Huzaima Bukhari, Dr. Ikramul Haq & Abdul Rauf Shakoori
Governments around the world try to fulfill the responsibility of creating an environment where the state generates enough resources to ensure the protection of national interests and the economic well-being of citizens. On one hand governments provide basic needs like health, education, and infrastructure, and on the other ensure continuity of rational fiscal policies. However, successive governments in Pakistan, due to various factors, have miserably failed to curtail the ever-rising burgeoning fiscal deficit. Thus, for meeting the huge fiscal gaps, our governments—military and civilian alike—have been relying on domestic and foreign lenders.
As we are aware, funding arrangements come with a heavy financial cost, which gradually reduces fiscal space for other development and welfare initiatives. For domestic borrowing, sovereign guarantee is sufficient, but for foreign loans, non-financial cost is much higher. The foreign lenders extend financial assistance with a fiscal reform package, with an objective to secure their debts. Opting for reform programmes on the foreign lenders’ conditions mostly ends up adding to the agonies of the citizens. The way foreign loans exacerbate economic miseries of citizens is evident from our dealings with International Monetary Funds (IMF).
In July 2018 the coalition government of Pakistan Tehreek-i-Insaaf (PTI) entered into an agreement with IMF for the Extended Fund Facility (EFF) of US$ 6 billion. However, subsequently, it failed to undertake fiscal reforms burdening the nation with heavy taxes, high costs of fuel and electricity, devaluation of currency, and enhancing policy rate. After PTI government’s departure the united government of Pakistan Democratic Movement (PDM) assumed power in April 2022 has just followed the policies of its predecessors and has failed to introduce any fiscal reforms as clear from the first budget presented for the fiscal year 2022-23.
In the last three months, the value of Pakistani rupee has seen a downhill trend—it has crossed the psychological mark of Rs. 200 against the dollar. Similarly, in just the last two months, fuel prices have increased by more than Rs. 80 per/litre. The worthy Finance Minister, Miftah Ismail, has indicated further price hike in the coming months.
On June 29, 2022 the National Assembly approved the amended Finance Bill 2022 which includes imposition of petroleum levy (PL) up to Rs. 50 on POL [petroleum. oil & lubricant] products. No doubt, crude oil prices are high in the international market. In Pakistan per litre petrol price as of June 30, 2022, was around Rs. 235 with expectation of increase of Rs. 10 on 1 July 2022, in order to meet preconditions of the IMF. This is bound to further increase inflation.
It is worth remembering that when the PTI government imposed PL back in 2020, it was widely criticised by businessmen, experts, and the opposition (now in power). One of the co-authors of this article highlighted gross constitutional violation in ‘Unconstitutional petroleum levy’, highlighting that since PL is a non-tax item, any amendment in the Petroleum Products (Petroleum Levy) Ordinance, 1961could not be made through Money Bill. The law passed in 2018 to this effect by the Parliament was unconstitutional. In 2011, amendments were made in Petroleum Products (Petroleum Levy) Ordinance, 1961 through Petroleum Products (Petroleum Levy) Amendment Act, 2011, which was passed by both National Assembly and Senate. It can still be seen at the website of Senate of Pakistan at: http://www.senate.gov.pk/uploads/documents/1363074572_505.pdf.
In the Finance Bill 2022 the PDM government has taken back the relief provided to the salaried persons and imposed 10% “super tax” on various sectors, cement, steel, sugar, oil and gas, fertilizers, LNG terminals, textile, banking, automobile, cigarettes, beverages, chemicals, and airlines. Earlier in the budget presented on June 10, 2022, 2% poverty alleviation tax was proposed on persons with annual income exceeding Rs. 300 million. The Finance Minister later announced revising it to 1% for income exceeding Rs. 150 million but less than Rs. 200 million, 2% for those whose income exceeds Rs. 200 million but is less than Rs. 250 million, 3% for those whose income exceeds Rs. 250 million but is less than Rs. 300 million and 4% where income exceeds Rs. 300 million.
The National Assembly has also approved the imposition of levy on the import of mobile phones from Rs. 100 to Rs. 16,000 depending on the price. All these measures, specifically, imposition of levy on POL products and revision of tax on salaries and surcharge will adversely affect the common man and corporate investments.
Pakistan’s economy has been depending on foreign loans and financial assistance. After every three months the government commits to execute reform programme to address fiscal issues with foreign lenders but ends up complying with the action items by raising the prices of fuel and electricity. On the other hand, to control inflation, government raises policy rate which is in double digits and has increased the cost of doing business in Pakistan for local businesses. Being an import-based country, the inconsistent value of rupee against the US dollar is causing a huge dent to our sustainability.
The current regulatory framework in Pakistan offers various privileges and preferential treatments in laws, rules, and regulations to powerful elites that lead to widen disparities among the citizens. Despite a lapse of 75 years since independence, our rulers have not been able to provide equal opportunities to the deprived classes to improve their living standards. The Pakistan National Human Development Report for 2020, published by the United Nations Development Program (UNDP), highlights the disparities in income—among the most visible forms of inequality in the country. It states that the poorest 1% of the population holds only 0.15% of national income, whereas the richest 1%, about 9% of national income in 2018–2019.
A progressive tax system, designed to remove special treatments, plugging loopholes and reducing tax evasion, can promise sustainable revenue growth and ensure the government’s financial capacity to spend more on human development and basic facilities like quality health care and education.
Over the period, successive governments in Pakistan have failed to align power tariffs at par with cost and recovery levels which has resulted in a monstrous circular debt—it is now well above Rs. 2 trillion. The present government is also reluctant to alleviate the cost as it can further trigger inflation that is already in double digits. There is a need to implement a better mix and rely on cheap sources like hydel and alternate energy which can help in managing cost of production. After addressing the strategic and recovery level problems, the government should work for offering targeted power subsidies that can effectively protect vulnerable income groups and ensure fairness.
Already scarce revenue resources are utilised to facilitate working capital and deficit funding requirement of state-owned enterprises (SOEs) for which the IMF has suggested that a stronger governance and a smaller footprint of the state is crucial to boosting efficiency. The IMF has stressed for acceleration of the legal, regulatory, and policy framework update of the SOE sector with an aim to define a rationale for state ownership, ensure commercially sound SOE operations and regulate oversight and ownership arrangements. Whereas, the additional steps include defining a new ownership policy, amending several SOEs’ Acts, and operationalising a central monitoring unit within the Ministry of Finance.
The above steps can help bring efficiency and reduce financial risks. The PTI government did share its plans for privatising two RLNG power plants by end-June 2022 with objective to direct the proceeds towards debt reduction and poverty programmes. It further committed to move forward with privatisation of two small public banks. For boosting exports and to address the challenges of current account deficit, the government needs to adopt the policy of Free Trade Agreements (FTAs) with other countries to obtain market access for domestic products. The scope of export financing facilities needs to be extended to new sectors and small exporters.
Strengthening the effectiveness of anti-corruption institutions and ensuring transparency, the government must form a task force of reputable international experts and civil society organisations to review current accountability and anti-corruption framework. The task force should analyse it with international best practices to ensure its independence, effectiveness, and fairness during the process of investigation and prosecution in corruption cases.
To improve its collection and achieve a better tax-to-GDP ratio, Pakistan needs to undertake administrative reforms and ensure that regulatory framework complement objective of fair and equitable taxation. With the support of modern technologies and tools the authorities need to update their infrastructure that can use third-party data, synchronise with other data base, and provide analysis and information to identify new revenue generating opportunities and highlight instances where spending is in contrast with tax declarations.
It is imperative that the government must support and direct financial institutions and other entities to improve their capacities for due diligence measures in a way that it complements the anti-money laundering and anti-corruption efforts of the state. The Financial Monitoring Unit should enter information sharing arrangements with foreign counterparts as it would help to curb corrupt practices and ensure that resources are used in an efficient and transparent manner.
Huzaima Bukhari & Dr. Ikramul Haq, lawyers and partners of Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS), members Advisory Board and Visiting Senior Fellows of Pakistan Institute of Development Economics (PIDE). Abdul Rauf Shakoori is a corporate lawyer based in the USA and an expert in ‘White Collar Crimes and Sanctions Compliance’. They have recently coauthored a book, Pakistan Tackling FATF: Challenges and Solutions