IMF'S STRANGLEHOLD OVER PAKISTAN
TARIQ AHMED SAEEDI
Mar 14 - 20, 2011
The pressure of International Monetary Fund (IMF) on the government of Pakistan to levy reformed general sales tax, and take one-off measures to scale up tax revenue, is increasing, and the government seems to have been left with no option other than conceding to it in order to get sixth and final tranche of US$11.3 standby arrangement (SBA) loan from the Washington-based lender. Pakistan is expected to start paying first instalment from February next year.
Analysts said Pakistan needed letter of comforts from the Fund to improve its rating with the World Bank and other international lenders and donors, which are the main supporters of Pakistan's leaked budget. IMF's team until the last week was dilly-dallying on the fifth review of macroeconomic and fiscal framework perhaps owing to the lingering issue of reformed general sales tax. The fund has conditioned the release of remaining tranches with the rise in tax revenue. However, so far nothing has appeared on the front of fiscal discipline.
A MASSIVE CONTRACTION IN C/A
It is feared that fiscal deficit will reach to 8 per cent of the gross domestic product in the current fiscal year. However, Dr. Hafeez Shaikh, federal finance minister, expressed his hope over the ability of the government to contain the deficit to near five per cent, which is relatively acceptable, he said last week. The ways to control the fiscal deficit involve saving of around Rs100 billion by cutting provincial expenditures and slash in revenue collection target to Rs1600 billion for this year.
Experts said the government did not need any further to bow down before pressure of IMF. There are media reports of possible restart of another IMF loan programme or restructuring like done earlier when original US$7.6 billion SBA was elongated to the current value. They said exports from Pakistan were showing an upward trend while remittances inflows had broken all-time records. Similarly, oil import bill of this year would remain lower than the expectations. All these, in the end of this fiscal year, would save the country approximately US$3billion, according to the media reports. Exports from the country witnessed a considerable surge of 23 per cent during July-Jan of this fiscal year (2010-11) to US$13.2 billion as compared to US$10.7 billion in the same period last year. In the same way, State bank of Pakistan recorded 18 per cent growth in remittances to US$6.1 billion in July-Jan from US$5.1 billion in the comparable period. Foreign reserve positions of the country also improved largely. Foreign reserves have been recorded at US$17.4 billion. Consequently, current account deficit that stood at over three billion dollar in the seven months of last fiscal year plunged deeply to negligible $81million. Economic growth target, which was feared to go down below two per cent due to floods and external pressures, has been revised up at above three per cent.
WEIGHING DOWN POOR MASSES
In spite of the positive developments, the government is perhaps all set to weigh down poor masses with new taxes. The government is expected to generate near Rs40 billion through these taxes in shape of flood surcharge on income tax and special excise duty.
Floods have caused massive financial losses and the government needs money to bring things back to the normal. However, international donors have extended financial supports to Pakistan with generosity. If funds are directed to the right place, the government does not need poor taxpayers to take ride on, according to the experts.
CORRECTING THE FAULTS IN TAX MACHINERY IS SAID TO BE ONE OF THE SOLUTIONS TO OVERCOME THE FISCAL PROBLEMS.
Cut in government's non-development expenditures is also necessary to develop fiscal space and lessen the economy's extreme overreliance on foreign inflows. Proper tax collection can generate Rs500 to Rs600 billion revenue. In fact, a senior politician has pointed at the potential recovery Rs1,000 billion from the present tax system given two or three unbending actions. Tax on agriculture can be broadened largely. The government's dependence on prohibitive taxes would produce negative implications in the long-term. For example, overreliance on income tax on salaried class has backfired, resulting in contraction of disposable income of low- and middle-income group. Taxing rich can fill the revenue-expenditure gap and give government space to spend on pro-poor sectors. Former foreign minister Shah Mehmood Qureshi, who is also the chairman of Farmers Association Pakistan, said recently that agriculture tax should be broadened. The statement was praiseworthy, especially since this came from a person associated with the ruling party.
IMF is disrupting the democratic process in the country by currying support with the government officials to increase revenue. According to critics, the Washington-based lender is persuading the government to go to any extent to develop fiscal discipline even if such actions have a direct impact on the people. The government is in the awfully perplexing situation over the issue of taxes. Unable to tax the evaders, it is zeroing in on those who are taxed already. This is a point of concern for political parties who fear a strong reaction from public in case of new taxes, which are in the pipeline for the upcoming budget. Under pressure from debt-obligations, the government may try to escape vetting of parliaments required to green-signal measures in public interest. Such is the case with reformed general sales tax, which is not implemented because of the widespread public opposition. A senior government official told this scribe it would take one day to implement the tax nationwide if the government was ready to bypass parliamentary channel.
IMF's intervention in Pakistan's economy has raged on intolerably. While the lending programme was aimed at to meet the balance of payment crisis, it is demanding too much on the fiscal side-like mobilisation of internal resources. Taxes that are aggravating public woes are not disaggregated from ones that should be levied or tax reforms that should be implemented. Agriculture and wealth taxes need to be imposed across the board.