Serious opposition: Besieged, govt puts RGST on hold again

Govt officials say the delay may be indefinite and accuse political parties of playing politics over the issue.

ISLAMABAD: After failing to muster support from its allies or the opposition, the government has been forced to postpone the adoption of the reformed general sales tax law (RGST), at least till the dust of the current political turmoil settles down – a decision that can lead to serious economic and political consequences.

“Political parties, opposition and allies alike, are playing politics over the issue. We have postponed (the adoption of) RGST … maybe for an indefinite period,” a top PPP official closely connected with the RGST issue said on Thursday.

A top finance ministry official told The Express Tribune that the postponement will immediately result in the blocking of the up to $2.5 billion foreign assistance package, besides fuelling runaway inflation, unemployment and ultimately leading to political unrest. He said it will also result in a historic budget deficit-gap between income and expenditure, of up to Rs1.28 trillion or 7.5 per cent of the total size of the national economy.

The ruling PPP is facing stiff resistance from mainstream opposition parties like the PML-N and PML-Q, while their own allies MQM and JUI-F have publicly announced intentions to vote against the bill.

So far, the government has succeeded in securing the approval of the Senate on the bill with the help of PML-Q and the legislation was sent to the national  assembly’s standing committee for approval before moving it for a final vote.

In the lower house of parliament, the government messed up the committee proceedings and did not seek voting on the draft law which was necessary before sending the bill in the National Assembly for final approval. Recent political developments like the JUI-F pulling out of the ruling coalition and MQM’s stiff opposition to the law have made the task even more difficult for PPP government to pass this legislation.

December 31 is the third deadline given by the International Monetary Fund for implementing RGST: a two-year $11.3 billion bailout programme will lapse on the same date.

The most crucial condition of the IMF was to implement the so-called reformed GST by June 2010. Pakistan again promised to implement the programme by October 1 and then again from January 1 next year.

The IMF has suspended the programme since May this year with two tranches of $3.6 billion remaining undisbursed.

“The GST is not all about collecting Rs40 billion taxes this year but a declaration of intent of what we are going to do to tap our resources,” said a top finance ministry official on condition of anonymity. He refused to speak on record due to the “political sensitivity of the issue”.

He said that the finance ministry had “clearly told Prime Minister Yousuf Raza Gilani on Tuesday that if the government did not implement the reformed GST, it would result into a widening the budget deficit. He said the most worrisome aspect was that the government will borrow the same amount from the domestic market, which will be a double edged sword. He added that the State Bank will have to increase the main discount rate to control inflation, which will not only increase government debt financing cost but will also break the backbone of the industry.

Background interviews with multilateral donors reveal that in a worst-case scenario, donors will hold review meetings in mid-January and try to work out joint strategies to deal with Islamabad. They say the donors “may not stop funding for ongoing result-oriented projects, but will definitely block programme lending and budget financing. A worrisome aspect is that it will undermine post floods rehabilitation and reconstruction efforts”, they say.

Published in The Express Tribune, December 17^th, 2010.