Challenges before the PML (N) govt

The markets have reacted favourably to the electoral victory of Nawaz Sharif, as has the business community. Perception can and does impact on key macroeconomic variables, however, no one at this stage can possibly conclude that better times are at hand simply because of market reaction to the poll results.

There is no doubt that Nawaz Sharif and his team would have to proactively engage in some very difficult and extremely unpopular decisions, both within and outside parliament that would impact on what each rupee that we, the public earn can purchase. The key decision that is likely to be vigorously opposed by not only the majority of our parliamentarians in the national assembly that include PML (N) backbenchers as well as its arch rivals PPP parliamentarians, is to impose a farm tax at the same rate as that levied on the salaried class. The only exception to this is the MQM that has gone on record in the 18th Amendment arguing in favour of such a farm tax. Taxing farm income is constitutionally in the domain of the provincial governments that are also over represented by landlords, which explains why the provinces have not taken bold measures to ensure that the rich absentee landlords contribute to the provincial kitty by paying a tax on their huge income. At the present juncture in our history Punjab is the only province that imposed a tax on the income of rich farmers, a levy that remains unimplemented to this day.

Under the Punjab Agricultural Income Tax Act, 1997, land holdings up to 12.5 acres were declared tax-free. Nominal land-based tax of Rs 150 per acre on land holdings of 12.5 acres to 25 acres and Rs 250 per acre on holdings above 25 acres was imposed with other provinces following suit in 2000. The Act was, however, amended in 2001 and the tax was shifted from “land-based” to “income-based” under its second schedule to enable farmers with fertile land and earning higher production levels to pay more than land owners in Barani areas where production was much less. Section 3(4) of the Act provides that ‘an assessee shall be liable to pay land-based tax or income-based tax whichever is higher.’ However research indicates that farmers continue to pay according to the first schedule, which is a nominal land-based tax and the second schedule of income-based farm tax has not been implemented.

According to the second schedule of the Tax, an income of only 80,000 rupees will be tax-free, while the next 100,000 carries a 5 percent tax. A fixed amount of 5,000 rupees on income not exceeding 200,000 rupees plus 7.5 percent above 100,000 rupees would be payable. In the next bracket on income not exceeding 300,000 rupees a tax of 12,500 rupees would be levied plus 10 percent on amount exceeding 200,000 rupees. In the last bracket, 22,500 plus 15 percent of amount exceeding 300,000 rupees would be taxed. Official data prepared by the Board of Revenue Punjab indicates that there are 35,886 landlords in 25-50 acre bracket owning 1,171,806 acres of land collectively. Farmers who own between 12.5 to 25 acres of land are 154,416 in number and possess ownership of 2,565,733 acres. There are two lower categories of land owners: those owning 5 to 12.5 acres and less than five acres who are 994,901 and 11,667,552 in number respectively and hold 6,440,921 acres and 15,328,109 acres of land and who do not have to pay any tax. Thus the law is on the statute books but implementation remains zero. No other province has legislated the income-based version yet. It is hoped that the Punjab government does take away the existing option of paying a tax on acreage or income and the latter be used to determine the tax. It is hoped that the PPP government in Sindh and the Pakistan Tehreek-e-Insaaf in Khyber Pakhtunkhwa consider levying and taking the lead in implementing this tax.

The Nawaz Sharif government would also have to take decisions with respect to reforming the poorly governed power sector and that would not only impact on powerful pressure groups including the auto sector and the textile sector but also the general public. In short this measure will be considerably more of a challenge as the scale and extent of the energy crisis is unprecedented and entails heavy loadshedding, up to 10 to 12 hours in major cities and almost 18 to 20 hours in rural areas. In addition consumer bills for the few hours that energy is supplied are higher than in 1986-87 when loadshedding was not that acute. The why is easy to explain: the eroding rupee vis-a-vis major currencies during the past five years (due to poor macro economic performance attributed to policies), an increase in the import bill due to rising international price of furnace oil as well as replacement of hydel generation with the more expensive furnace oil subsequent to the Benazir Bhutto government’s decision to approve furnace oil-based Independent Power Producers that changed the energy mix from greater hydel dependence to furnace oil.

What therefore would be the very short-term measures that would be preferred by a political party that has been swept to power due to not only (i) the incompetence and corruption scandals of the previous government with respect to the power sector but also due (ii) to its pre-poll claim that it would resolve the energy crisis. The PML (N) is reportedly seeking assistance from the Saudis to provide the country 100,000 barrels of crude and 15,000 tons of furnace oil daily for a period of three years on deferred payment – a package costing around 15 billion dollars. It is not clear whether this request would translate into reality however in case it does, Pakistan can delay going on the International Monetary Fund programme while the country seeks to raise revenue and reduce expenditure.

It has also been reported that the government-elect would issue treasury bills to eliminate the circular debt and take concurrent governance measures to ensure it does not resurface that include: (i) cutting the arrears at source and disconnecting electricity supply to private sector defaulters, (ii) installing smart meters to ensure the elimination of over billing, and (iii) reducing the transmission losses to the accepted 2.5 percent rather than the existing 3.6 percent. The long-term solution, of course, would be to change the current energy mix away from the expensive furnace oil towards hydel projects or domestic coal.

Two other measures should be supported. The first is to merge the ministry of water and power and petroleum into an energy ministry so that supply of fuel can be rationalised (hydel, domestic gas, furnace oil imports for the Independent Power Producers). The Ministry of Natural Resources can continue to deal with resources other than gas including copper and gold reserves in Balochistan. The other decision that is not part of the PML (N) manifesto must entail close co-ordination between the Ministry of Water and the Ministry of Finance on not only the way forward but on a time barred performance-based power sector plan. This may require the Ministry of Finance to realistically identify the amount it can release for current as well as for development expenditure in the power sector – unlike the past three years during which subsidies to the sector were more than double of what was budgeted. In turn the Ministry of Water and Power must specify what reforms it is undertaking and receive a disbursement only when quantifiable reforms are already in place. One would suggest the Ministry begins with rationalisation of existing staff, appointments on merit and eliminating bill arrears.

(This is the first of a two-part series. Part II will focus on the need, if any, as well as timing for the PML (N) government to go on an International Monetary Fund programme.)