Financial instability

In 2016, this writer wrote as many as six articles on Offshore assets of Pakistani citizens, which have been compiled in the form of a book. This endeavour, however modest, was followed by a detailed discussion on the provisions introduced in the Companies Act, 2017 with respect to foreign assets. Then in the following months there were two articles on anti-money laundering provisions in Pakistan. In all these articles the writer tried to identify that all these events which happened concurrently have unconsciously led to ‘instability’ in the financial echo system in Pakistan. The term ‘instability’ for the purposes of this article refers to the present state of affairs of Pakistan’s financial and fiscal regulatory environment. There are many open chapters. These include clarity on the subject of holding assets abroad, examination of sources of financing such assets, nature of Pakistan’s tax resident and citizenship and respective tax and corporate law disclosure requirements, validity or otherwise of transfer of funds from Pakistan to abroad and vice versa, declarations in the wealth statements, nature of money laundering laws, correlation between money laundering, fiscal and accountability mechanism, etc.

People at large fully realize the gravity of situation; however, for personal and privacy reasons specific situations are not discussed. That is quite natural. This confusion, lack of clarity, chaos and uncertainty are creating an inherent instability seriously effecting economic decisions by the relevant people. Let me state that this is not a new phenomenon. This tendency had been brewing for over two decades, however, in the post-Panama Papers scenario a new dimension has emerged. Now the most commonly used phrase about financial matters is ‘money laundering’. Every financial crime, every case of tax evasion, every transfer of funds from Pakistan without appropriate knowledge and comprehension of law on the subject is described as ‘money laundering’.

Matters discussed in this article do not appear in any textbook on finance and economics. It is a specific domestic issue, created by our actions, inactions and inappropriate untimely actions which would have to be dealt with locally.

At the outset, this writer wants to clarify that corrective measures, including appropriate modifications/amendments and enforcement of laws, regulations and accountability are steps in right direction. We all agree that money laundering is a crime. However for that purpose there has to be an appropriate practical definition of ‘money laundering’. We should all disclose our wealth, whether in Pakistan or outside in the wealth statement if so required under the fiscal law. However, at the same time we all agree that there cannot be any provision in the company law for disclosure of shares in other companies anywhere in the world. These aberrations have created irritations in the system leading to instability in the financial environment as described above.

The purpose of bringing this matter under the spotlight is to create confidence and trust amongst the people, dispel the impression that unlike the past this wave will die down in political rhetoric and that the fundamental principles of transparency and simplicity will not be compromised.

As a state we have limited options. On economic, financial and fiscal matters the private sector businesses can have sustainable existence only if there is stability in the system. This writer’s primary concern is whether or not we have been able to provide the same. The answer is not positive. The result is obvious: brain and funds drain out of Pakistan. This is not a justifiable state of affairs for 250 million citizens of Pakistan. We all know that around USD 4 to 5 billion are invested by resident Pakistanis abroad. Policing is not the answer or a solution for this outflow. There has to be natural evolution of stability in the sense referred above.

What this writer had been feeling was also echoed in the remarks by the senior most person in the establishment on the matter of tax compliance. It is unusual that tax matters are dealt with by such organization; however, this clearly signifies the gravity of the situation and dispels the impression that we are moving in the right direction in that field.

There has been an increase in tax collection in the rupee terms. This is demonstrated as an achievement of every government including military rulers. However, an in-depth analysis reveals a consensus to the extent that on account of policy and administrative actions and inactions, there has been a comparative decline in transactions in organized economic sectors. In simple terms, cash and undocumented economy are prospering while relative size of that part of economy is constantly increasing. This directly contributes to a decline and erosion of effective tax base. Similarly, there has been a constant decline, in relative terms, in the organized documented industrial sector. Unlike any reasonable administration, we constantly measure the successes in terms of rupee collection, ignoring the fundamental principles of development economics.

This article, which will be followed by further elaboration, focuses on the instability in the system that is the direct cause of a sense of uncertainty in economic and financial life of private sector. There cannot be any incremental growth unless issues related to private sector organized documented industrial sector are settled.

In the following paragraphs the writer would like to summarily identify the steps which contribute to financial instability for the organized documented private sector. As stated above, instability in the financial system, for the purposes of this article, means a lack of medium and long term economic policies especially tax and tariff provisions, apparent confusion in the foreign exchange regime especially with regard to investment outside Pakistan, disparities in the taxation system with for various business activities in Pakistan, over extended meaning of money laundering under the money laundering laws, process of accountability with respect to financial crimes etc.

Personal economic decisions in the writer’s view are not made on the basis of patriotic considerations. As Pakistanis we want to live and also like our future generations to live like a first class citizen. This country has one of the highest potential for growth in future provided our priorities are aligned with our objectives. There is no road map for harnessing that potential. Short-term kneejerk actions have led to erosion of long time hope and trust in the mind of general public on economic policy matters. The result is short-term stake in Pakistan on financial matters by Pakistan’s private sector. This is a natural outcome. In practical terms Pakistan, in 2017 is facing a very high level of financial instability as defined in the aforesaid paragraphs. This is not the result of any particular event in 2016 or 2017. It is a result of continued imprudent policies where organized documented private sector has been left in a chaos. Resultantly, saving and investments are being placed in trading activities related to real estates, ie, plots or housing for trading instead of residence, trading, not being long-term stake in stock exchanges, import of consumer goods, and lastly long or medium term investments only in the sectors where return and risk are essentially guaranteed or there is an implicit sovereign guarantee, such as power and infrastructure. Very few private sector businesses are ready to take long-term stake for tangible assets in this country. The question this writer wants to raise at this stage is whether or not as a state we actually and correctly anticipate the results of this chaotic short-term approach.

In short, there is a lack of trust in system in the mind of private sector if one intends to operate in organized documented industrial sector. On the contrary, there is very open greener pastures for unorganized undocumented sectors. The issue is quite simple. What do we really want? Our history of at least past 40 years has vehemently and emphatically demonstrated a trend towards trading and de-industrialization and as a result, after every decade, we talk about shortage of USD and IMF package.

All the so-called measures for corrections, add to instability as identified above, whereas discriminations and short-term paradigms continue to grow. Five to 6 percent growth in GDP or even more is not going to resolve the primary issues of lack of direct taxation, documentation of economic transactions, financial inclusion, quality of public service, equitable distribution of resources and all such problems. Pakistan is being deindustrialized. A new economic map is to be redrawn.

The solution to the present crisis lies in clear distinction between organized documented industrial sector (telecommunication and banking is also an industry) that provide employment to over 50 percent of employable persons at present and in future. This will further increase. If we will not industrialize Pakistan, then these huge urban centers of Pakistan, and resultantly Pakistan will become un-governable.

The second step is to provide space or clarity to the organized documented private sector that there is a difference between tax avoidance, tax evasion and money laundering. The next stage is abuse of state funds, being the role of NAB and other such questions. All these are separate but relevant subjects. In that process we all realize that system had been so ‘relaxed’ in the past, that there had been very few cases where there is 100 percent compliance. Everybody took wealth statement for granted. Now, there is a complete U-turn. Unfortunately, however, the organized documented industrial sector is again the victim and the target. There is no defense for any wrongdoing; however, there is a need to define the manner of correction – the way forward for compliance. This requires a national debate for undertaking the same without destabilizing the financial system for organized documented industrial sector; otherwise, our economy will continue to stagnate, and this so-called macroeconomic indicators will remain headlines in newspapers or a breaking news in the broadcast media only.