Source: http://thenews.com.pk/arc_news.asp?id=9
Wednesday, July 23, 2008
By Meekal Aziz Ahmed
The Pakistani economy today faces the looming risk of a full-fledged balance of payments crisis. Macroeconomic imbalances, the domestic fiscal imbalance and the external imbalance, have increased to alarming proportions and show no signs of self-correcting or responding to policy action. Inflation has accelerated to levels never seen before in our history and is set to rise further, devastating the fixed income groups and the poor. There has been criminal negligence behind the power crisis which has led to untold losses in domestic production and exports. Added to these disasters the country has a food crisis, an oil crisis, an emerging water crisis, and a political crisis.
Economists agree that Pakistan's short-term prospects are grim. With economic policies likely to remain broadly unchanged, the economy will continue to slide downward until the country runs out of foreign exchange reserves. Unfortunately, Pakistan cannot print dollars. At the point of reserve exhaustion, Pakistan will not be able pay for imports or meet its debt service obligations. The country will be bankrupt.
How did things get so bad, and how is it that the government has not responded to try and arrest this alarming situation? Our present predicament did not happen overnight. It is the direct consequence of the government's past short-sighted and misguided policies which were comprised of a single-minded obsession with producing high growth rates of GDP. No consideration was given to the quality or sources of growth which have a crucial bearing on the sustainability of growth.
Such an economic strategy, largely consumption driven and fueled by cheap credit, rather than being driven by the more desirable route of investment and exports, was bound to run into resource constraints. Eventually, demand would outstrip available capacity, macroeconomic imbalances would widen and inflation would start to turn upwards. The economy would be in trouble.
The view that today's economic problems are the lagged consequence of past policies is evident. This view is not conspiratorial or a blame game. It is explained by the long lags between policy actions and policy outcomes. What the economy is witnessing today is the lagged consequences of policy actions taken months earlier. These are now being felt.
These lags underscore the need to frame economic policies within a forward-looking framework and for policy makers to act promptly to the first signs of economic stress because their effects will not be evident without a long delay.
The State Bank's recent actions to tighten monetary policy reflect a failure to gauge the strength of the inflationary pressures building up in the economy and to act. Given the long lags in the monetary policy transmission mechanism, monetary policy should have been tightened much earlier. The State Bank missed the opportunity to act early and responsibly. Its belated actions were a classic illustration of "too little, too late".
As one observer, I am dispirited by what appears to be the State Bank forfeiting its hard-won autonomy. Despite possessing considerable statutory powers, the State Bank seemed to have waited for a nod of approval from government, rather than act on the strength of its mandate and tighten monetary policy immediately.
In the meantime, inflation took-off and has continued to accelerate. To many observers, it is now out-of control. That is troubling because Pakistan has little experience with high inflation. Policy-makers may not know how to control it.
The new government missed an excellent opportunity to demonstrate it was taking charge of the rapidly worsening economic situation. It could have been bold in devising a fiscal strategy aimed at reducing aggregate demand pressures and starting the process of restoring macroeconomic stability. This could have been achieved through the implementation of a sound 2008-09 budget. A tight fiscal stance,desirable in its own right from a macroeconomic standpoint, would have reinforced the tight monetary policy stance.
What economic briefing the new government received on the economic situation will remain a mystery. It seems obvious that the government was not unduly alarmed by the economic situation. This was evident in the "awam dost" budget that followed.
The budget turned out to be a major disappointment. A critical opportunity was missed. The budget is loose and non-credible, abounding in exemptions and concessions and amnesty schemes from which policy makers never learned our past mistakes. They are poorly thought out plans to "help" the poor which will probably be ill-targeted, costly, and only make matters worse. It makes no sense to have a tax revenue target which is fanciful and completely out of line with what the Federal Board of Revenue (FBR) has been able to achieve in the past six decades. To have budget expenditures which are seriously understated makes the entire exercise frivolous.
All this will mean a fiscal deficit outcome that is likely to be significantly higher than budget projections. This budget will exacerbate demand pressures and inflation and spill over into the external sector via a faster growth of imports. This is the last thing the economy needs. With limited autonomous or induced financing, not much left to sell by way of privatization, our foreign exchange reserves will start to fall even faster as the trade deficit expand with surging imports and lackluster export growth.
The speculative stock market and real estate bubbles will pop creating havoc in the financial sector and wiping out the lifetime savings of small investors. According to some economists, the economy could fall apart as soon as December this year, or March of 2009, by the latest, even with the respite offered by the recent Saudi oil facility.
What the economy needs is an immediate and drastic tightening of macroeconomic policies, to be achieved principally through deep and durable expenditure cuts. These cuts have to be real and not cosmetic. They can be implemented quickly. Similarly, quick-yielding revenue measures could also be considered.
Pakistan needs to halt adverse trends and start the process of reversing them. Valuable time has already been lost. Confidence is being rapidly eroded as reflected in the recent fall of the domestic currency and the stock market, both of which are symptoms of accelerated capital flight.
It will become painfully obvious that confidence, once lost, is difficult to rebuild. The State Bank's most recent steps to shore up the domestic currency weer once again, "too little, too late". To be fair, however, the State Bank is helpless when the economy's "fundamentals" are deteriorating sharply. Critics of the approach of immediate macroeconomic tightening fear growth will falter, unemployment will rise, jobs will be lost and economic distress will spread. Such events will make the government of the day highly unpopular. This opinion is probably right.
Unfortunately, there are no other options. There is no other way known to economists to halt a further widening of macroeconomic imbalances which creates huge financing problems, other than to slow the economy down. Since the domestic and external imbalance can be seen to be related by definition, and one is largely a mirror image of the other, a slowing economy should bring about a gradual reduction in both these imbalances. At such a point, these imbalances can be more easily financed and our foreign exchange reserve loss can be halted.
Similarly, there is no credible way to start the long and painful process of controlling runaway inflation and bringing it under grips other than to arrest, or slow, the forward momentum of the economy.
Inflation will not abate if aggregate demand continues to outstrip aggregative supply by a wide margin as now. With inflation and inflation expectations deeply entrenched, and the risk of a wage-price spiral starting, attempting to get inflation back into low single digits will not be an easy task. It will take a painfully long time to achieve price stability again.
The view that there is a soft option, which has been propounded by some economists recently, does a great disservice to the people of Pakistan, who are desperate for a respite from their economic travails. These proposals lull the people into believing that there is an easy way out of our present economic difficulties if only the government would seize it. The fact is there isn't an easy option with no policy adjustment, no sacrifice, no hard decisions, no tears. To suggest that just a "promise" of reforms will induce unconditional financing is absurd.
Ideas about donor conferences where aid donors are supposed to volunteer to pledge financial assistance to Pakistan are at best naive and misleading. At worst, they are mischievous.
No aid donor, however sympathetic to Pakistan, will give money without conditions attached. Foremost of these conditions would be a well thought out medium-term adjustment and reform programme with specific targets and objectives. It would have to be a programme which is consistent, coherent and doable, with assured implementation.
(This is adapted from a paper that he wrote for the Lahore-based think-tank Spearhead Research, headed by General Jehangir Karamat)
The writer has a doctorate from Oxford University and has worked at the Planning Commission and the IMF. Email: Meekalahmed2@aol.com
Thursday, July 24, 2008
Wednesday, July 23, 2008
Celebrating 'success'
Source: http://jang.com.pk/thenews/jul2008-weekly/nos-20-07-2008/pol1.htm#8
The FBR is trying to take credit for something it has not done
By Huzaima Bukhari and Dr Ikramul Haq
The bosses of the Federal Board of Revenue (FBR) are taking credit and getting kudos for collecting more than Rs1 trillion for the first time in the country's history. The FBR has wasted a lot of taxpayers' money on media advertisements, congratulating the public and the tax officials for this 'extraordinary achievement'. It is strange that the FBR is trying to take credit for something it has not done -- 98 percent of the tax collection was made possible through withholding agents or voluntary payments. Secondly, there is no occasion for self-praise, because the FBR is duty-bound to collect revenues -- this is for what the whole army of collectors gets paid out of the taxpayers' money.
For exceeding the revised tax collection target of Rs990 billion by Rs10-14 billion, tax officers are getting special rewards. This is a mockery of reason and logic. The apex revenue authority is making a fool of everyone. The real potential of tax is not less than Rs3 trillion, while the FBR has collected only one third of that and is posing as if wonders have been achieved. It is shameful that the indirect tax-to-gross domestic product (GDP) ratio in 2007-08 was about six percent and the direct tax-to-GDP ratio only 4.5 percent. The latter comes to even less than two percent if withholding taxes are excluded.
The tall claims of broadening the tax base in the last decade are now proving to be false. The strategy devised by top managers at the apex revenue body is faulty and isolated from the ground realities. There has hardly been any effective co-ordination between policy-makers and field formations. The issues of motivation, integrity and efficiency are still lingering on despite the FBR being only months away from the last year of Tax Reform Administration Project (TARP), launched with borrowed funds without any public debate or support of stakeholders.
The FBR chairman recently said: "Though we are happy to cross the psychological barrier of Rs1 trillion in revenue collection in 2007-08, still there is a gap of Rs400-500 billion. This gap cannot be bridged until and unless we enhance our tax-to-GDP ratio from the existing 11 percent to 15-16 percent. It is not impossible unless we have the will, commitment and tools to do it."
It is sad to note that even the big boss of the FBR is unaware of the real revenue potential of the country. Our real tax potential at the federal level is not less than Rs3 trillion. It is sheer lack of will and incompetence on the part of the FBR that we have failed to collect the potential revenues where these are actually due -- unprecedented benefits are available to the rich and foreign companies are remitting huge untaxed profits through abusive transfer-pricing transactions. For the last many years, the government has been extorting money from the people who are not supposed to pay any taxes, and granting unprecedented concessions and exemptions to the rich -- a 20-year tax exemption has been give to operators of the Gwadar port as if they will be engaged in some charitable work.
For tapping our actual potential, there is an urgent need for taxing the rich, bringing undocumented economy in the tax net and distributing the incidence of various taxes judiciously among all the segments of society. The tax loss due to one section alone, [section 111(4) of Income Tax Ordinance, 2001] granting complete immunity from probe and taxation to untaxed money fictitiously remitted through normal banking channels by paying a very nominal commission to any money exchanger, is in billions.
The cost of exemption under just one head alone -- capital gains on stock markets -- in the financial year 2006-07 was Rs112.45 billion, according to government's own admission on page 262 of the Economic Survey 2006-07. Had this exemption not been granted, the total collection for the financial year 2006-07 would have been Rs953.85 billion. For the financial year 2007-08, it could easily have been Rs1.5 trillion. This exemption continues in the financial years 2008-09 and 2009-10 with negative revenue impact of about Rs250 billion and Rs350 billion, respectively.
The people of this country are accused of not paying income tax; whereas the reality is that even a petty shopkeeper in a village (whose total income is much below the taxable limit of Rs100,000) is paying as high a tax as Rs720 per annum. On the other hand, a rich absentee landlord having agricultural income of millions of rupees does not pay a single penny as income tax.
A person making millions in speculative transactions (shares and property) is enjoying tax exemption, whereas a widow on her meager income of Rs90,000 from a bank savings account pays full and final tax of Rs9,000. Interestingly, there is no tax on business or any other income falling under normal tax regime of Rs120,000. In case of salary, the non-taxable limit for the financial year 2008-09 is Rs180,000; for women, it is Rs240,000. Why a widow, being female, is subjected to discrimination, whereas she actually deserves more tax concession?
The collection of taxes from speculative transactions, taxing income avoided by big foreign companies through transfer pricing (cost of revenue is about Rs100 billion) and withdrawal of exemptions can easily increase our tax collection to Rs3 trillion. However, this requires strong political will, which is completely lacking as those in power have vested interest in safeguarding the landed classes, the rich and the mighty. The unwillingness to tax the rich and mighty reflects in pathetic state of affairs vis-a-vis tax-to-GDP ratio from 1990-2000 to 2007-08. The tax-to-GDP ratio of direct taxes is appallingly low. It may be noted that in the official figures, huge amount of indirect taxes is shown under the head of income tax. The actual tax-to-GDP ratio of direct taxes for the financial year 2007-08, after excluding presumptive taxes, is only about 1.4 percent, whereas officially it is projected at 4.5 percent.
It is an established fact that despite resorting to all kinds of high-handedness, illogical policies and unjust withholding taxes, the FBR has failed to improve the tax-to-GDP ratio. The burden of a number of presumptive taxes levied under the income tax law (which are nothing but crude forms of indirect taxes) has been shifted from income earners to consumers and clients. These presumptive taxes have not only distorted the whole tax system, destroyed economic growth and made the consumer / client the ultimate sufferer, but these despotic, short-term, myopic and figure-oriented measures have also failed to bridge the fiscal deficit. Of the total collection of Rs1.04 trillion by the FBR in the financial year 2007-08, regressive taxes were to the tune of Rs800 billion (after making adjustment of indirect taxes collected under the name of income tax!).
The rich and mighty, who do not pay personal taxes despite enormous wealth and incomes, are the real culprits. If the government removes all exemptions and concessions, brings big absentee feudal landlords into the tax net, manages to get taxes from the influential people and succeeds in imposing general sales tax (GST) across the board (preferably with a low rate of three percent at one single point), there will be a record collection of Rs3-3.5 trillion in a year. This goal can only be achieved if the government simultaneously addresses issues related to wasteful expenses, tax evasion and rampant corruption.
(Email: ikram@huzaimaikram.com)
The FBR is trying to take credit for something it has not done
By Huzaima Bukhari and Dr Ikramul Haq
The bosses of the Federal Board of Revenue (FBR) are taking credit and getting kudos for collecting more than Rs1 trillion for the first time in the country's history. The FBR has wasted a lot of taxpayers' money on media advertisements, congratulating the public and the tax officials for this 'extraordinary achievement'. It is strange that the FBR is trying to take credit for something it has not done -- 98 percent of the tax collection was made possible through withholding agents or voluntary payments. Secondly, there is no occasion for self-praise, because the FBR is duty-bound to collect revenues -- this is for what the whole army of collectors gets paid out of the taxpayers' money.
For exceeding the revised tax collection target of Rs990 billion by Rs10-14 billion, tax officers are getting special rewards. This is a mockery of reason and logic. The apex revenue authority is making a fool of everyone. The real potential of tax is not less than Rs3 trillion, while the FBR has collected only one third of that and is posing as if wonders have been achieved. It is shameful that the indirect tax-to-gross domestic product (GDP) ratio in 2007-08 was about six percent and the direct tax-to-GDP ratio only 4.5 percent. The latter comes to even less than two percent if withholding taxes are excluded.
The tall claims of broadening the tax base in the last decade are now proving to be false. The strategy devised by top managers at the apex revenue body is faulty and isolated from the ground realities. There has hardly been any effective co-ordination between policy-makers and field formations. The issues of motivation, integrity and efficiency are still lingering on despite the FBR being only months away from the last year of Tax Reform Administration Project (TARP), launched with borrowed funds without any public debate or support of stakeholders.
The FBR chairman recently said: "Though we are happy to cross the psychological barrier of Rs1 trillion in revenue collection in 2007-08, still there is a gap of Rs400-500 billion. This gap cannot be bridged until and unless we enhance our tax-to-GDP ratio from the existing 11 percent to 15-16 percent. It is not impossible unless we have the will, commitment and tools to do it."
It is sad to note that even the big boss of the FBR is unaware of the real revenue potential of the country. Our real tax potential at the federal level is not less than Rs3 trillion. It is sheer lack of will and incompetence on the part of the FBR that we have failed to collect the potential revenues where these are actually due -- unprecedented benefits are available to the rich and foreign companies are remitting huge untaxed profits through abusive transfer-pricing transactions. For the last many years, the government has been extorting money from the people who are not supposed to pay any taxes, and granting unprecedented concessions and exemptions to the rich -- a 20-year tax exemption has been give to operators of the Gwadar port as if they will be engaged in some charitable work.
For tapping our actual potential, there is an urgent need for taxing the rich, bringing undocumented economy in the tax net and distributing the incidence of various taxes judiciously among all the segments of society. The tax loss due to one section alone, [section 111(4) of Income Tax Ordinance, 2001] granting complete immunity from probe and taxation to untaxed money fictitiously remitted through normal banking channels by paying a very nominal commission to any money exchanger, is in billions.
The cost of exemption under just one head alone -- capital gains on stock markets -- in the financial year 2006-07 was Rs112.45 billion, according to government's own admission on page 262 of the Economic Survey 2006-07. Had this exemption not been granted, the total collection for the financial year 2006-07 would have been Rs953.85 billion. For the financial year 2007-08, it could easily have been Rs1.5 trillion. This exemption continues in the financial years 2008-09 and 2009-10 with negative revenue impact of about Rs250 billion and Rs350 billion, respectively.
The people of this country are accused of not paying income tax; whereas the reality is that even a petty shopkeeper in a village (whose total income is much below the taxable limit of Rs100,000) is paying as high a tax as Rs720 per annum. On the other hand, a rich absentee landlord having agricultural income of millions of rupees does not pay a single penny as income tax.
A person making millions in speculative transactions (shares and property) is enjoying tax exemption, whereas a widow on her meager income of Rs90,000 from a bank savings account pays full and final tax of Rs9,000. Interestingly, there is no tax on business or any other income falling under normal tax regime of Rs120,000. In case of salary, the non-taxable limit for the financial year 2008-09 is Rs180,000; for women, it is Rs240,000. Why a widow, being female, is subjected to discrimination, whereas she actually deserves more tax concession?
The collection of taxes from speculative transactions, taxing income avoided by big foreign companies through transfer pricing (cost of revenue is about Rs100 billion) and withdrawal of exemptions can easily increase our tax collection to Rs3 trillion. However, this requires strong political will, which is completely lacking as those in power have vested interest in safeguarding the landed classes, the rich and the mighty. The unwillingness to tax the rich and mighty reflects in pathetic state of affairs vis-a-vis tax-to-GDP ratio from 1990-2000 to 2007-08. The tax-to-GDP ratio of direct taxes is appallingly low. It may be noted that in the official figures, huge amount of indirect taxes is shown under the head of income tax. The actual tax-to-GDP ratio of direct taxes for the financial year 2007-08, after excluding presumptive taxes, is only about 1.4 percent, whereas officially it is projected at 4.5 percent.
It is an established fact that despite resorting to all kinds of high-handedness, illogical policies and unjust withholding taxes, the FBR has failed to improve the tax-to-GDP ratio. The burden of a number of presumptive taxes levied under the income tax law (which are nothing but crude forms of indirect taxes) has been shifted from income earners to consumers and clients. These presumptive taxes have not only distorted the whole tax system, destroyed economic growth and made the consumer / client the ultimate sufferer, but these despotic, short-term, myopic and figure-oriented measures have also failed to bridge the fiscal deficit. Of the total collection of Rs1.04 trillion by the FBR in the financial year 2007-08, regressive taxes were to the tune of Rs800 billion (after making adjustment of indirect taxes collected under the name of income tax!).
The rich and mighty, who do not pay personal taxes despite enormous wealth and incomes, are the real culprits. If the government removes all exemptions and concessions, brings big absentee feudal landlords into the tax net, manages to get taxes from the influential people and succeeds in imposing general sales tax (GST) across the board (preferably with a low rate of three percent at one single point), there will be a record collection of Rs3-3.5 trillion in a year. This goal can only be achieved if the government simultaneously addresses issues related to wasteful expenses, tax evasion and rampant corruption.
(Email: ikram@huzaimaikram.com)
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