility of buying power directly from power generation plants.
And those who remain on the grid would tend to pay less, a phenomenon that is resulting in higher recovery losses. In this scenario, it is extremely difficult to control the growth in circular debt and mere raising power tariff may no longer be a possible solution.
Therefore, the bottom line is that these fiscal and energy side slippages are going to grow and will drag the economy further into the informal sector.
The economy cannot be fixed by just continuing to be in an IMF programme; it requires political will to take bold decisions to bring the tax delinquents into the tax net no matter how powerful they may be or how high is their nuisance value. The writ of the state must prevail at all costs. Time is running out fast, to say the least.
Copyright Business Recorder, 2023