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Last three months of 2023 have witnessed an avalanche of economic annual meetings, conferences, economic fest and thematic seminars organized by think tanks, institutes, schools and their departments of business/economics all over the country.

It has now subsided to a low flood. These forums supported by public/private funding showcased their research faculty along with a number of well-known economic gurus.

It is heartening to see that the exponential growth of relatively young economists in the academia and research institutes, are eager to be heard and join the chorus for meaningful structural reforms in the country.

Hopefully, some of them will be selected along with gurus in the next economic advisory council. From the overlapping broad themes that were presented in these forums one can easily distil most popular sub-themes, which can justifiably be elevated to ‘economic clichés /mantras’ of the economists’ community during 2023.

These are: increase in tax to GDP ratio, lower interest rates and implementation structural reforms.

It can safely be assumed that a few more sub-themes presented in the forums will assume the status of clichés in the near future such as green economy, climate change, depleting water resources, population growth and urbanization. This article will dissect the former set of economic clichés.

The word ‘Reform’ is the icing on a cake of clichés/mantra in terms of its usage in articles, reports, talk shows, economic discussions and titles of forums held last year. It has built a sizeable pressure group of economists, young and gurus alike and intellectuals. Initial steps or signals by the caretaker government in fiscal (both on the revenue and expenditure side) and exchange rate management have stabilized the economy for now, but according to the World Bank (WB) assessment based on last 30 year experience, steps towards ‘structural’ reforms face considerable risk from incoming political government.

Till now, announced economic manifestos of political parties are nothing more than wishful empty slogans, indicating how serious they are to implement painful reforms.

PIDE, the premier economic think tank in the country, suggests a wish list of 10 reforms spanning nearly the entire economy, has taken a lead in upholding the reform mantra.

Other forums advocated smaller set of specific reforms, overlapping with PIDE’s set. Given that there is a wider consensus among the economist community, for some or all in the PIDE’s master list of areas, the pressure generated by these forums should be intensified for the incoming new political government built on the following stylistic strategy. I) A with-in the community unanimous consensus befirst built on prioritizing the reforms.

If the new government will be living on begging for USD and from one tranche to the next mode for political and economic survival for the next 3 years, it is unlikely whether it will even touch ‘deep’ structural reforms, excluding fiscal and exchange rate tempering for stabilization.

Picking one to three from the PIDE checklist, economist community will have to convince the new government that it can embark on them without the political and economic pain with net benefit. This in itself would be a commendable feat defying a favorite proverb ‘Two economists never see eye to eye on an economic issue’.

The next step would be time-bound implementable plan that is nitty-gritty in its detail on its organizational ownership, buy-in from implementing ministries, buy-in from judiciary and legislature, manpower, financial aspects and operational strategy for overcoming resistance from the various formal and informal mafias.

The nation has had enough experience with 5-10 year plans, perspective plans and visions. It is time to test and implement in a true sense the real ‘home grown and consensus driven’ version of reforms suggested by the professional community of the country rather than come up with another grandiose, hollow and non-implementable 5-year plan dependent on more borrowing and increasing debt.

Following IMF diktat, increasing tax/GDP ratio remained the most popular cliché among the community. However, the essence of the above diktat is overlooked and wasn’t elaborated sufficiently in the forums, which almost equates it to a cliché.

The increase in ratio is relevant for direct taxes, rather than indirect taxes. To the extent that speakers and gurus identified, agriculture incomes, retail and wholesale sector and real estate as the culprits for low tax/GDP it is commendable.

The economy is already burdened with a host of indirect taxes in a number of sectors, which ultimately hit all the income classes but middle and lower income classes, disproportionately more.

However, the direct tax regime is theoretically and operationally not a direct tax regime in Pakistan, as it mainly consists of pseudo ‘direct’ taxes and is contaminated by presumptive /withholding income taxes, and in case of WRT sector, proposed I-tax on floor size and/or electricity bills and fixed tax regime.

The first type is also based on customs duties. Thus income tax collection under direct taxes is a misnomer and misleading number. These ‘psuedo direct taxes’ are similar to indirect taxes and are distortionary, reduce the efficiency/competitiveness of production and choice between consumption, investment and savings.

Weak currency, increase in international and administrative prices, further fuels inflation as domestic /imports prices are tied to fixed contaminated I-tax rates. The main issue is to broaden the base of direct taxes that cannot be passed on to others and is paid from the documented net income/ net profits earned by an economic agent.

The latest news from FBR states that the number of individual active income taxpayers has risen to 3.7 million, which is 1.54 percent of the total population compared to 7 percent in India. As in the past, in the last two weeks many ‘feelers’ are coming from the FBR about their seriousness in documenting the incomes and broadening the tax base.

Let’s hope feelers won’t gradually disappear, as in the past, under the rubric of legal, administrative bottlenecks and political exigencies of the incoming government, once the anticipated USD 350 million from the WB for FBR reforms are deposited in the New York bank.

The IMF diktat includes the suggestion that once economy is reasonably documented and income-tax collection increases, the indirect tax rates need to be brought down to single digits to reduce the above-noted distortions.

Macro 101 shows us that direct taxes, specifically broad-based progressive I-tax regime act as automatic stabilizer for inflation through lowering demand, in times when nominal incomes through windfall profits and nominal wages/salaries are also increasing rapidly.

Is this the case in Pakistan? The answer is in the negative. During FY 21-22 and FY22-23, the growth rates in the collection of ‘pseudo’ or ‘contaminated’ income taxes were very close to the growth of Gross Valued Added (GVA) in current prices, as it rose by 25.4 percent as compared to growth of ‘pseudo’ I-Tax collection by 26.8 percent.

Currency depreciated by 28.5%, and CPI Inflation rate was 28.2% in the corresponding period. I-tax growth similar to GVA rate, lower than the depreciation of the currency and CPI increase, suggests that automatic stabilizer of fiscal policy is non-existent.

Most of the increase in I-Tax collection came from ‘pseudo’ fixed I-tax rates and corporation tax rather than from the inflation driven increase in net incomes/profits of the individual agents.

In these forums a wider discussion on country experiences with enlarging I-tax base, documentation and resistance planning models would have increased the knowledge base and enriched discussion of younger audience.

(To be continued)

Copyright Business Recorder, 2024


Comments are closed.

kuchbh Jan 14, 2024 09:31am
@zaya zaya, not defending her but if you read the article, she answered your question clearly. "do not borrow externally for local expenditure" - what that means is that avoid taking debt in USD terms that you then convert to PKR for PKR based expenses. for those local expenditures, the govt would be better taking local debt because in the worst case (such as inflationary conditions now), you can inflate away debt if it's in PKR
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