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Dr. Ikramul Haq
Even with a steep decline in development spending, total spending grew by 11.3 percent during FY19. The major push came from current expenditures, which grew by 21.3 percent on top of 12.6 percent growth last year— The State Bank of Pakistan (SBP) in its ‘Annual Report 2018-19—The State of Pakistan’s Economy
For the last many decades, fiscal (mis)management has pushed Pakistan into debt enslavement and perpetual crisis on the economic front. The causes diagnosed are reckless borrowing, ruthless spending, rent-seeking, elitist structures, un-tapping and wastage of resources, inefficient/corrupt institutions, oppressive/excessive taxes, imperfect markets/lack of competitiveness, absence of rule of law, lack of fair play, debt trap, fiscal, trade and current account deficits—just to mention a few.
Historically, our civilian and military rulers have been hooked on bailouts from IMF—many call it death-blows. With every loan came harsh conditions—ostensibly meant for economic revival/reforms, but every time left us in a deeper quagmire. Musharraf-Shaukat duo hoodwinked the nation by claiming that they were severing all ties with IMF, whereas in reality loans were taken even for in the name of reforming (sic) the tax, banking and justice systems—just to mention a few. All the successive governments thereafter secured fresh loans with renewed enthusiasm. This trend continues under the Government of Pakistan Tehreek-i-Insaf (PTI) that before coming to power vowed not to further indebt Pakistan, especially seeking no IMF’s bailout. Contrary to all claims, it took foreign loans of US$ 10.4 billion in its first year in power resultantly Rs. 571.6 billion were consumed by debt servicing alone from July to September 2019—foreign debt servicing was Rs. 77.7 billion, showing an increase of 70%. Circular debt is expected to swell to Rs. 1700 billion by end of the current fiscal year!
Dr. Abdul Hafeez Shaikh, who is now the economic wizard of PTI Government, signed $11.3 billion Stand-by Arrangement (SBA) with IMF in 2008 as Economic Minister of PPP. Pakistan got only $7.6 billion—the balance was denied due to lapses in performance criteria, leading to suspension of the programme in May 2010, culminating in an unsuccessful ending on September 30, 2011. Main responsibility was that of Hafeez Shaikh as captain of economic team. Now representing the PTI Government, he has secured IMF 39-month extended arrangement under the Extended Fund Facility (EFF) for an amount of Special Drawing Rights (SDR) 4,268 million (about US$6 billion or 210 percent of quota). Eelier Ishaq Dar got S$ 6.6 billion bailout package. Will Hafeez Shaikh turn his past failures into a success this time?—there is optimism in the eyes of Premier Imran Khan—in a recent address on December 5, 2019 he said: “Good days are coming” and you need not to worry”[ghabrana nahi hai]! The same day, Asian Development Bank (ADP) approved $1.3 billion budgetary support loan for Pakistan, including $1 billion in crisis response facility to shore up low official foreign exchange reserves. The ministers and advisers, like their predecessors whom they ferociously criticise, were over jubilant on getting new loans—rather than chalking out plans for early debt-retirement and becoming self-reliant.
In 2018-19, the Federal Board of Revenue (FBR) collected merely Rs. 3828.5 billion showing negative growth of 0.4%— original target was Rs. 4435 billion resulting in record fiscal deficit of 8.9% of GDP—it was a gift to the PTI Government from economic wizards of Pakistan Muslim League (Nawaz)! The same trend continues in the first five months of the current fiscal year; even after imposing multiple oppressive taxes, FBR is facing a shortfall of around Rs. 218 billion.
The dismal performance of FBR adversely affects the provinces that are heavily dependent on collection by the Centre from the divisible pool. Provinces are not ready to collect taxes due from the rich—all of them cumulatively collected less than Rs. 2 billion from the rich landowners in 2018-19. Failure of FBR to meet the assigned target, what to speak of tapping the real tax potential of Rs. 8 trillion, and inability of provinces to raise sufficient resources on their own, has created a fiscal mess. In this mess, the real problem is not lower tax collection as always exaggerated by IMF, World Bank and ADP but monstrous current expenditure which grew by 21.3% last year. What makes the situation worse is high rate of interest, complex tax laws/regulations, inefficient/corrupt government institutions, loss-bearing public sector enterprises (PSEs), huge perks and benefits for miltro-judicial-civil complex and political elite, circular debt and blocking of genuine refund of billions by FBR retarding exports and local investment.
We have an oppressive tax system as FBR Year Book 2018-19 concedes that withholding taxes constitute 67% of the total collection of income tax. Out of income tax collection of Rs. 1445.5 billion [it was Rs. 1536.6 billion in 2017-18], FBR’s own efforts (collection of demand created) yielded only Rs. 84 billion (5.8%, it was 7% last year) and from arrears Rs. 18.6 billion (1.3%, it was 1.2% last year).
What do we need, to put Pakistan back on the road to progress? First dismantling of elitist structures along with empowerment of masses at grass root level by implementing Article 140A of Constitution in its true spirit. No other strategy will work, not even the latest $ 400 million loan from World Bank for Pakistan Raises Revenue Project. The provincial parliaments should be pressurized by media and civil society to enact laws for bona fide fiscal devolution to local governments—they have so far just copied the previous outdated laws with patchwork here and there. The privileged classes, especially officers of infamous DMG (now Pakistan Administrative Service) do not want to give up their control over resources. The local governments cannot be meaningful unless they enjoy adequate resources to spend for education, health and all kinds of civic amenities.
Addiction to borrowed money and lust for wasteful spending are the main stumbling blocks for achieving the cherished goal of self-reliance that can pave the way for rapid growth, employment generation and substantial spending for social sectors. The ever-widening fiscal deficit among many other reasons, has its roots in wasteful funding of monstrous government machinery, especially corruption-ridden-inefficient PSEs, and extending of tax-free perks and perquisites to elites. These profusely bleed the already scarce resources—both tax and non-tax.
The country is surviving on bailouts from IMF due to perpetual failure of the successive governments to tax the rich and cutting enormous wasteful expenditure that are over 21% of GDP—Bangladesh incurs only half of it and thus emphasis is not on oppressive taxes but export-led growth. According to ADP, in 2019, Bangladesh’s GDP will grow by 8%—better than that of India at about 5.1% and we at 2.8% (the government claims it will be over 3.5%), even lower than Afghanistan at 3.7%.
We cannot put Pakistan back on the road to prosperity unless we stop wasteful, unproductive expenses, cut the size of cabinet/government, restructure/privatise loss-bearing government-owned corporations, spend on human resource training, increase productivity, revatilise agricultural sector and establish value-added agro-based industries to create exportable growth and create jobs in rural areas.
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The writer, Advocate Supreme Court, is visiting faculty at Lahore University of Management Sciences (LUMS).