The ongoing slide

The IMF review team headed by Jeffrey Franks is satisfied with Pakistan’s performance in the first quarter following IMF’s sanction of its Extended Fund Facility (EFF) and its verdict is that, except for building foreign exchange reserves, Pakistan’s government has done well. This view amazes most Pakistanis who helplessly watch the ongoing economic slide.

Franks has reportedly been angry with Pakistan’s economic analysts for faulting the conditions set by the IMF for extending its EFF, and the consequences they have been having on the economy in terms of a steady rise in inflation, and slide of the rupee which is aggravating it to the gross discomfort of not just the ordinary, but also business and industry.

On Pakistan’s failure to build exchange reserves to the level set by the IMF, Franks cited inadequate foreign inflows (not retirement of IMF’s SBA facility) and SBP interventions to pull up a sliding rupee, realising little that had SBP not done that (though belatedly and inadequately), inflation and social discontent in an import-oriented country like Pakistan could have been at a much higher level.

It is worth asking whether at this critical stage of its existence (facing a huge security threat recognised by everyone around the globe), can Pakistan afford massive social discontent? Or an organised effort is being made to ensure that it does happen to turn Pakistan into a truly failed state to serve the undisclosed aims of those who want this tragedy to crystallise into a solid reality?

For years, and for valid reasons, the IMF has been unsatisfied with the tax collection performance of the FBR. Isn’t it amazing that in spite of the many reform programmes that the IMF implemented to improve FBR’s performance, FBR has failed to increase tax collection and cut tax evasion? Or is it that the IMF doesn’t know how to increase tax collection in an unorganised economy like Pakistan?

Did we ever hear the IMF ask the government to make it mandatory for all trade bodies to include in their regulations a set of self-regulatory codes whereby every trade body member is required to obtain NTN, maintain standard books of account, file tax returns, and blackball any member found involved in malpractices, especially hoarding and price manipulation?

Tax evasion is a suicidal culture that develops in ill-regulated economies that Pakistan became over time because neither its leaders nor its advisors (like the IMF) thought about setting the right traditions. In this setting, to expect that tax-to-GDP ratio will rise and fiscal deficit drop to a realistic level is a no more than a dream that is unlikely to turn into reality.

We keep talking about 3 million retailers being outside the tax net, besides evading taxes businesses pocketing the taxes they collect on behalf of the FBR, customs authorities being involved in smuggling, and the highly subsidised agriculture sector not being taxed, but except for loading the honest taxpayers with higher taxes, do little in implementing workable systems that plug these widening gaps.

Even if you ignore the zero importance assigned to helping inculcate a tax payment culture (publishing booklets containing formats of the desired books of account, various tax returns to be filed, and guidance notes on filling them and the manner of paying taxes) the way the FBR makes last-minute changes every year to the tax return formats only worsens the collection process.

This ‘suicidal’ strategy conveys a clear message to honest taxpayers: exit Pakistan; you have no chance of survival. What we refuse (it seems, on purpose) to do is initiate steps that encourage tax payment – a habit that will develop if taxes are levied and collected fairly, and taxpayers see visible benefits of paying taxes – an ever-improving social and physical infrastructure.

The current strategy is a number game – cutting the fiscal deficit, no matter how it darkens the future; one indicator thereof is the urgency for withdrawing subsidies in the power tariffs – shortest route to hastening an economic collapse – and it is working. It will also ensure that, even if the EU parliament finally offers GSP Plus status to its textile exports, Pakistan won’t benefit there from.

External pressure to abandon the IP gas project, and dearer and yet inadequate power supply will ensure that Pakistan fails to build its foreign exchange reserves yet again and thus disqualifies itself for continuation of IMF’s current facility. This outcome seems likely and none other than tactless negotiators in Pakistan’s Finance Ministry and the IMF will carry the blame there for.

In this scenario, the assertion by Jeffrey Franks that Pakistan and IMF have agreed on actions to build the exchange reserves, but these cannot be shared because of the sensitivity involved therein, deepens the doubts people already have about the future. In such an uncertain environment, how many new investors will be willing to take a business risk on Pakistan?

The only good news (really?) the Federal Finance Minister had to offer was that the Organisation of Petroleum Exporting Countries (Opec) has increased Pakistan’s credit line from $500 million to $1.5 billion, and the International Finance Corp, will provide a trade finance facility of $500 million (including $200 million for oil import). How long can Pakistan survive on such bailouts?

At a World Bank conference on “Problems of Developing Countries”, while commenting on Pakistan’s record during the 1960s, economist Richard Eckaus said “Pakistan was a puzzle, a miracle of levitation; with one of the lowest domestic savings rate in Asia, its economy has performed creditably,” but wondered whether foreign capital inflows that sustained its growth would last.

Pakistan’s real tragedy has been its failure to learn to survive on its own resources; its persistent low savings-to-GDP ratio reflects that. Unabated rise in inflation and government’s cover-up thereof by quoting its cooked up estimates forced payment of real negative returns to savers. Worse still, it inculcated a ‘buy now’ culture and downgraded the importance of saving.

How concerned is the government about pushing up the savings-to-GDP ratio is reflected in the fact that the headless state offices and state-owned entities also include the National Savings Directorate – an institution that has provided over Rs 2.5 billion in medium-term funding to the government at rates well below those paid on bank borrowing via 3 and 6-month Treasury Bills.

Inadequate incentives for import-substitution increased Pakistan’s dependence on imports and vulnerability to exchange rate fluctuation, which is now the biggest contributor to inflation rendering it virtually impossible to work out reliable discounted cash flows from projects that can be completed in even as low a period as three years. No wonder investment is sliding. How long can all this go on?