Former Governor State Bank of Pakistan Shahid Kardar has stated that International Monetary Fund (IMF) has been responsible for tax distortions in Pakistan, adding the country's gross financing needs may be $50 billion in the next two years with annual requirement of $25 billion.
Speaking on 'Current Challenges to the Economy of Pakistan' at Swiss Embassy, Kardar said that it was on IMF watch that Pakistan's tax system was distorted "and stated that IMF core competence is fiscal and taxation side, but the Fund has totally failed in case of Pakistan. The Fund failed in its own areas of core competence on its watch and the last programme was given 12 waivers and now it is demanding prior actions. Tax dodgers were declared as non-filers and that happened on the watch of IMF, added the former governor SBP.
As a result, he said, poor revenue mobilisation with tax revenues of 13% of the GDP weakened the country and now tax to GDP ratio is further declining with a shortfall in the tax collection. He said that reasons behind low tax collection included distorted structure, narrow base (exemptions, presumptive and final tax regimes, etc) and failure to exploit agriculture, real estate, property tax, etc, bases.
Pakistan's economic challenges stem from higher fiscal and external account and gross financing requirement of the country for the next 2.25 years are estimated around $50 billion, which would require debt rollover/rescheduling of $15 billion and additional debt of $35 billion.
Kardar said that inflation would remain at slightly over 8 percent for the current fiscal year and there are very little or remote chances of its decrease in near future. However, he added that as the country is going through further adjustments, no one can estimate how it would impact growth and inflation.
He also expressed apprehension over rise in poverty in the next two to three years and stated that average growth to remain not more than three percent and deplored that farmers are not being taxed by the provinces but Pakistan's focus has always been on immediate issue of financing the gap instead of addressing the fundamental challenges on external account and consequently the issue of financing needs keeps coming back year after year. He said that higher growth of investment and saving of around 30 percent would be required to absorb the population of youth in the jobs. This requires investment to be increased to 30 percent against the existing 15 percent.
Kardar said that structural issues of the current account deficit are its financing through irregular capital inflows like expensive short-term commercial borrowings which, according to him, provide 'temporary' relief while increasing debt servicing needs are putting pressure on rupee. Reserves built on external flows have kept value of rupee higher than it would be otherwise, he added.
He said that the country is taking expensive commercial loans, and much cheaper and longer maturity debt is available from the World Bank, ADB and IMF for undertaking much needed structural reforms.
He said that tackling external imbalances needs capital inflows for reserves in tradable currencies to finance external obligations and suggested the way forward i.e. increasing FDI flows, adding but foreign investors follow a boom and do not create a boom. There is need to provide incentives to the domestic investors so as to create a boom as boom is created by local investors which requires improved environment for domestic investors.
He said that macroeconomic management remained unchanged during the last 50 years. He said that this results in near-crisis situation after every few years in the form of fiscal and external deficits. He said that Rs 100 billion fiscal deficit has a Rs 40 billion impact on external account. Pakistan has been luckily so far that it never went through a full-blown crisis of sovereign default.
Pakistan, he said, often sought help from the IMF but had not undertaken adequate structural reforms and cost of failure has been slowdown of economic development.
He said that longer term challenges for the country included how to achieve 8% growth to absorb additional 40 million youth entering labour force in the next 35 years. He said that to achieve higher growth, country needs 30% investment to GDP as opposed to existing 15 percent as well as 30 % savings to GDP against existing lower than 14%.
He regretted that owing to skewed or weak priorities, accumulated losses of public sector enterprises have reached Rs 1.3 trillion (excluding circular debt) and there is a large size of government even after 18th Amendment. Provo governments also bloated, as departments in Punjab government were 22 in 2000 but now they have been increased to 48.
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