On matters fiscal

Chairman Nadeem Afzal Chan of the Public Accounts Committee is stated to have remarked that the government of his own party has a planted finance minister. As journalist Ian Jack would have put it, this is “a minor accuracy embedded in a larger untruth”. The larger untruth came out a little later in the story that the IMF wants the president to put his signatures on the Letter of Intent (LoI) requesting any future programme. Reportedly, the IMF staff also met with the army chief. Who knows, their next port of call may be the UN Security Council for a binding resolution. So much for the democracy support programmes of the International Financial Institutions!

These extraordinary approaches show frustration with the usual co-signees — the finance minister and the governor of the State Bank of Pakistan. The LoIs of 2008 and 2009 remain largely unimplemented. It is no secret that the IFIs find it difficult to deal with the political class in Pakistan. Out of the 30 odd finance ministers appointed since 1947, only seven were politicians and the IFIs had problems with most of them. A mutually convenient way out is to appoint present or former IFI staff or friendly civil servants. Both sides speak the same language and reach agreements and understandings in an atmosphere of ideological echoism. Even so, the letter is drafted by the IMF side. Once the negotiations finish, the IMF staff takes its time to dot the i’s and cross the t’s. Removed as they are from the political culture, the co-signees fail to sell reform to those who have to vote them in the legislature. The evidence from Latin America, except for Luiz Lula’s Brazil, Europe and our own experience is that the draconian austerity measures proposed by the IMF require a bureaucratic-authoritarian state for execution. Technocratic set-ups are proposed in this very background, despite repeatedly unsustainable outcomes.

The Memorandum of Economic and Financial Policies (MEFP) appended to the LoI included full elimination of electricity tariff differential subsidies. Circular debt was to be eliminated within the agreed fiscal deficit target, not through additional borrowing. The State Bank financing of the budget was to be reduced to zero. An integrated tax administration organisation on a functional basis was to be established together with risk-based audits. Income tax and GST laws were to be harmonised and a full VAT with minimal exemptions was to be legislated. The State Bank had to tighten monetary policy, stop foreign exchange provisioning for oil import, eliminate exchange restrictions, amend the Banking Companies Ordinance to strengthen its supervision and review the legal provisions relating to the operational independence of the State Bank itself. Government support for the stock market had to stop.

In practice, ‘revenuecracy’ is back to business as usual. The monetary joyride has begun. Circular debt is alive and kicking. In an attempt to wear a human face, the MEFP required better targeting and delivery of the Benazir Income Support Programme. This has happened, as the political class sees clear returns here. And this is the catch. The political class has to see clear returns before it shows real commitment to economic reform. This can take the form of an economic consensus across the political spectrum, which I have been advocating for the past four years. Or, one has to wait for the difficult prospect of a party to win a clear majority by selling the idea of reform in the elections campaign. At this very moment, all parties in the parliament have a consensus on no more taxation.

Published in The Express Tribune, August 24^th, 2012.