IMF worried over narrow tax-base, govt not
March 09, 2012
Though Pakistan has started paying back the loan it secured from the IMF in 2008, the PPP-led regime is hardly expected to apply for any assistance in the near future. The reason: it is not ready to expand country tax base (now below 10% of GDP), which the lending institution insists on. Understandably, interest rates and inflation will remain high to keep economy on the slow track.
The government has made it clear long ahead of presenting the upcoming budget that no new taxes will be introduced, though it is confident to overcome anomalies in revenue collections. The commoners should not expect any relief either — soaring oil prices will keep them hitting in the future as well. There are no chances of GDP growth improving (now 4%); the finance ministry, now under the command of the premier, has yet to bring forth any credible plan to this end.
The fiscal year 2004-5 must be remembered as a year when GDP growth rate stood at 8.4% and the interest rate 5%. The success story, if it was, could only be attributed to the determination of economic managers who had been given a free hand (of course by a dictator) to deal with economic slowdown and they had taken the route of fiscal reforms, privatization and deregulation, which helped them attract the IMF.
The country made an impressive advancement on fiscal reforms during the first half decade of the new millennium. The Central Bank was made autonomous. The issue of non-performing loans was settled down (it is another question as to what extent it was done judicially), banks were privatized and the ratio of private ownership in fiscal assets was raised to 80%. Merger of the financial institutions was allowed for the sake of efficiency and predictability.
Reforms in banking sector increased both the scope and range of services. Credit was expanded and made available to the urban middle class and farmers. Energy and telecommunication sector were deregulated and more revenues were generated through tax reforms. A liberal investment policy, throwing every sector open to private businesses with liberty to send profit to the destination of their choice, was adopted and non-tariff barriers were removed other than lowering the import duty down to 25%.
That the economy went back to the beaten track, the factors responsible were beyond the control of the economic managers. The earthquake absorbed a lot of attention of government as it got engaged in rescue and rehabilitation efforts. America by then had become demanding vis-a-vis engaging army on the western front where it suffered defeats and damage to the regime’s credibility stirred the political opponents — it was the time the PPP and PML-N signed the Charter of Democracy and MMA, the opposition party, started distancing away from the Musharraf-led government.
The beneficiary of the structural reforms undertaken in the early five years of the Musharraf-led regime happened to be the wealthy and the rich. Downsizing and lowering of interest rates had affected the lower and middle income groups the most. Too, the investors who had been allowed to borrow from local resources became reluctant to reinvest their gains due to growing political uncertainties.
Energy crisis also started emerging by the middle of 2000s as consumption went high due to liberal import of electronic goods, particularly refrigerators. Though the revenues had increased due to the tax reforms whereby GST was introduced, the businesses passed the burden on to the consumers. The government reverted to subsidies and the fiscal deficit swung up, so did inflation. Musharraf and his economic managers packed off before they could initiate the second phase of reforms whereby they could widen tax base and pass the benefits of economic reforms onto the middle and lower strata of the population.
When the PPP-led coalition government took over the economic slowdown had become more visible than ever. Though the new regime did not reverse the economic reforms undertaken by the previous regime but it applied an effective break on it as well — the second phase of reforms still goes missing though the same is essential to remove anomalies, if not bringing improvement, in the working of a semi- liberalized economy. What prevents it to tax real estate and stock exchanges, if not agriculturists, has propped up as a million dollar question. Understandably, the regime has become the largest borrower of the fiscal assets available with banks — one thing other the IMF has objected to.
The lower and middle income groups are groaning under the exploitative revenue system and broadening of tax base remains a task yet to be undertaken. Additionally, the government has not only withheld subsidies on energy but also has made the sector as the source of revenue generation — inflationary trends are visible in the form of the declining purchasing power of the people and growing incidents of abject poverty. It declined to push the social sector development funds beyond 3% on the pretext of the war on terror it is fighting in FATA without any help from the US — after Osama, the most wanted man, was nabbed and killed by Navy SEALs in Abbotabad last May, Coalition Support Fund is not available any more.