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Beggars cannot be choosers

Since Ayub’s era our rulers have developed addiction for large intakes of foreign loans, especially IMF bailouts – many call it death-blows. With every loan comes a host of conditions. These conditions though ostensibly meant for reforms leave us in deeper economic quagmire. During Musharraf-Shaukat era, our economic managers started hoodwinking the nation claiming that they were severing all ties with IMF and other foreign donors, whereas in reality new loans were secured for reforming (sic) tax, banking and justice systems – just to mention a few. Fresh loans were negotiated with renewed enthusiasm. This undesirable trend continued unabated with unprecedented vigour under the PPP regime till May 2010 when to our great luck the IMF suspended the programme due to our government’s serious lapses saving Pakistan from further indebtedness – we should be grateful to them for this favour.

The third time government of Nawaz Sharif is now setting new records of borrowing at home and abroad though during the election campaign contrary claims were made of not following the path of the predecessors. Now the slogan is that with the IMF’s fresh loan of $6.7 billion approved on September 4, 2013 “will put the country on path of sustainable growth and is going to open lending avenues with other international lenders”. Showing mood of jubilation on further indebtedness confirms an unworthy attitude of our rulers, especially when the IMF decided to disburse only $547 million as first shot, much lower than what Dar was expecting. For the release of the remaining amount, condition is imposed that it depends on the successful completion of quarterly reviews that entail many decisions not only politically unpopular but detrimental to the economic growth of the country.

According to IMF, Pakistan’s economy will grow only at 2.5% of GDP, much less than the target of 4.5% set by the government for the current fiscal year. With this dismal growth rate, the condition of reducing fiscal deficit by 2% of GDP or Rs 520 billion appears impossible. As a contingency measure, the government is reducing expenditure allocations by Rs 130 billion in the first nine months of the year compared to the budget to create a reserve against any fiscal slippage.

The approval of 16th programme for Pakistan since 1958 by the IMF’s Executive Board came after the government accepted tough structural reforms as prerequisites for qualifying for the three-year Extended Fund Facility (EFF). It must be remembered that Pakistan has earned notoriety of a one-tranche nation – a reference to the country’s track record of taking loans at critical times and abandoning them prematurely. The regime is happy that unlike the last stand-by arrangement, the new EFF provides repayment period of 10 years. The Finance Minister was excited to tell the nation “we have three-year breathing period on international obligations for debt servicing and will bring financial discipline”. It means that without IMF and other foreign donors we are not capable of enforcing fiscal discipline – what a disgraceful attitude of the part of ruling elite.

Pakistan’s last $11.3 billion Stand-by Arrangement (SBA) with IMF expired on September 30, 2011 with last two tranches of $3.7 billion that could not materialise following Islamabad’s failure to implement key reforms coupled with fudging in revenue figures – showing advance in back dates as collection for the year. Pakistan opted for $11.3 billion SBA in 2008 and got disbursements of about $7.6 billion, but failed to get the remaining $3.7 billion due to lapses in performance criteria, leading to suspension of the programme in May 2010, culminating in an unsuccessful ending on September 30, 2011. The following were some of the terms and conditions of $9.6 billion IMF loan in 2008:

1. 30% cut in defence budget (over 4 years).

2. Downsizing of government and semi-government departments from 350,000 to 120,000.

3. Change in tax structure to increase general sales tax by Rs 50 billion.

4. Agriculture tax of 7% on wheat production and 3.5% on other crops.

5. IMF’s official control on monitoring revenue collection and making changes whenever it so desired, in the tax system.

6. Six IMF directors and two World Bank directors to monitor preparation of the federal budget of Pakistan.

7. Pakistani government to report all other loans negotiated with other countries (including China) to the IMF 48 hours before signing the funding agreements.

The conditions for fresh tranche of $6.7 billion under the Extended Fund Facility (EFF) are even more stringent though Ishaq Dar has been insisting “we have got it on our own conditions.” He wants us to believe that beggars can be choosers after all! Obviously nobody is so naïve as to blindly led by him. It is rather a matter of great concern that before sending Letter of Intent (LoI) the parliament was not taken into confidence about the terms and conditions agreed with the IMF. However, Dar was honest enough to at least tell us all in a news conference on August 26, 2013 that “in the first year, IMF will give $2.2 billion while we have to pay back over $3 billion.” He further revealed that Pakistan had no option but to borrow $12 billion “to retire its previous debts.” He informed the nation that the “most vital precondition” of IMF for broadening of tax base was fulfilled as the Federal Board of Revenue (FBR) had already issued 15,000 notices to “potential tax dodgers.” The total number of these notices has now exceeded 20,000.

It is clear that new conditions will hamper growth process and bring more hardships for Pakistanis – especially the poor and middle income segments. According to the Memorandum of Economic and Financial Policies (MEFP) – a set of detailed policy actions that the government will take to secure the loans – the government is committed to recovering losses from electricity consumers and reduce subsidies to the power sector. Additionally, a gas levy on consumers is promised to raise additional revenue of around Rs 104 billion – the less spending of the government is going to retard growth significantly.

The government has assured the IMF that deliberations for new National Finance Commission (NFC) Award would be held earlier than the schedule and share of provinces would be reduced. This is a bad news as federation has already usurped the right of provinces to levy sales tax on goods, which historically was a provincial subject – ‘Fiscal decentralisation’, Business Recorder, November 11, 2011.

The IMF wants increase in interest rates and bar on the State Bank of Pakistan to conduct money market operations by purchasing dollars from the market to adjust the foreign exchange rate. How it is going to affect us very obvious, yet Dar wants us to admit that fresh IMF programme is ‘good for economy”. On taxation front, the government and IMF want more oppressive taxes and there is no will to tax the rich and mighty. No condition has been imposed by the IMF that the richest 1% Pakistani would be forced to pay taxes according to their ability, amnesties like section 111(4) of the Income Tax Ordinance would be withdrawn, there would be complete abolition of Statutory Regulatory Orders (SROs) and all the state functionaries will get consolidated monetized pay packages – with no free perks and benefits – liable to tax as in the case of other employees working in the private sector.

The agenda of Federal Board of Revenue (FBR) thus remains unchanged – go after the small fry and protect the big fish. The government wants FBR to make “extraordinary collection efforts” during September 2013 to please the IMF – yet Dar says no conditions are attached to the 16th IMF programme! FBR has as usual started its negative tactics to show higher figures. Large Taxpayers Units (LTUs) and Regional Tax Offices (RTOs) in Karachi have withheld sales tax refunds of over Rs 15 billion since July 2013. Further LTU Karachi got advance tax from banks and insurance companies, etc, in August 2013 of around Rs 10 billion. The LTU Lahore and Islamabad had blocked refunds of over Rs 10 billion. Obviously, the IMF is not aware of these “extraordinary” efforts of FBR. And if it knows, it is more than lamentable on its part to remain silent.

Despite all these negative tactics FBR managed to collect only Rs 280 billion in July and August, registering a shortfall of Rs 15 billion against the fixed target of Rs 295 billion. According to reports, Chairman FBR, Tariq Bajwa, “expressed disappointment over low duty collection in the first two months” and held meetings on September 3, 2013 with senior customs officials to discuss the revenue collection position and possibilities of phasing out the SRO culture. Bajwa knows little about “mafia-like-operations” in Customs. The only way to crack down on the mafia is scanning of every in-coming and outgoing container. The tax evasion in Customs alone is over Rs 400 billion per year. The arms dealers and criminal gangs in Karachi protect corrupt Customs officials who actually work for them and not for the government.

The “performance” of Customs irritated the apex court in missing container case, but till today neither the lost revenue of billions has been recouped nor any action taken against the mafia involved. Now the Supreme Court has constituted one-member fact-finding commission to look into the issue of arms smuggling into the country and theft of duty at seaports. Like the Suddle Commission on missing containers, this would just be another effort in futility as the corrupt elements in FBR and government would eventually protect the mafia that generates billions for them.

Pakistan is now in a very difficult position. On the one hand, mafia inside FBR is so powerful that it can even undermine the government and on the other, for the continuance of IMF programme, achieving of revenue target for the current fiscal year and next many years is a prerequisite.

The IMF has not accepted Pakistan’s request for releasing every tranche before its quarterly review of the programme – in fact the same has been linked to successful achievement of the structural benchmarks and performance criteria. According to a press report, “if the trend of missing the tax target continues in the coming months, the IMF during its quarterly review meetings may ask Islamabad to levy more taxes to achieve the annual target. The IMF, it is reported, “will not accept any shortfall against the quarterly and annual collection targets”. It is thus clear that FBR’s failure to meet targets will not only jeopardise programme with IMF but also the federal government’s understanding with the provincial governments for posting a surplus of Rs 117 billion to keep the overall budget deficit at 6% of GDP – as agreed with the IMF. The provinces have obviously linked it with FBR’s ability to generate Rs 2,475 billion.

By this time it is clear that Nawaz Sharif government has no coherent programme and strategy to overcome the ever-increasing internal and external debts, fiscal deficit, inflation, the worsening balance of payments and unfavourable trade imbalances. If key to debt retirement is to raise tax revenues, the issue is why free perks and benefits are still available to the State Oligarchy – ‘FBR: new chairman, old challenges’, Business Recorder, August 2, 2013, ‘An elitist Pakistan’, Business Recorder, July 26, 2013 and ‘Predatory elites’, Business Recorder, April 19, 2013.

If the government cannot protect life and property of citizens, does it possess legal and moral authority to demand taxes from them? The criminal gangs in Karachi and elsewhere are targeting businessmen and what is left is taken away by the tax officials in the name of “personal levy.” The writ of governments – both the federal and provincials – is non-existent. The people who have enormous hidden wealth are now on the hit list of the criminals. It happens in societies where the wealthy and mighty do not believe in rule of law and think that their money will buy anything from state functionaries to rascals in the street. They do not realise that in the end the same money can become a source of serious trouble for them. The main malady of Pakistan is thus absence of rule of law and erosion of state authority. The State is now captive in the hands of criminals and terrorists. If Pakistan has to survive and progress then as a first step, rule of law has to be established and all miscreants that include tax evaders, will have to be dealt with iron hand.

Once writ of State is re-established, the government must earmark revenues for specific purposes and place the same in ‘Funds’ created for debt retirement, creation of employment zones and provisions for social services like education, health, housing etc. This will persuade the people to contribute towards the national exchequer. This is the only way that revenue can be generated through voluntary compliance and at the lowest possible cost. The present policy of imposing irrational taxes, eg, taxing even that portion of citizens’ income that they spend on educational and medical needs, can never produce any positive results. These are bound to create more inequalities in the society leading to social unrest and lawlessness.

Presently, the state is so indifferent towards the law and order situation and high charges of power and gas that no one is inclined to invest in any venture despite tall claims to the contrary by the financial managers. If the government is really interested to improve the situation it must improve law and order situation and create investment-inductive environment.

Today’s Pakistan represents a State where a trio of corrupt civil-military bureaucrats, incompetent politicians and profit-hungry businessmen is very affluent, but the Government is poor and incurring more and more debts to pay salary and other expenses of its employees. This state of affairs is the direct outcome of the State’s pathetic policies that allows a free hand to forces of loot, corruption and terrorism. No other state in the world has undergone such a horrible experience. A number of studies conducted by independent researchers reveal that narco-money and debt-enslavement has made Pakistan a State subservient to international donors and forces of terrorism. Pakistan’s transition from a ‘Kingdom of Heroin’ to an “Enslaved Economy” shows how certain forces managed to push this nuclear state to a position of extreme helplessness.

Our ruling classes in fact do not want to come out of debt enslavement as it would end their perpetual control over the State and means of production. Pakistan served as an experimental ground in the hands of foreign donors to see how effective their strategy can be in enslaving resource-rich countries. Their experiment has produced positive results as Pakistani rulers co-operated beyond their expectations – now they are applying the same tactics in many other countries. Pakistan leadership proved incompetent and weak. During the Afghan War against the Soviet occupation, Pakistan became a victim of narco-money destroying its political, social and economic fabric and the present terrorism is an off-shoot of the same. In post-9/11 scenario, toeing the US-Nato policies and supporting their physical occupation in Afghanistan engulfed the country in the New Great Game and objectives of the New World (dis)Order unleashed by the US and its allies. A nuclear State is trapped into a deadly debt trap with a purpose. The debt trap, in fact, is a symptomatic expression of complete subjugation. The economic enslavement leads to political subjugation. It is, therefore, not surprising that Nawaz Sharif is getting IMF bailouts readily in his third term as he is ready to make Pakistan a ‘Non-resisting Satellite State’ of USA.

(The writers are Adjunct Faculty at Lahore University of Management Sciences (LUMS) and partners in law firm, Huzaima & Ikram (Tax and Pakistan). The views expressed in this article are not necessarily those of the newspaper)

Huzaima Bukhari and Dr Ikramul Haq, "Beggars cannot be choosers," Business recorder. 2013-09-13.
Keywords: Economics , Economic issues , Economic policy , Economic system , Economic growth , Government-Pakistan , Economic planning , IMF policy , Political leaders , IMF , PPP