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Kargil conflict severely jolts improving economy

  1. Forbes fishing project is dead
  2. Kargil conflict and the economy
  3. CTA concerned over export related problems
  4. " Its time to do away with all direct taxes"

Dar rushes to Washington to pacify IMF for release of $ 280 million tranche due in June/July 1999

From Shamim Ahmed Rizvi, Islamabad
July 26 - August 1, 1999

Pakistan's fragile economy has suffered considerable damage due to two-month conflict with India over Kargil issue. Unfortunately the conflict began exactly at a time when the economy had started showing some signs of recovery after rescheduling of debts and release of IMF tranche.

The two month-conflict, which virtually brought the two countries on the verge of war, hit the stock market, discouraged investors and put the trade and industry activities a the slower pace.

A country like Pakistan, heavily dependent on foreign loans, could have hardly sustained any further strain in the conflict. The government took the right decision to de-escalate the crisis otherwise the country was heading towards a total economic collapse. Still it would take time to put the economy, back on the track.

Despite many tough decisions taken to increase revenue generation, such as increase in POL prices, withdrawal of subsidy allowed by the Prime Minister to electricity consumers and increase in PTCL charges, the IMF is still not satisfied as the government has not so far moved to levy general sales tax (GST) on services sector and is still unable to bring the agriculture sector into the tax net. As a result they have withheld the $ 280 million tranche which was due in June/July 1999 under ESAF/EFF. It is also feared that the next trance, due in August, 99 might also be withheld or delayed.

Finance Minister Ishaq Dar has already left for the USA on a mission to appease the IMF. Before leaving he had a detailed meeting with the Prime Minister (on tour to Saudi Arabia) at Madina and held discussion on the economic situation of the country. Dar is expected to start meetings with the IMF during the current week for the settlement of the issue and release of withheld tranche including release of the next tranche. The other members of Dar's team, Governor State Bank of Pakistan Dr. Muhammad Yaqub, Finance Secretary Khalid Javed and Special Secretary Finance Abdul Ghafoor Mirza have already reached Washington.

IMF authorities are convinced that the target of revenue generation of Rs. 356 billion during 1999-2000 fiscal year cannot be achieved unless GST was levied on services and utilities and without a meaningful increase in tax on farm income. This view, they argue, is confirmed by the performance of the CBR which could hardly recover Rs 306 billion in 1998-99 budget against the target of Rs. 354 billion.

Revenue generation has been a perennial problem for Pakistani governments. Benazir Bhutto during her rule could not force the rich absentee farmers to pay income tax. Mian Sahib, at his place, is finding it extremely difficult to make the traders to purchase Trade Enrollment Certificates. The resistance, mounted against new proposals for multifarious reasons, has thus been the single major impediment to reforming the tax system.

Is there a way out? One may well be tempted to ask. Ishaq Dar's approach to date has been to issue regular threats to those who publicly refuse to make his new plans about taxes a success. His threats that he would let loose the FIA on them, the implication of such a threat in a society such as ours is not only that punishment will be meted out to all those who refuse to pay taxes but, more disturbingly, it also opens the door to the need for, paying out more kick backs by the traders, at least as far as the FIA is concerned. Their plea at the time was: "Refrain from levying GST on us which would document our income and leave us open to demands of high income tax in the years to come but, instead, unfortunately though, till today, in spite of two extensions of fifteen days given to the traders to pay, the Sales Tax Department has collected not more than Rs 87 million, far short of Rs 5 billion target. The tax did not work and neither did the threat. Strike is being planned by the traders. They talk of unjustified and anomalous tax system which they insist they will not accept.