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Difficult act of balancing

Published on 13th May, Edition 20, 2013

 

The current financial year (2012-13) is likely to close on a pessimistic note with: 1) looming balance of payments crisis, high budget deficit, exports proving dismal for financing imports but above all country continue to suffer from ‘trust deficit’. The conditions are marred by general elections for the time being because the caretaker government has no mandate to take some crucial decisions, including finalizing terms and conditions for the much talked about $5 billion Extended Financing Facility (EFF) to avert potential default.

It is writing on the wall that that next budget will be greatly influenced by the conditions to be finalized with the International Monetary fund (IMF) for the disbursement of funds under EFF. On point is very clear that the rate of interest charged will be higher under EFF as compared to standby facility that Pakistan finalized in 2008. This will require additional revenue to ensure interest payment to the IMF.

Traditionally, IMF recipe include introduction of new taxes, hike in existing tax rates and withdrawal of subsidies. This becomes a dominating factor because most often Pakistani economic managers fail in coming up with ‘homegrown’ plan and following IMF dictation blindly. Around the world there is a consensus that following IMF recipe leads to vicious borrowing cycle, borrowing for the paying off existing liabilities. It is very rare that IMF conditions help in finding a sustainable solution to the existing malice.

It is feared that due to poor tax collection regime, the government will once again resort to imposing new indirect taxes and enhancing existing tax rates. The most probable is hike in rate of GST and imposition of GST on more products. It is also feared that minimum tax rate will also be increased by one percent across the board. The worst worry is hike in levies on POL products electricity and gas, historically the successive governments have been following this practice and the new government can’t be an exception.

Since budget for the next financial year is being prepared by bureaucracy, which has always remained under the influence of multilateral lenders, the expectations of any relief is ruled out, in fact there are growing fears of further squeezing of the existing tax payers rather than bringing more people under the tax net. Since the general elections are scheduled on 11th May, formation of new elected government may not be possible till mid June, it may be further delayed in case a ‘hung parliament’ is created. The probability of no political party getting even simple majority is very low.

Ironically, budget preparation has remained an exclusive prerogative of bureaucracy in the country, partly because for a long time the country has remained under martial law and partly because of the incompetence of the elected representatives. While bureaucracy claims to be working on developing sustainable policies, politicians often suffer not only from myopic view but also focus on achieving ‘political mileage’ by introducing popular policies without having the least realization of fiscal limitations.

 

Some of these policies include introduction of yellow cabs, green tractors, sasti roti, laptops, metro bus and even Benazir Income Support Program (BISP). All these programs may have supported less than one percent population but utilized billions of rupees of tax payer’s money. Though, the example of metro bus is not aimed at maligning PML-N, its top priority should have been resolution of energy crisis that could have helped industries operating at optimum capacity utilization. Similarly, BISP has added to the list of beggars rather than creating new job opportunities.

Political governments usually suffer from the habit of sweeping the problems under the carpet, mainly to avoid any lash back. As a result, once their term is complete they pass on huge load of borrowing and accumulated losses to the next government. The last coalition government has also left a huge load of borrowing, circular debt and also plunged the country into balance of payment crisis.

Setting realistic targets for the next budget may not be an easy task for the next elected government. It is feared that in case PML-N or PTI wins majority it may try to undo some of the policies introduced by the PPP-led coalition government. One of the indications given by the caretaker government is ‘following austerity measures’. One can still recall such moves introduced in the past but the results achieved remained highly disappointing, for the simple reason that changing mindset of people takes longer time.

Revenue collection during next financial year will remain highly dependent on performance of the economy. The biggest stumbling block is circular debt now touching almost half a trillion rupees. Though, some of the experts dispute these numbers but it is a fact that unless root causes are removed, resolution of the crisis is almost impossible. Let one point be very clear that circular debt is the outcome of massive theft of electricity and gas, failure of the companies to recover outstanding amounts and highest disregard to good governance, added to these are inefficiencies and corruption. Every year state owned enterprises eat up to half a trillion rupees and the worst entities are NIC, PIA and PSM.

Revenues collection will also remain dependent on the performance of provincial governments. After the introduction of 18th Amendment collection of certain duties and taxes has been transferred to provincial governments, from the federal government. Since the required infrastructure has not been created as yet, collections are likely to remain low.

The time has come also to remove exemptions granted to some of the sectors/individuals. The logic behind keeping the income from agriculture tax exempt is beyond comprehension. It is the violation of cardinal principal that all sorts of income should be taxed irrespective of the source. The rational that imposition of tax on income from agriculture will hurt the small farmers is completely incorrect. The tax liability is linked with produce index units (PIU) implying higher the number of PIUs higher will be the tax liability.

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