Surmounting crises

Pakistan is in the grip of yet another crisis-this is a recurrent pattern in our history showing weaknesses in the system lacking socio-economic justice, and clash of various conflicting interests keen to capture state power. It confirms that even after 68 years of independence, we have not learnt to respect democratic norms, follow the rule of law and principle of peaceful co-existence. The calls for protests and sit-ins for coming Sunday [August 10, 2014] by Tahirul Qadri and Imran Khan on 68th Independence Day are creating political instability and economic shockwaves. In just a few days, there was colossal loss at Karachi Stock Exchange and elsewhere.

While critics of the government are citing various failures of Pakistan Muslim League (Nawaz) and rule through family dynasty, Minister for Information and Broadcasting, Senator Pervez Rashid said on August 3, 2014 that the “government is making progress by leaps and bounds” as number of projects have been initiated by the government which will usher in an era of progress and prosperity not only in Pakistan but also in the region. Talking to newsmen in Rawalpindi after a flag-hoisting ceremony in connection with the Independence Day celebrations, he claimed that the economic progress “has been acknowledged by the leading world institutions including Moody’s, Asian Development Bank, World Bank, Wall Street Journal and others.” The stark reality remains that common man is not getting any benefit of this “great economic progress.”

Asian Development Bank (ADB) in its report on Pakistan’s economy has observed that “macroeconomic and security challenges continue to weigh on the economy. GDP growth is projected at 3.4% for FY 2014, marginally slower than in FY 2013. Agriculture is expected to be weaker due to a drop in cotton output, which partly offsets the improvement in sugarcane and rice crops. Ongoing rains, however, may benefit the upcoming wheat crop, despite a reduction in the sowing area this year”. According to ADB, GDP growth is expected to be higher in FY 2015, at 3.9%, as the impact of fiscal consolidation eases somewhat, energy supplies improve, and the global economy strengthens-http://www.adb.org/countries/pakistan/economy.

Referring to the fiscal framework under the three-year Extended Fund Facility (EFF) agreed in September 2013 with the IMF focuses on strengthening the revenue base, limiting power subsidies, ending the drain on the budget from loss-making state-owned enterprises, and compressing non-salary expenditure, the ADB observed that “the budget deficit excluding grants is expected to be held at 5.8% of GDP in FY2014, which is somewhat lower than the original budget target of 6.3%.” At the close of FY 2014, the deficit is in fact 7% as Federal Board of Revenue failed to meet the second revised target of Rs 2275 billion.

ADB very rightly observed that achieving “fiscal sustainability is a major recurring challenge for policy makers in Pakistan.” It noted with concern that:

“Fiscal discipline has eroded in recent years with the persistent need to finance expanding energy sector subsidies, worsening losses incurred by state-owned enterprises, and high expenditures for security. Tax collected by the Federal Board of Revenue stood at 8.5% of GDP in FY 2013, one of the lowest collection ratios in the region that reflects structural and administrative issues. As a result, spending for badly-needed infrastructure has relied largely on foreign inflows. Additional spending requirements have emanated from natural disasters in the past few years, as well from the need to establish social safety nets.

Higher fiscal deficits and very limited foreign inflows during the past 2 years have significantly increased short-term domestic borrowing, causing interest payments to balloon. Moreover, high government borrowing from commercial banks contributes to low private sector credit. The domestic portion of public debt increased sharply for the second year in a row, from 38.0% of GDP at the end of FY 2012 to 41.5% in FY 2013, to finance high fiscal deficits. Foreign debt fell by 4.6% of GDP in FY 2013, mainly as IMF debt was repaid. Total public debt (including external liabilities) at the end of FY2013 amounted to 63.3% of GDP, exceeding the legal limit of 60% set under the Fiscal Responsibility Debt Limitation Act, 2005.”

ADB, IMF, World Bank and others are not supposed to suggest the real reforms needed by us. This is for us to change the system that creates frequent crises. The main cause of our pathetic socio-political and economic situation is existence of outdated, inefficient, corrupt and repressive institutions that do not care for the welfare of the common people. These institutions serve the State Oligarchy (Riaysti Ashrafiya)-comprising indomitable military complex, civil bureaucracy, higher judiciary, landed aristocracy and greedy industrialist-turned politicians.

The successive governments’ policies of self-aggrandisement have reduced Pakistan to a State-in-perpetual-conflict. We need to move quickly and decisively to reverse this trend by making Pakistan a modern, democratic and welfare State-this alone can restore its important geo-strategic and business competitive position in the region as well as image in the world communities. There is thus an urgent need to take necessary and tough decisions to make Pakistan a respectable country to work, live and invest. This is possible only under a broad national government rising above party lines. We can achieve nothing without first ensuring political stability, justice, law and order.

The following steps are inevitable if we want to survive and make Pakistan a place worth living:

1. Establishment and continuance of democratic institutions through responsible governments, ensuring socio-economic justice, accountability and participation of masses under elected local bodies (complete self-governance).

2. Dispensation of justice without delay should be the top most priority of the State for which we need an efficient, competent and independent justice system.

3. Revamping of entire education system and ensuring revolutionary measures to take society out of jahalat [ignorance] as our problem is not merely illiteracy. Even the so-called ‘educated’ are jahil [ignorant] as they do not demonstrate by their actions any norms of a civilised behaviour. Our educational institutions are just ‘degree factories,’ not producing competent people or good human beings. Our foremost stress should be on Iqra [knowledge] and technological advances to end this state of national jahiliat.

4. Elimination of bigotry, religious intolerance and violence by taking concrete measures to ensure social development of society based on higher values of life and love for living beings.

5. Devising long-term and short-term strategies to break the shackles of debt-trap.

6. Determination and political will to control wasteful, non-developmental and defence expenditure.

7. Strict laws and their effective implementation to curb money laundering, plundering of national wealth, political write-off of bank loans and leakages in revenue collections.

8. Reform of technical, institutional and organisational dimensions of public finance.

9. Improvement in public sector effectiveness.

10. Reform and strengthening of management of public finances.

11. Transparent public sector spending.

12. Efficient public sector performance.

13. Revitalisation of tax machinery and simplification of tax laws and procedures.

14. Reduction in excessive marginal tax rates making them compatible with other tax jurisdictions of the world, especially in Asia.

15. Substantial reduction in corporate rate of tax.

16. Elimination of onerous tax and other regulations for corporate sector that are the main stumbling block for new direct foreign investments.

17. Good governance and corruption-free government structures.

18. Sufficient openness and accountability in the government to enable citizens to understand and participate fully in the process of national integration. This includes live telecast of the assembly proceedings.

19. Complete transparency in government and private financial transactions ensuring that fundamental rights are fulfilled and budget allocations are for welfare of society and not to provide luxuries to the elites.

The juxtaposition of economic policymaking and political reforms [democratisation] of society is necessary. The agenda for reform and survival should entail a comprehensive, well-integrated and unified plan that alone can guarantee its success. The reform in one sector ignoring the ills in the other, resorting to improving something at the cost of leaving aside the one interlinked, will not yield desired results. The case of tax reforms divorced from elimination of black economy is the point in focus. The main cause of fiscal mess is existence of an unprecedented size of underground economy, though the share of incompetence and inefficient tax machinery is significant, but reform in tax administration alone without routing the causes of parallel economy is not going to improve GDP-tax ratio, which is now below 9%.

In the same manner mere cosmetic constitutional changes have failed to improve the political culture. We cannot achieve the cherished goal of democratisation of society unless respect for rule of law and democratic behaviour is demonstrated in practice. Elections alone are not an instrument to ensure democratisation of society-these are a means to achieve the goal of true representation of the people in governance. Non-implementation of Articles 3 and 140A is the real cause of our present and past crises.

The understanding of the concept of peoples’ rule of Nawaz Sharif is not different from his mentor, late General Ziaul Haq, who destroyed all public institutions during his 11-year dictatorial rule in the name of his version of Islam. Every dictator – military or civilian alike – desires to perpetuate his rule advocating that he is the saviour of the nation, and ultimately destroys the national cohesion itself. Like Ziaul Haq, Nawaz Sharif suffers from the same syndrome. His dictatorial attitude is the main issue. It is unfortunate that our politicians have not learnt how to forge consensus on at least one point: continuation and consolidation of democracy through responsible and accountable governments and enforcement of rule of law. Our successive regimes have been doing everything contrary to democracy, resorting to anti-people economic policies and making Pakistan heavily dependent on external loans instead of moving towards self-reliance. Rising poverty and ever-widening rich-poor divide is the direct result of these policies. The civil governments, expected to be more realistic in tackling economic problems, have proved to be as bad as the military ones. We cannot come out of perpetual crises unless fundamental reforms are implemented through national consensus.

(The writers, tax lawyers and partners in law firm, HUZAIMA & IKRAM (members Taxand: www.taxand.com), are members of Adjunct Faculty of Lahore University of Management Sciences (LUMS). They can be contacted at info@huzaimaikram.com)