ISLAMABAD: The declining tax-to-GDP ratio has started causing additional financial problems and the situation has worsened due to further political instability, forcing the government to rely on extending yet another amnesty scheme.
The tax-to-GDP ratio that rose to 12.6% in 2015-16 from a low of 9.3% in 2010-11 is again said to be going in the single digit. Critics and detractors of the government do not believe the double-digit tax-to-GDP ratio and often accuse concerned officials of figure manipulation to show a lower budget deficit.
The difference between income and expenditure has already widened by over Rs1.5 trillion with the tax machinery failing to generate enough direct taxes.
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The carrot-and-stick policy, it is said, has not worked as current and previous rulers always avoided making the rich unhappy. Both the PPP and PML-N governments found an easy way of meeting financial needs by extending amnesty schemes.
Now, when just four to five months are left to fresh elections, there is increasing scepticism, both in official and unofficial quarters, if any worthwhile amnesty scheme can work out. Most of them, it is said, are not interested in availing the scheme.
On the contrary, further money-laundering is feared to take place in the days to come in the absence of what is generally perceived “a non- functional” government. Currently, two advisers with the status of federal ministers – Miftah Ismail and Haroon Akhtar Khan – and State Minister for Finance Rana Afzal are looking after various departments.
A fourth adviser, with the status of a minister, former adviser on finance Shaukat Tarin is being tipped to join the Ministry of Finance. Why would the other three, especially Ismail, accept Tarin in any capacity is a million dollar question?
Fingers are crossed in the concerned quarters with many complaining that Prime Minister Shahid Khaqan Abbasi, who announced immediately to concentrate on economic issues particularly the weak tax base, does not have time to deliver. He is said to be more in an appeasement mood.
One of the important tasks that require urgent attention of the finance ministry’s top three is to take into account currency fluctuation due to which there is over Rs2 difference between the inter-bank and open market rates. Since there is chaos both in the central bank and the Ministry of Finance, there is little effort being made to ensure early currency stabilisation, which might go as high as Rs115-120 against the US dollar at the time of 2018 general election.
The most worrying issue is foreign direct investment (FDI) that has witnessed a mighty 75% decline in December 2017, while revenue growth of the Federal Board of Revenue (FBR) has come down to 12.5% against the target of 19.4%. There is no FDI other than the Chinese that is coming in the wake of the $56-billion China-Pakistan Economic Corridor (CPEC).
Debt servicing and fiscal deficit
Another frightening issue is the amount of debt servicing that has seen a whopping 57% increase while government borrowing from the central bank has reached over Rs700 billion in the first six months of the current financial year. Additionally, the central bank is regularly printing notes, also called as deficit financing, which is bound to bring inflation. With new increase in petroleum prices, inflation will create further problems for lower middle classes.
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Fiscal deficit in the first six months of 2017-18 has already reached Rs900 billion against the full year target of Rs1,470 billion. Word has it that the same would grow to Rs2 trillion by the time the current fiscal year ends on July 30 this year.
Former prime minister Nawaz Sharif says the country’s economy has taken a nosedive due to his ouster by the superior courts. However, his advisor, Ismail, said three weeks ago that the economy was stable and there was no need to be worried.
“What is happening on the economic front is simply very dangerous and frightening and sadly, nobody is taking any notice of it,” said renowned economist Dr Hafiz Pasha. The former finance minister said that the government needed to take into account internal and external developments that are directly affecting the country’s fragile economy.
“Why is debt servicing increasing and why is the FBR failing to meet its revenue targets,” Pasha questioned, adding that the government must restrict its borrowing from the central bank.
Exports and refunds’ issue
On the external front, Pakistan’s exports are not keeping pace. Back in 2003, Pakistani and Bangladeshi exports of readymade garments were at the same level of $3 billion a year but by 2016, Bangladesh crossed $30 billion while we remain stuck at $3 billion.
Since international markets are very competitive, the government needs to ensure that Pakistani exporters do not face unnecessary delays.
There is another issue relating to it; the high cost of doing business in Pakistan. Why is it so that exporters first pay taxes and import duties and then get a refund? These sales tax refunds have grown over Rs250 billion and the government continues to avoid its payment.
Earlier, former finance minister Ishaq Dar had been punishing exporters by not paying them their refunds. Now, his successors are doing the same with the sole purpose of showing a lower fiscal deficit. This is gross injustice.
Failure in exploring new export markets is another worrying area to be looked at. Now that the exchange rate has been made competitive, Pakistani exports must grow and if countries like Bangladesh, Cambodia, Sri Lanka an Vietnam can succeed in exploring new export markets, particularly those in Africa and South America, why can’t Pakistan do the same?
The foreign exchange reserves level is concerning as well. There is no plausible cut in imports due to the lukewarm attitude of the concerned officials who are often seen allowing luxury and unnecessary imports. Introducing additional import duty must be pursued to discourage superfluous imports.
Going forward, with a few months left, PM Abbasi must live up to his promises of increasing revenues and foreign earnings by concentrating on key economic challenges.
He should be holding regular meetings with economic ministers to avoid a default situation, which seems to be around the corner considering the weakening reserves position of the central bank. The FBR must deliver by increasing direct taxes and ensuring more and more people file tax returns, which at present is frustrating and disappointing.
The writer is the recipient of four national APNS awards
Published in The Express Tribune, January 22nd, 2018.
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