Holding the economy hostage

Tax reform was born out of existential necessity but it will die at the hands of political exigency of the worst kind.

Khurram Husain December 15, 2010

Don’t believe the hype. This is not about protecting the poor from inflation, or stopping corruption. This is about one thing only: blood. Let me explain.

The opposition to the government’s attempts to introduce a value added tax (VAT) in the country has grown in proportion to the IMF’s public insistence that this tax is essential to secure the next tranche. Of course, the IMF had insisted on advancing tax reform from the beginning. But the first four reviews under the facility signed in November 2008 had been approved without making tax reform a sticking point.

The issue was meant to be advanced at the same time last year. The board of directors of the IMF was quite upset that Pakistan had not finished drafting the bill in December last year.

But the tranche was disbursed and a new timeline was agreed upon for the tax reforms to be implemented, in prolonged discussions that stretched until April 2010. The IMF announced the release of the funds and accepted the new timeline offered by the new finance minister.

In fall last year, as debate took place between the finance ministry and the World Bank over the modalities of seeing the bill come into force, the World Bank was said to favour the Presidential Ordinance route, saying this would be a lot quicker and would bypass the messy politics of parliament. The finance ministry, on the other hand, had favoured taking the bill to parliament, confident that it could be passed.

When word of this debate leaked to the media, the PML- N said that the World Bank should not offer its advice on how legislation should be conducted in Pakistan and demanded that the bill be routed through parliament. They got their way. Notice, they did not say at the time that they oppose tax reform, did not say that the government should tackle “corruption” first and then embark on tax reform, did not say that a value added tax will fuel inflation. No, all they said was bring it to parliament please, we’re a democracy now.

Meanwhile, the VAT bill was brought before the NA and Senate standing committees on finance in April of 2010, and debate began. There was no accompanying political noise. Throughout the process, while it was being drafted and being discussed with the IMF, the bill was a publicly known endeavour.

What happened between then and now that the tone of the debate changed so decisively?

What happened was that the opposition smelled blood. As the IMF insisted publicly that passage of the bill was essential to ensure the release of the next tranche, opposition parties found what they had been looking for all along: an easy, politically palatable way to deliver a potentially fatal blow to the PPP government without getting their hands dirty.

Thus began the slow vilification of a reform effort that every national government in Pakistan has tried to enact for the past 20 years. If Pakistan’s relationship with the IMF breaks, our reserves could plummet very fast. We have 18 weeks or so of import cover, but that will diminish exponentially, in a handful of weeks at best, if a break with the IMF becomes unambiguous.

And then we’ll have all the makings of an economic crisis on our hands: rocketing inflation, yawning budget deficit, dwindling reserves. And that is exactly the outcome the opposition parties now want, because those are exactly the circumstances in which they believe they can drop the curtain on this set-up and demand fresh elections. Tax reform was born out of existential necessity but it will die at the hands of a political exigency of the worst kind.

Published in The Express Tribune, December 16th, 2010.


Amna | 11 years ago | Reply @Chandru: Lets be honest though, is this really going to be a beginning for other sectors to be taxed?? I highly doubt it. And I can not speak for PML N or any other political party, but personally I think it is easy members of the well to do class, to advocate for this tax and talk about all the benefits to the economy, but at the end of the day, life is going to get tougher for the poor. And God knows how much they can possibly take
saimakhan | 11 years ago | Reply Very good and too the point. Gillani should call NS's bluff. Put him in-charge of a Special Committee to "root out corruption". What is that old saying: "the pot calling the kettle black"?
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