Pakistan

Regional geostrategic challenges & quest for economic security

Dr. Ikramul Haq

I am thankful to think-tank, The Golden Ring Economic Forum (GREF), and University of Management & Economics (UMT) for inviting me to share ideas on a topical and highly important subject as title of the webinar suggests: “Regional geostrategic challenges: golden ring—an opportunity for Pakistan’s strategic & economic security.”

The brochure of GREF sent before webinar provided necessary background and work done by the think-tank since its inception in 2015. The salient points, I want to recapitulate before giving my suggestions are as under:

• GREF has successfully conducted several meetings with high level officials from China, Iran and Russia confirming their acceptance of GREF idea and initiative.
• The objective of all this, is to jointly explore opportunities and possibilities for multilateral strategic economic cooperation in different fields and to find an answer to “HOW & HOW SOON”. As a result of consultations with Chinese, Iranian and Russian embassies at Islamabad and high officials at their respective capitals, GREF has planned a few short term and long term initiatives covering different aspects of economic and national security.
• Some of the GREF initiatives are: a. Post Covid-19 Shared Economic Recovery jointly by China, Iran, Pakistan and Russia. b. Energy Security through Regional Energy Network (Grid). c. National Economic Security through Economic Investments of Golden Ring Countries in Pakistan. d. Establishment of Joint Media Association of Golden Ring Countries. e. Trade Security by Establishing “Joint Barter Chamber and Trade SPV” of Golden Ring Countries. f. Agriculture and Food Security. g. Development of Joint Advanced R&D Facilities in Engineering, Sciences and Technology.
• In the light of above, GREF has planned several rounds of webinars covering different aspects of national security. Two rounds of webinars covering Shared Economic Recovery, Defence & National Security and National Interests Based Foreign Policy have already been very successfully completed.
• According to GREF some very positive and productive result oriented discussions were held and all countries fully supported these initiatives and agreed to work together.
• Now GREF has planned the third series of webinars to discuss the topics keeping in focus the strategic aspects of the new grouping of these five countries—a the Golden Ring Grouping and how Pakistan can extract maximum benefits from it.
• There will be following four webinars:
  • 1. Agriculture and Food Security.
  • 2. Energy Security through Golden Ring Regional Energy Network (here energy means all forms, like electricity, gas, oil, nuclear, etc.).
  • 3. Industrial & Trade Security.
  • 4. Strategic Economic Security.
• Through these webinars, GREF seeks to generate a discussion on the effects of the evolving regional developments around Pakistan and how Pakistan can adjust to the evolving opportunities in the short and midterm for its strategic economic security. How Pakistan can work with Iran and Russia circumventing US and Arab pressures? How Pakistan can ensure its energy security when KSA and UAE, the main sources of Pakistan’s oil supplies, have signed defence and security agreements with Israel and India? Since, Pakistan is not willing to leave CPEC, nor its new friend Russia and is also not willing to go against Iran. Under this scenario they will squeeze Pakistan from every side, economy and energy is the most effective weapon.
• There is an eminent Page #: 3/3 threat that India and Israel will exert pressure by disturbing oil supplies to Pakistan hence, crippling our economy. The discussions at this webinar are intended to specifically revolve around the issues related to national economic security. NATIONAL ECONOMIC SECURITY FOR SELF-RELIANCE
• A country’s self-reliance means its autonomy, independence and capacity of freely making its foreign and other policies and decisions. National economic security for self-reliance is crucial for Pakistan due to rapidly changing regional geo-strategic conditions around Pakistan.
• One of the present existing options available for Pakistan to stand on its feet is the economic security through international connectivity, partnerships and strategic economic investments in Pakistan. This will develop infrastructure and industry to stimulate economic development and growth resulting in economic stability and security.
• The new paradigm shifts of innovations in technology, manufacturing and supply-chain management (improved the products and services with growing consumer markets) have emphasized to influence the approaches of human capital management.
• Pakistan has the abundance of human resource but less of human capital as compared to other economies in the region and the World. The notion of “Economic Security for self-reliance” requires serious participation of all the segments of population by making them active and productive.
• The multi-sectoral cooperation mechanism for macro-stability ensures the better Human resource management policies in different industries.
• The collaboration with the Golden Ring economies for economic security will create new opportunities through higher investments in education, health, technological improvements and trade activities.
• Talking of international trade volumes of four Golden Ring countries, other than Pakistan, is over US$ 5.00 trillion. Pakistan’s share in this regional market is only 0.7%, whereas, some 65% of items imported by them are those which Pakistan has but not exporting to them. Pakistan’s energy is mostly based on non-renewable energy resources which have further cost in case of environmental degradation.
• Pakistan’s primary commercial energy supplies comprise of thermal power is highly dependent on fossil fuels. Pakistan is an energy deficient economy, and has always been an energy importer. Russia and Iran are the main exporters of energy sources (oil, gas, coal and petroleum products) close to Pakistan. Pakistan may propose to them, under the Golden Ring bloc arrangement, to trade these on the basis of barter thus reducing its foreign currency balance of payments.
• GREF is seeking recommendations from the experts on:
  • a. How best Pakistan can extract benefits for strengthening its economic security from the economies of Golden Ring countries?
  • b. What policy changes and modifications are required in basic and on macro levels for achieving economic self-reliance and independence?
  • c. To benefit from barter trade with Golden Ring countries what basic changes will be required on policy level?
  • d. To come out of Dollar/Euro and IMF/World Bank Group shackles how best the Golden Ring bloc currency free or common currency concept can work?
  • e. What national arrangements will best serve integrated strategic economic planning?     

I feel that my humble input should be a simple but pragmatic blueprint to achieve all the objectives suggested and proposed by GREF in holistic way and not in segmented manner that will never succeed.

We cannot achieve any objective mentioned above unless we first put our house in order and come out of fiscal mess created during the last few years. Pakistan as a weak economic entity cannot achieve the objectives highlighted by GREF.  

The present coalition Government of Pakistan Tehreek-i-Insaf (PTI) on assumption of power in August, after general elections held on July 25, 2018, contrary to its election promises, failed to undertake much-needed and long-delayed fundamental structural reforms in all institutions, especially administration, where singularly Pakistan Administrative Service (PAS, still better known as DMG) controls most of the key posts both in federal and provincial governments.

The highest judicial forum time and again in the last many years pointed out failure of successive governments in governance, including poor justice delivery system. However, the PTI Government came with tall claims of establishing egalitarian society and providing “justice” to all—the very name of party means “movement for justice”. However, it failed to provide resources and roadmap for reformation of obsolete and outmoded institutions, especially the judicial system.

No country has progressed economically without fixing its justice delivery system and improving all areas of governance. One cannot review or analyze the geo-strategic challenges and opportunity for cooperation assuring national security. The main challenge faced by Pakistan is on faulty fiscal policy that is destroying even otherwise a country called “fortress of Islam” due to its nuclear capability and advance programme in missile technology.

The economic challenges faced by Pakistan are due to oppressive taxes, narrow base, amnesties, money and asset-whitening schemes, huge tax expenditure and monstrous debt with ever-increasing debt servicing, poor social spending and high cost of running inefficient gigantic state apparatus are all interlinked in Pakistan.

Foreign lenders/donors and so-called aid agencies try to further overburden us with loans to reform the tax system but never ever admit that it is not possible in a society where defying rule of law is a national character and expression of power and control.  ‘Dispensation of justice is the main pillar of democracy’ and there is a consensus that delivery of justice is our weakest area.

In Pakistan, successive governments have been always very keen to make efforts (though remain unsuccessful) for enhancing tax revenues, especially collection by FBR, but never talk about the real problem that is huge tax expenditure and monstrous size of unproductive expenses and absence of regional trade and initiative with golden ring countries. If these two are reduced even by 30%, Pakistan can substantially decrease fiscal deficit—nearly 40-50%. The cost of unprecedented tax-free perquisites and benefits available to high-ranking state functionaries cost loss of billions of rupees to the national exchequer [tax exemptions and concessions of Rs. 30 billion were given to the top civil and military officers and judges of superior courts on perks and benefits in the tax year 2019]. In the face of this reality, we keep on hearing from every government that it is cutting “unproductive” expenses and withdrawing tax concessions to improve fiscal management.

FBR in Statement of Estimated Tax Expenditure of Federal Government has admitted that out of total tax expenditure of Rs. 1150 billion in tax year 2019, sales tax was highest at Rs. 519 billion (45%), followed by income tax at  Rs. 378 billion (33%) and customs at Rs. 253 billion (22%). It was 30% of FBR’s total tax collection of Rs. 3828 billion and 3% of the Gross Domestic Product (GDP).

The PTI Government could not reduce wasteful, unproductive expenditure by right-sizing and revamping loss-bearing PSEs. It only resorted to patchwork here and there, thus, fiscal years 2019-20 witnessed obtaining record loans, external and internal, no privatisation or revamping of PSEs, ending of circular debt, meaningful efforts to cut unproductive/wasteful expenditure. On the contrary, further regressive taxes were imposed and in two years tax exemptions/waivers/concessions amounted to Rs. 2.12 trillion—those were sufficient to create connectivity through rail and roads with China and Iran.

In fiscal year 2018-19, fiscal deficit was 8.9% of GDP (Rs. 3.45 trillion) and for fiscal year 2019-20, it was 8.1% of GDP (Rs. 3.37 trillion). Had tax expenditure been curtailed by 50% (Rs 500 billion) and wasteful expenses at 40% (Rs. 400 billion), the fiscal deficit of GDP for both the years would have been around 6% of GDP. It was 6.5% in fiscal year 2017-18.

In the pre Covid-19 era, the poor fiscal management, wrong economic policies, and adoption of failed strategies pushed the country into stagflation leading to recession, high inflation and unemployment, closing down of industries/businesses leading to job losses, high interest rates and extremely low growth. It also created disappointment and despair in general public. The reasons for sluggishness in business and lack of any further investment, among many other factors, have roots in oppressive taxes and highly anti-business behavior of FBR and ever-increasing cost of running State machinery.

The PTI Government is using Covid-19 endemic as a face-saving device, but the facts remain that from the very beginning its fiscal policy was a disaster. The ex-Finance Minister, Assad Umar, while presenting the Finance Supplementary (Amendment) Bill 2018 on September 18, 2018 in the National Assembly showed the traditional bureaucratic approach to balance the books. He failed to include the key areas of Theme-3—‘Revatilise Economic Growth—part of First 100 Days Plan of PTI after forming Federal Government, unveiled during the election campaign.

In its two years in power, the PTI Government incurred ‘tax expenditure’ of Rs. 1149.95 billion in FY 2019-20 and Rs. 972.4 billion in FY 2018-19 (total of Rs. 2122.35 billion (shown in Annex II of relevant Economic Surveys), but ignoring impact of asset-whitening schemes of 2018 and 2019 and many other items which FBR in  ‘Statement of Estimated Tax Expenditure of Federal Government’ says could not be quantified for lack of data! The total tax expenditure, according to independent estimates, was not less than Rs. 3 trillion. 

The PTI Government lacked a roadmap to fulfill its election promise of collecting Rs. 8 trillion. On the contrary, FBR’s target was reduced by Rs.169 billion, reduction of 3.5% over the original target. The shortfall of Rs. 606.5 billion in collection led to historic high fiscal deficit of 8.9% of GDP leading to unprecedented indebtedness! The PTI Government had nine months in FY 2018-19 for initiating reforms for revenue mobilisation—both tax and non-tax—but its economic managers did not bother to implement even its own tax reform agenda unveiled/promised during election campaign. The speech of Prime Minister in Parliament on June 25, 2020 could not explain/justify it, though he admitted his failure to reform FBR! This had nothing to do with Covid-19 endemic’s toll as rightly confessed by the Premier.

Instead of blaming FBR’s officials alone for inefficiency, the PTI Government must admit lack of will to reduce exemptions, concessions, waivers and amnesties to powerful segments of society. If only 40% of taxes waived/forgone in fiscal year 2019-20 were recouped in Finance Act 2020, there would have been a fiscal space of Rs. 600 billion to reduce taxes. But the PTI Government, like its predecessors, showed apathy towards the weaker sections of society and small and medium enterprises (SMEs), facing the unbearable toll of Covid-19 outbreak/lockdown, by not reducing exorbitant sales tax, withholding taxes, advance tax, and high cost of utilities as well as oppressive 12.5% advance income tax from mobile users, no matter whatever their quantum of income. The latest data available on the website of Pakistan Telecommunication Authority (PTA) shows the total cellular subscribers as on December 31, 2020, 176 million, out of which 91 million are 3G/4G subscribers, 3 million basic telephony users and 93 million broadband subscribers. In the presence of such confiscatory taxes, Parliament gives tax amnesties, immunities and waivers to the rich, tax evaders and looters of national wealth or Presidential Ordinances of extending tax benefits are issued for the mighty developers and constructors. They all are also paying 19.5% sales tax on services to provinces and 17% federal excise duty, if based in Islamabad Capital Territory (ICT).

In the Finance Supplementary (Second Amendment) Bill of 2019 presented on January 23, 2019 once again no steps were announced for making FBR efficient, simplify taxes, making them fair, low-rate and broad-based to harness the real potential, drastically reduce wasteful expenditure and accelerate growth.

Taxes are the backbone of a country’s economy as these help to meet day to day expenses for running the government’s machinery (which in our case needs rightsizing and reforms to be efficient), for developmental projects, for maintaining the profitability equilibrium of commercial enterprises to discourage monopolies and create a level playing field for all types of entrepreneurs, to enable equitable distribution of wealth so that the rich do not get richer and the poor, poorer. The generous tax exemptions, concessions, waivers and amnesties, especially to privileged ones and tax evaders/avoiders must end as these are destroying the entire fiscal system and retarding business growth/investment. 

In budgets for FY 2019-20, presented on June 11, 2019, and for FY 2020-21, on June 12, 2020, burden on businesses and common citizens increased manifold by enhancing indirect taxes, while extending asset-whitening/amnesties/exemptions/waivers/immunities to the rich and mighty. Before coming to power, PTI labelled tax amnesties as “immoral” and “unlawful” and a “slap on the face of honest taxpayers”.

FBR admitted before the Standing Committee on Finance & Taxation of National Assembly on November 7, 2019 that governments of Pakistan Muslim League (Nawaz) and PTI in their amnesty schemes of 2018 and 2019, respectively, extended benefit of Rs. 61.4 billion to 191 billionaires, caught concealing undeclared/untaxed offshore assets. FBR revealed that definite information was available against them under Automatic Exchange of Information (AEOI) initiative of the Organisation for Economic Cooperation and Development (OECD), yet amnesties were given keeping their names “confidential”. It belies tall claims of accountability and transparency of Prime Minister, Imran Khan.

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For Pakistan from national security point of view, besides from external threats from two neighbors, India and Afghanistan, the internal formidable challenges are on the fiscal front for 2021—these are not limited to revival of economy amidst rising human and financial toll of Covid-19 endemic, but also how to manage mounting debt burden and meeting revenue targets fixed for the fiscal year 2020-21.

It is high time that the federal and provincial governments chalk out a national plan for long-overdue second Green Revolution in Pakistan by increasing productivity and quality, reducing costs and establishing agro-based industries capable of meeting local demands and producing value-added exportable surplus and enhance trade with Golden Ring Countries. Our emphasis should be on growth, productivity and enhancing exports through diversification and value addition. The IT sector is highly ignored and heavy taxation of telecom sector is proving to be anti-growth.

IMF Agreements (1958-2019)

Since 1958, Pakistan signed 16 programmes with IMF. On December 8, 1958 the military government signed one-year Standby Arrangement (SBA), which it terminated prematurely in nine months. The second SBA was signed on March 16, 1965 and concluded on March 15, 1966. Yet another one-year SBA completed on May 17, 1973. The fourth SBA, signed on August 11, 1973, ended on August 10, 1974. The fifth one was on November 11, 1974 and concluded on November 10, 1975. The sixth was signed on March 9, 1977—it was terminated exactly after one year. On November 24, 1980, an Extended Fund Facility (EFF) was concluded which lasted for three years—ended on November 23, 1983. After a gap of five years, two simultaneous programmes, Structural Adjustment Facility (SAF) and SBA were signed on December 28, 1988. Both continued beyond the agreed timeframe and ended in 1990 and 1992, respectively. The ninth programme, again a one-year SBA, was signed on September 16, 1993 but was terminated prematurely on February 22, 1994. The 10th programme comprised two separate facilities—SAF and EFF—signed on February 22, 1994 for a period of three years. However, both the facilities were terminated much before maturity—on December 13, 1995. The 11th SBA was signed on December 13, 1995. It ended on September 30, 1997. The 12th programme was of two separate facilities, the Poverty Reduction Growth Facility (PRGF) and an EFF. Both were signed on October 20, 1997 and continued till October 19, 2000. Under the 13th programme, another SBA was signed on November 29, 2000 and continued until September 30, 2001. The 14th Extended Credit Facility/PRGF was signed on June 12, 2001 and terminated on May 12, 2004. A three-year SBA was signed on November 24, 2008 but was prematurely terminated on September 12, 2010 after Pakistan could not initiate tax and energy reforms. The PMLN signed agreement in September 2013 and successfully completed it on August 4, 2016. Under the PTI Government, IMF Executive Board approved the 39-month-$6-billion EFF on July 3, 2019.

Managing high fiscal deficit coupled with massive debt burden is the toughest challenge faced by our economic managers in 2021. The obvious and undisputed solution is substantial increase in resources and drastic reduction in spending. For the last many decades, Pakistan’s fiscal policy has remained under immense pressure owing to perpetual failure of underperformance of FBR, continued security related outlays, rise in wasteful expenditure and greater than targeted subsidies, losses of PSEs, circular debt, especially in the energy sector.

In the days of international recession due to Covid-19 endemic, the first and foremost priority should have been to take measures to ensure survival, revival and growth in all sectors. Till today, no concrete steps have been taken by the federal and provincial governments for meeting this emergent situation. Resource mobilisation should be given preference to build infrastructure, facilitate growth of small and medium sized firms in the industrial sector and small farms in the agricultural sector for an employment intensive and equitable economic growth process. In all these areas great scope exists with Iran, Turkey, Russia and China for achieving rapid growth, human resource development and a regional EU [European Union] style bloc.  

There is still time for the Prime Minister to realise that the iniquitous prescriptions of World Bank/IMF of high taxes, complicated laws and enormous cost of doing business will not solve our fiscal woes. These will bring more miseries as economy in recession cannot grow due to economic toll of Covid-19 endemic. The viable solution is simple/low-rate taxes, reduce the huge tax expenditure by withdrawing exemptions available to the rich and mighty, give relief to taxpayers as they suffered heavily during lockdown due to Covid-19 endemic.

If the PTI Government wants to restore Pakistan on the path to prosperity, it must drastically cut wasteful expenditure, eliminate circular debt, get rid of loss-bearing public sector enterprises and improve efficiency and productivity in all sectors of economy. State lands, situated in the heart of cities, should be leased out for business and commercial ventures which would generate substantial funds, rapid growth and new jobs. For this joint ventures with all countries of Golden Ring should be the top priority.

For progressing, Pakistan must end anti-growth/anti-business taxes, dismantle all elitist structures and empower masses at grass root level by implementing Article 140A in letter and spirit ensuring social service delivery and prosperity for masses. No other plan will work, including the recent $ 400-million loan from World Bank for Pakistan Raises Revenue Project by the Federal Government and following its footstep the Punjab Government also decided to borrow $304 million from the World Bank for tax reforms. Such loans, though not at all required, are being taken when debt-to-GDP ratio reached an alarming level of 87.2% by June 30, 2020—15% increase is by the PTI Government in its two years’ tenure which is against the promises of Premier, Imran Khan, during election campaigns that after coming in power, his Government would not take foreign loans, but would raise revenues with own efforts to the extent of Rs. 8 trillion.

By now, it is not a disputed that there exists a ‘Grand Design’—New Great Game—aimed at sabotaging Belt and Road Initiative (BRI) and keeping South Asia and Middle East in turmoil. The ultimate aim is containment of China.

The rise of extremism and militancy in the entire area, including Modi-driven Hindutva ideology and genocide of Muslims in Indian held Kashmir—all are part of the New Great Game. The forces behind this New Great Game want to make a nuclear Muslim State—Pakistan—economically subservient on the IMF and World Bank.  

Our defence analysts and political historians have yet not examined the real target and objectives of New Great Game. It is the time that GREF must work with all Golden Ring countries  to counter this immediate threat and build a bloc to defeat the forces of terrorism, bigotry, extremism, fanaticism and fascism, which are part of the New Great Game aimed at dividing the Muslim World on sectarian and other bases, controlling South Asian and Central Asian resources using the bogey of militants, BJP-supported-Hindu extremism, and terrorist-cum-separatist outfits, working to create hurdles in China’s Belt and Road Initiative (BRI), in which China-Pakistan Economic Corridor (CPEC) is a flagship project. In BRI, the Golden Ring countries must become stakeholders and this will ultimately lead a hub of prosperity and vanguard of peace in the world.

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Dr. Ikramul Haq, Advocate Supreme Court, specialises in constitutional, corporate and tax laws. He established Huzaima & Ikram in 1996 and is presently its chief partner as well as partner in Huzaima Ikram & Ijaz. He studied journalism, English literature and law. He is Chief Editor of Taxation andVisiting Faculty at Lahore University of Management Sciences (LUMS).

He has coauthored with Huzaima Bukhari many books that include Tax Reforms in Pakistan: Historic & Critical Review, Towards Flat, Low-rate, Broad and Predictable Taxes (revised & Expanded Edition,  Pakistan: Enigma of Taxation, Towards Flat, Low-rate, Broad and Predictable Taxes, Law & Practice of Income Tax, Law , Practice of Sales Tax, Law and Practice of Corporate Law, Law & Practice of Federal Excise, Law & Practice of Sales Tax on Services, Federal Tax Laws of Pakistan, Provincial Tax Laws, Practical Handbook of Income Tax, Tax Laws of Pakistan, Principles of Income Tax with Glossary andMaster Tax Guide, Income Tax Digest 1886-2011 (with judicial analysis).

The recent publication, coauthored with Abdul Rauf Shakoori and Huzaima Bukhari is Pakistan Tackling FATF: Challenges & Solutions

available at:  https://www.amazon.com/dp/B08RXH8W46

He is author of Commentary on Avoidance of Double Taxation Agreements signed by Pakistan, Pakistan: From Hash to Heroin, its sequelPakistan: Drug-trap to Debt-trap and Practical Handbook of Income Tax. He regularly writes columns for many Pakistani newspapers and international journals and has contributed over 2500 articles on a variety of issues of public interest, printed in various journals, magazines and newspapers at home and abroad.