Adviser to the Prime Minister on Finance, Revenue and Economic Affairs, Miftah Ismail, in a press conference held on March 9, 2018, said that for the financial year 2018-19, the federal budget, sixth of the present government, would be announced on April 27, 2018. He revealed that the government had taken this decision, after taking all political parties on board, in view of the fact that the present National Assembly is completing its 5-year term on May 31, 2018 and due to advent of Ramazan around mid-May.
Miftah claimed that "the tenure of the outgoing government has shown a decline in foreign loans and a rise in local loans". He also claimed that "areas where people regularly pay bills no longer experience load shedding". He said: "We have added 12,000MW of electricity to the system while work is under way on power projects worth 20,000MW". Miftah claimed that "Pakistan is now ranked on the fifth spot globally in the race for economic progress and international institutions have been rating Pakistan's economy positively".
Adviser to the Prime Minister said that the government "hopes to achieve GDP growth of six percent during the current fiscal year, which will be the highest in the last 10 years". The growth of six percent, he added, would translate into an injection of a sum of Rs 200 billion into the economy. About the increase in the current accounts deficit, he justified it as a result of heavy import of machinery. To a question, he said that State Bank of Pakistan (SBP) had foreign reserves of $13 billion.
Speaking on the occasion, Minister for Planning and Development, Ahsan Iqbal said that the heavy investment had been also made in the country's infrastructure, energy and industrial sectors under the China Pakistan Economic Corridor (CPEC) "which would result in giving boost to the national economy". He added: "The CPEC is at initial stage and still its benefits are being felt across the country as far-flung areas of the country are being connected with the big cities through construction of 1650 kilometres motorways besides numerous employment and entrepreneurship opportunities are also surfacing".
Ahsan Iqbal said that after completion of the mega projects under the CPEC in 2030, Pakistan would "become a hub of regional trade, business and manufacturing". He said that during the last four years, the government had invested over $1 billion to revive the country's railway system while under the CPEC, "over $8 billion is being invested to upgrade the railway sector". He claimed that Gwadar Master Plan would be completed "within five months and after its completion, work on a state of the art and one of the smartest Gwadar port would be started".
Minister for Planning and Development said that for the first time in the country's history, the government made it possible "to utilise the precious Thar coal and by the end of current year, the local coal would start producing electricity which would continue to produce electricity for next 400 years as the coal reserves in Tharparkar had energy equal to that of Iran and Saudi Arabia's oil and gas reserves".
It was claimed in the press conference that the present government since 2013 had taken various steps to manage the public debt and the following positive developments were highlighted:
-- Major debt sustainability indicators have improved in last four years of the present government, a fact that is acknowledged by global stakeholders.
-- The government continued to adhere to the targets set forth in Medium-Term Debt Management Strategy (MTDS) to ensure public debt sustainability.
-- 'Refinancing Risk of the Domestic Debt Portfolio' was reduced through the lengthening of the maturity profile as a percentage of the domestic debt maturing in one year was reduced to 55.6 percent at end of June 2017 compared with 64.2 percent at end of June 2013.
-- 'Exposure to the Interest Rate Risk' was also reduced as the percentage of public debt re-fixing in one year decreased to 47.8 percent at the end of June 2017 compared to 52.4 percent at the end of June 2013.
-- 'Share of External Loans Maturing within One Year' was equal to around 27.7 percent of official liquid reserves at the end of June 2017 as compared with around 68.5 percent at the end of June 2013 indicating improvement in foreign exchange stability and repayment capacity.
-- The weighted average interest rate on the domestic debt portfolio has further reduced while the cost of the external debt contracted by the government is not only economical but is also dominated by long-term funding. This reduction led to decrease in interest servicing burden as interest servicing as a percentage of revenue was recorded at around 27 percent during 2016-17 compared with 33 percent during 2012-13.
-- Around 68 percent of public debt is denominated in domestic currency. Domestic debt is perpetual in nature and is constantly refinanced through new issues. Domestic market (both primary and secondary) are very well developed and established in Pakistan and as such the government does not feel any cause for concern with regard to refinancing its domestic debt.
After exit of Ishaq Dar, the economic team of Prime Minister Shahid Khaqan Abbasi, while commenting on external sector claimed that a high growth trajectory and rapid implementation of energy and infrastructure projects had increased external sector pressure and that current account was likely to be widened around 5 percent of GDP in fiscal year 2017-18. The current account deficit from July 2017 to January 2018 stood at US$9.16 billion.
In the first seven months of the ongoing fiscal year, exports have registered increase of 11.8 percent which is laudable but the rise in imports is still worrisome. The government is of the view that import demand "led by capital goods (20 percent), petroleum products (23 percent) and industrial raw materials (9 percent), "highlight significant investment in production activities". It is claimed that regulatory duty (RD) has helped in containing undesirable imports.
The International Monetary Fund (IMF) on March 7, 2018, in a handout released after the conclusion of its Executive Board's post-programme monitoring discussions with Pakistan, said: "risks pertaining to Pakistan's economic and financial outlook have increased and its medium-term debt repayment capacity has weakened". In contrast to what is claimed by Miftah Ismail and Ahsan Iqbal, the projections by IMF over the current account and budget deficits are stunningly alarming. According to a report: "These cast a huge question mark on the narrative presented by former Finance Minister Ishaq Dar at the time of unveiling the government's fifth budget in June last year". According to the IMF, the current account deficit will be at 4.8% of total national income, or $16.6 billion, which is a staggering 83% higher than the government's official estimates. The IMF has warned that foreign currency reserves can slip to US$12.1 billion, barely enough to finance 10 weeks of imports. The IMF wants our economic managers to take immediate corrective measures that include "devaluing the currency to minimise damages to the external sector" and "levying of more taxes to control the growing budget deficit".
The handout of IMF says that near-term outlook for economic growth of Pakistan is favourable and real GDP growth is expected to be around 5.6% in fiscal year 2017-18, supported by improved power supply, investment related to CPEC, strong consumption growth, ongoing recovery in agriculture and with inflation under control. However, it warns that "continued erosion of macroeconomic resilience can put this outlook at risk". The budget deficit is expected to widen to 5.5% of GDP, which is equal to almost Rs 2 trillion and will be the highest in the history of the country in absolute terms. The official target is 4.1% of the GDP or Rs 1.48 trillion. The IMF apprehends that the deficit may even go higher due to upcoming general elections.
While expressing concern over the weakening of the macroeconomic situation, including a widening of external and fiscal imbalances, the IMF notes that a decline in foreign exchange reserves poses increased risks to "Pakistan's economic and financial outlook and its medium-term debt sustainability". Our external debt and liabilities increased to US$89 billion by the end of December 2017 and the figure is expected to rise as the current fiscal year ends. The IMF also expects no change in the worsening debt burden. It has clearly pointed out that the overall debt-to-GDP ratio would remain around 70 percent. The IMF welcomed the move to allow some exchange rate adjustment in December 2017, but "stressed the importance of greater exchange rate flexibility on a more permanent basis to preserve external buffers and improve competitiveness". The IMF also stressed upon Pakistan "to phase out administrative restrictions that it has placed on imports to contain its bill".
It is an irrefutable fact that external sector pressures are in part linked to the fiscal deterioration during last year and an accommodative monetary policy stance, as well as the high imports related to CPEC projects. The IMF has again emphasised that Pakistan must strengthen fiscal discipline through additional revenue measures and efforts to contain current expenditure while protecting pro-poor spending. The IMF has also reiterated the need for prudent debt management and caution in phasing in new external liabilities, and the urgency of tackling rising fiscal risks stemming from continued losses in public sector enterprises.
"There is absence of political consensus in Pakistan, which remains an obstacle to deep structural reforms," said Tokhir Mirzoev, the outgoing resident representative of the IMF. He said that politics must be separated from the country's economic agenda. "The economic future of Pakistan is the collective responsibility of all political parties, whether they are in the government or in the opposition," said Mirzoev, who has just ended his three-year term in Pakistan.
The government having majority in National Assembly will easily get its sixth budget approved along with the Finance Bill 2018, as Senate can only make recommendations about Money Bill. The question is where are the concrete measures that are needed to overcome the difficulties pointed out by the IMF and many other experts. Till today, nothing is made public or any serious debate initiated in the parliament or elsewhere. Thus, budget 2018-19 will also be yet another routine exercise, a bureaucratic sleight of hand with the document prepared behind closed doors having no meaningful impact on our economic situation.
It is an undisputed fact that the present and earlier governments have perpetually demonstrated that they have no desire or concern for making Pakistan an egalitarian state through fair and just taxation. The prerequisite of such taxation is improving contribution of direct taxes as a tool of redistribution of wealth. The share of income tax (which is now largely indirect in nature with as many withholding provisions of the Income Tax Ordinance 2001 on consumption or transactions having no nexus with taxable income, constituting full and final discharge of liability). If we exclude indirect taxes levied in the garb of income tax under repealed Income Tax Ordinance, 1979 and the existing Income Tax Ordinance 2001, the official claim of improvement of share of direct taxes (they even add Workers' Welfare Fund receipts and petroleum development levy in it!) in overall taxes would prove to be just a jugglery of figures.
Historically, the contribution of direct taxes, till 2003 wealth tax was also part of it, as percentage of GDP has been pathetically low. In 1994-95, it was 2.74% (this year GDP was increased by 20.6% following the rebasing of national income accounts), in 1999-2000, it was 2.95%. From 2000 to 2009, it never went beyond 3%. From 2010 to 2016, the average was around 3.5% [Source: FBR Year Books, Economic Surveys and IMF staff reports]. These figures tell the story of taxes in elitist economy!
Overwhelming reliance on indirect taxes and withholding taxes raises serious questions about the fairness and effectiveness of Pakistan's tax system - besides eroding tax base, creating fiscal imbalances and dampening revenue collection, it has been continuously pushing millions below the poverty line and making the rich richer. These rich earn enormous income, possess immense wealth, own industries, expensive commercial and residential urban properties, agricultural lands, so get elected on the basis of money power, no matter what party they join. Since they dominate National and provincial assemblies, they never legislate for progressive taxes, rather keep on getting exemptions for their perks and perquisites which they get from the State free! In this way, the very purpose of redistribution of wealth as main object of rational tax policy is being defeated and nullified in Islamic Republic of Pakistan.
Since Pakistan is controlled by elites, there is no political will to alleviate poverty by taxing the privileged classes. Elites, even in their own interest, have failed to raise the required resources for meeting current expenditure and development projects. Adding insult to injury, money extorted in the name of taxes, mainly under exorbitant sales tax and withholding taxes, is also wasted by elites maintaining palatial residences, rest houses, messes and golf courses, just to mention a few. These free luxuries met from taxpayers' money, and getting State land on throwaway prices are unique features of elitist economy - so they keep on levying more taxes rather than ending these VVIP facilities, free perks and benefits.
Majority of the writers, experts and TV anchors do not highlight these facts and follow the line of donors and their crony elites that "more taxes" are needed! Nobody raises the question taxes for what? Why 50% people are living below the poverty line is not their concern. The non-fulfilment of fundamental rights "for lack of funds" and reliance on "borrowed funds" has a clear nexus. The elites want to waste resources on their luxuries. This colossal wastage of resources, coupled with non-taxation of the rich and mighty, has created a variety of crises for Pakistan, abject poverty for majority of population, unemployment, slow economic growth, debt trap, poor infrastructure, monstrous fiscal and trade deficits, shortage of foreign reserves and huge current account deficit.
Despite tall claims by elected governments of serving the people, since 2008, not a single progressive tax is levied on the rich and mighty or drastic reduction is made in unproductive expenditure to bridge the burgeoning fiscal deficit that is now of over Rs 2 trillion, requiring Rs 1500 billion in debt servicing alone! The poor are burdened with more indirect taxes. In this scenario, the heavy borrowing will further destroy the economy and push the entire nation in dark 'debt prison'. On the part of elites, there is no inclination whatsoever to make Pakistan a self-reliant economy even for their own self-interest to reap more benefits of a robust economy which is largely owned by them.
The budget 2018-19, as the earlier five of PML-N government, will favour the rich. More taxes will hurt the poor. Punjab, Sindh, Khyber Pakhtunkhwa and Balochistan provinces, in their budgets for 2018-19, will also show the same attitude. Their main emphasis will also be on indirect taxes, bringing more services in the ambit of sales tax, burden of which will be borne by the users. There is no will on the part of provinces to levy wealth tax, capital gains tax, estate duty, gift tax on the rich and mighty, these taxes were transferred to them through 18th Constitutional Amendment in 2010. The present tax policies of all governments are violative of Constitutional provisions that require the State to provide social justice to all through fair taxes.
By just tinkering with tax rates here and there and imposing or enhancing regressive taxes, fixing revenue collection target at Rs 5000 billion for fiscal year 2018-19, the PML(N) government in its last budget will confirm that it has no political will to tax real potential of Pakistan, which is not less than Rs 8 trillion.
Miftah Ismail, following in the footsteps of Ishaq Dar, in the coming budget will not show any intention to punish tax evaders and looters of national wealth that was done three years back by India by passing 'Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015' At that time, it was pointed out to the government in these columns that by introducing this kind of law providing confiscation of untaxed assets, Pakistan could have generated billions. The government chose to ignore it and on the contrary, introduced more amnesties and concessions for generation of black money and its safe transfer abroad.
Dar presented cooked up figures (exaggerated revenue figures, lower expenditures and anticipated foreign grants, etc,) to assure IMF of restricting fiscal deficit to less than 4 percent of GDP. He never offered viable solutions for the real malady that was colossal wastage of resources, open and blatant non-compliance of tax laws by the powerful segments of society and existence of a large untaxed economy. Since he and his political masters (even relatives) were the principal beneficiaries of Protection of Economic Reforms Act, 1992 and Foreign Currency (Protection) Ordinance, 2001, he was not ready to undertake corrective actions or implement workable policy to streamline the entire tax system and crackdown on undeclared and unlawful assets. The same is so far the attitude of Miftah Ismail and other members of the economic team of Shahid Khaqan Abbasi. In this backdrop, the coming budget would not be expected to bring anything positive for our ailing economy.
(The writers, authors of many books and partners in HUZAIMA IKRAM & IJAZ, are Adjunct Faculty Members at Lahore University of Management Sciences)