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Voice against economic subjugation

Dr. Ikramul Haq[1]

Pakistan, caught in a deadly debt trap, is struggling hard to get rid of external loans of 35 billion US$. There is no hope to come out of this crisis or to stop looking towards IMF, World Bank, Paris Club, London Club and ADB in near future. There are no signs yet for overcoming the ever-increasing fiscal deficit, the worsening balance of payments and unfavorable trade imbalances.

The borrowing spree of the successive governments in Pakistan, civil and military alike, has never stopped. They have been getting loans from wherever these were available without ever thinking or realizing how to return these. The government borrowed Rs 135 billion from the State Bank in the fiscal year 1999-2000.This borrowing was not in conformity of the 1999-2000 credit plan. Under the plan the government was supposed to make a net credit retirement of Rs 15 billion instead of borrowing anything from the banking system.

On the other hand the private sector and public sector commercial enterprises together borrowed Rs 23.1 billion against a combined credit plan target of Rs 104.5 billion. Of this Rs 15.4 billion went to the private sector proper. In 1998-99 the private sector had received Rs 68.9 billion-bank credit. The government borrowing of Rs 135 billion in 1999-00 that was 15 times higher than its 1998-99 borrowing of Rs 8.9 billion helped it retire commercial bank credit of Rs 95 billion and left Rs 40 billion in its coffers to fill in the gaps between income and expenses. And since the money borrowed from SBP was cheaper then the credit retired because of the difference in their pricing structure the government also benefited in the shape of low cost of credit retirement.

 All the governments in Pakistan during the last 30 years did not properly utilize foreign lending and never gave a serious thought to the idea of living within means. The present economic crisis is a logical outcome of the wrongdoings of the last three decades. Clearly, Pakistani rulers have destroyed the economy through corruption and incompetence. Unfortunately IMF and World Bank trained Pakistani economists were defending and serving them, instead of advising the concerned quarters to enforce financial discipline and better financial management. In addition to external debt of 40 billion US$, the government had borrowed Rs. 2000 billion from the Pakistanis.

The Government of General Pervez Musharraf after coming to power constituted Debt Reduction & Management Committee (DRMC) to evolve a strategy to come out of the debt trap. Dr Pervez Hasan, the Chairman of the Debt Reduction Committee (DRC), in a number of Press interviews, claimed that Pakistan could kick-start the economy without much new investment by adopting a nine-point strategy on a priority basis. Discussing this strategy briefly, Dr. Hasan said Pakistan needs immediately to improve canal irrigation and maintenance, raise sharply the water rates to provide better incentives for efficient water use, reduce adulteration in seeds, pesticides and fertilizers, focus on value-added exports, increase unit value of exports, give high priority to software exports, close down uneconomic industrial plants, announce a 2-3-year time table for upward adjustment of gas price and devolve authority to local level for decentralization of education and health.

Dr Hasan submitted his committee’s interim report on debt reduction in the Cabinet meeting of Nov. 2, 2000 and also made a presentation on the occasion. Reportedly he is also disillusioned now that there is no will to implement his proposals Hasan who calls his committee as debt burden reduction committee rather simple debt reduction committee admits that our debt ‘burden’ has become really acute in the three years since 1996 as during this period there was zero growth in revenue collection and exports while borrowing for current expenditures kept on going up.

The official thinking about Pakistan’s debt burden lacks any in-depth perspective; it conveniently ignores the political dimensions. The political elite in Pakistan never watched national interest and its policies were always motivated by self-interest. Besides, corruption and loot, it also tried to please the military establishment by giving them more than what was due. The military establishment, even when not in power, controlled the main policies of the civilian regimes. The civilian rulers always worked under pressure of this institution. In the name of defense, the military establishment managed to eat the biggest chunk of the cake and resultantly the State is now virtually bankrupt, finding it almost impossible to come out of debt trap.

The Government of Gen. Musharraf on the one hand is seeking advice and expertise of persons like Dr Hasan for the retirement of debt and on the other has been toeing the IMF line in letter and spirit. It is a strange dichotomy. It shows how confused in their thinking are the present military rulers of Pakistan. They have been put in an awkward position by the international forces, which want to cripple this State to blunt its nuclear teeth. The military regime wants recognition as representative of Pakistani people’s actual aspirations, but lack economic viability for any international acceptance. Pakistani defense experts regard the nuclear capability as a great achievement, but economic bankruptcy has almost neutralized this otherwise very effective military weapon..

There was a mood of jubilation in official quarters when the IMF finally cleared (on 30th November 2000) a much sought after letter of intent (LoI) to Pakistan for a $596 million new SBA. The military government was said to have been given to understand that the continued revenue slippages could cause the discontinuation of SBA, like that of the previous $1.5 billion Extended Structural Adjustment Facility (ESAF). According to the officials of the ministry of finance the government had no option but to accept the IMF conditionalities of strict enforcement of GST, removal of the indirect subsidy on gas and bringing down the import tariff to 25 per cent by 2003 to meet the criteria of the World Trade Organization.

The debt trap, in which Pakistan is caught, is a multifaceted phenomenon; economic political and social. As international donors are tightening their noose around Pakistan’s neck, the negative effects of conditionalities are becoming more and more visible. In the frenzy of collecting more and more taxes (through oppressive means), the rulers of Pakistan are making the lives of common people miserable. Today’s Pakistan is trapped in a vicious debt trap whereby it needs to borrow more than Rs. 600 million every single day of the calendar year to survive. That translates into an additional debt of Rs. 50 million every working hour of the day, Rs. 800,000 every minute or close Rs. 15,000 every second. Fiscal and monetary policies are inextricably linked with debt management.  

The struggle to keep fiscal deficit to sustainable levels is becoming more and more difficult with each passing day. The fiscal authorities are caught in a vicious circle of offering higher and higher rates of return, which raise the cost of borrowing to unacceptable levels. Increasing the monetized deficit in this difficult situation can unleash a growth of primary liquidity with consequential acceleration in inflation. It, thus, becoming crystal clear that an unsustainable deficit is bound to have a destabilizing impact on the economy.

Since October 2000, there in no reduction in the level of political uncertainty, as concerns still persist about the outlook on democracy front. General Musharraf’s Administration has already delayed the implementation of difficult economic reforms. The level of public discontent remains high and the weak performance of the economy continues unabated. While official donors continue to press the military government to speed up the timetable to return the country to democracy, no dates have been set for national elections and the review petition dismissed by the Supreme Court has given a new boost to military regime to even demand a permanent role in future polity. The country’s political institutions will therefore remain weak. Restoring faith in these tarnished institutions is likely to remain one of General Musharraf’s Administration’s greatest challenges.

According to State Bank Report 2000, “the increasing level of debt stock of Pakistan has led to a sharp increase in debt servicing over the period 1st July 1996 to 30th June 1999.  At its present level, interest payments on domestic debt account for 46.7 percent of tax revenues, and 25.5 percent of total expenditures. The rescheduling of external debts has not had any impact on Pakistan’s Rupee debt servicing.  All rescheduled repayments still require the borrower to make Rupee payments to SBP according to the original schedule of repayments.  This has been done to insulate the impact of the external constraint (which required the rescheduling) from the performance of Pakistan’s fiscal system.  Since payments on external debt are a significant part of total debt servicing, it s important to make sure that the leeway provided in terms of hard currency payments was not being reflected in lower debt servicing”. 

Since December 2000, the annual debt servicing is around US $4.6 billion, while the current account deficit is in the range of US $1.7 billion to $2 billion. Financing a total obligation of $6.3 billion from internally generated funds is proving to be a highly unlikely scenario. Thus further external funding is inevitable for economic survival in the near future. The tall claims that in three years’ time Pakistan will pay off the entire external debt is nothing but eyewash. The government’s policy of implanting IMF proposed reforms is evident of continuous dependence on foreign assistance. The long-term external debt scenario has never been planned in the past, resulting in the current debt mess.

The problems in Pakistani economy can be summarized in one word, which is ‘instability’. The military regime, just managed to squeeze meagre Rs. 11 billion through highly publicized Tax Amnesty Scheme 2000. The real tax potential of undeclared wealth in Pakistan is between Rs.700-1000 billion, according to very conservative estimates. The successive governments have utterly failed to convince the Pakistani people for paying the taxes due from them. The common argument against paying taxes is that money so collected is spent for wasteful purposes and on unprecedented benefits enjoyed by high placed civil-military bureaucrats and corrupt politicians. In this tug of war, the tax machinery is minting money by harassing the public in the name of army rule. This is the first time in the history of Pakistan that a military take-over has become a tool in the hands of tax bureaucrats for exploiting the general masses for self-interest. The small businesses have been asked to pay minimum tax of 0.5% on their turnover irrespective whether they earn taxable income or not. The larger business houses and big industrialists have been threatened through the institution of National Accountability Bureau (NAB). The result is that everybody is removing capital out of Pakistan and foreign direct investment has nose-dived.

On the one hand we are destroying the available capital, industry and human resource and on the other for economic growth we have heavy and persistent reliance on external loans and credits. The International Monetary Fund, (IMF) is nowadays imposing tougher and even contradictory conditionalities for Pakistan, which is a victim of international “financial terrorism”. The donor countries have their own political strings attached to the loan facility. The IMF is certainly advocating an unjust ‘global trading system’, as a chosen instrument for imposing imperialistic financial discipline upon poor countries. They are destroying the industrial base of Pakistan and forcing its markets to open up for goods from the developed countries. The IMF is creating a form of international ‘peon age’ or debt-slavery in which the balance of payment problems of developing countries are not resolved but rather perpetuated. Pakistan represents a good experimental ground for testing the success of these policies.

It is an undisputed fact that IMF conditionalities have aggravated the inequalities of income and wealth in Pakistan and resulted in more unemployment. The IMF conditionalities have caused more harm to us than doing anything real good. It is therefore, painful to note that every government in Pakistan, including the present one, continues to take loans by accepting and complying harsh IMF conditionalities.

 Pakistan’s economy during the past fifty years can be described as a classic example of a case where artificial prosperity was maintained by heavy doses of foreign aid and overseas remittances of Pakistanis. Though during the initial years a section of Pakistan ruling elite did think in terms of building a self-reliant economy, it remained only a concept. Easy and cheap availability of goods and services through foreign aid discouraged the development of a large-scale indigenous industry. At another level, Pakistan failed to do even the basics of economic development which most of the developing countries have done. Some of the macro level economic indicators point towards this. For instance, in case of population, Pakistan experiences one of the highest population growth rates (around 3 per cent) among the developing countries. This has brought greater stress on the already fragile socio-economic structure.

Formation of elite groups which control and acquire publicly owned resources for private enrichment and also exclude majority of the population from the benefits of development, has further reinforced the inequities in the society, and skewed the distribution of economic and political power. This has further strengthened the feudal mindset and behavior of the narrow class of ruling elite that moved in and out of power at various intervals and captured most of the rents for themselves. This class was attuned to the client-patron relationship. The economic rents created through import licensing, industrial permits, foreign exchange allocations, credits by the government banks, tariff concessions, subsidized agriculture credit, tax evasions were some of the tools for the elite society to thrive. Studies have shown that the lowest 20 per cent of the population in Pakistan received 7.3 per cent of the income whereas the highest 20 per cent received 44.5 per cent of the income.

There is near unanimity among Pakistan’s economists and their well wishers from outside that its economy has been mismanaged since its independence in 1947. The little development that took place in 1950s and 1960s was accidental and not due to governmental policies. In addition, the absence of institutional frameworks for the governance of the State to channelize the aspirations of people has resulted in a chaotic situation. In normal circumstances, the people only would have suffered. The money that flowed into the Pakistani economy was largely borrowed from both external and internal sources. The money so borrowed was not used for any productive purposes. This automatically resulted not in the creation of any economic assets which could repay the loans. The borrowed money kept an artificial prosperity in the beginning, but as the years passed, Pakistan got caught in the classical ‘debt trap’ scenario feared by most of the developmental economists.

The situation was further aggravated due to financial indiscipline, rampant corruption and wasteful expenditure by all the successive governments in Pakistan, both military and the civilian. The borrowed money was always used for wasteful purposes. A recent report in Press exposed that the regime of Gen. Musharraf wasted millions by appointed handpicked so-called economic experts. A few of them, who were assigned the job of reforming tax structures, were not even familiar with the basic principles of taxation, yet received million for the job they never performed.

The following report published in a leading daily newspaper[2] is an eye-opener for all the concerned:

“The already overstaffed finance ministry of Pakistan is being assisted by a record number of 17 advisors/consultants to help the financial wizards of the military government in pulling the country out of its present economic quagmire. Most of these advisors/consultants draw hefty salaries besides enjoying other facilities. The financial impact of government spending on these “experts” runs into millions of rupees. Official sources in the finance ministry do not see the justification for so many advisors/consultants when the ministry is already having a battalion of serving civil servants and a heavy top with a minister, a secretary general, a secretary in the finance ministry do not see the justification for so many advisors/consultants when the ministry is already having a battalion of serving civil servants and a heavy top with a minister, a secretary general, a secretary and another serving secretary as managing director.

Among the 17 advisors/consultants five are serving on honorary basis even though the government provides them secretariat facilities. Two of these honorary experts are also provided. Club class air tickets to the United States.  Eight of these experts were hired by the Chief Executive (CE) which include one recruited through the Establishment Division; three appointed by the finance minister; four by the secretary-general finance who himself is a re- employed retired government servant; and one by the State Bank of Pakistan.

CE’s APPOINTEES: Those appointed by the CE include Syed Shahid Hussain, chairman task force on reform of tax administration. He was appointed on honorary basis for a period of one year (extendable). Secretariat facilities are provided to him. He has also been given club class air ticket to the USA. Dr Ehsanul Haq has been appointed by the CE as consultant for a study on an anti-corruption strategy for a period of five months with effect from Aug 15, 2000. He has been offered Rs 4,875,000 for the contract. Dr Zafar Iqbal Cheema has been appointed by the CE as consultant for a study on human resource management for a period of three months in August 2000. He has been offered Rs 4, 415,000. Dr Anjum Nasim and Dr Ali Cheema were appointed consultants for a study on business processes & interface between tax administration & tax payers (on income tax and sales tax sides respectively) for a period of three months in August 2000 for Rs 4,507,000 and Rs 4,766,000 respectively. Masood Aziz, consultant for a study on business processes & interface between tax payers and tax administration also appointed in August for a period of about four months for Rs 4, 000,000. Sidat Hyder Murshad was hired by the CE as consultant for a study on information management in Aug 2000 for about four months for Rs 2,500,000 (2.5m). The CE also appointed Dr Tariq Hassan as advisor to the finance minister through the Establishment Division. Mr. Hassan has been appointed for a period of two years and offer maximum package of Management Pay Scale-I.

Finance Minister’s appointees: All the four appointees of the finance minister were engaged on honorary basis but they enjoy secretariat facilities. These include Javed Ahmad Noel, advisor/ chairman task force to prepare measures to convert government borrowing according to Shariat injunctions; Fateh M Chaudhry, member debt reduction & management committee; Saeed Ahmad Qureshi, chairman committee for redrafting the income tax ordinance; and Dr Parvaiz Hasan, chairman debt reduction & management committee. One of these experts Dr Parvaiz Hasan is also being provided air ticket to USA from Asian Development Bank funds”.

This is the way Pakistan has been handling the crisis situation. The borrowed money has been wasted in a ruthless manner on the perquisites of the so-called experts. The IMF is looking the other way; making it a point the economic affairs of Pakistan are handled in this ruthless manner ensuring that Pakistan can never break the slavery shackles. The agenda of IMF is taken care of by these gentlemen, who are here no just for the sake of good time and attractive perquisites, but with a clear mission of making the ordinary people of Pakistan permanent economic slaves of their foreign masters. This is a conspiracy against Pakistan, which should be unveiled. The Pakistani intelligentsia should raise its voice in a powerful manner against such forces so that the undemocratic rulers know that this nation has a will to resist subjugation in the hands of donors and their lackeys.

[1] Dr. Ikramul Haq, a leading international tax counsel, is a well-known author specialising in international tax, press, intellectual property, corporate and constitutional law. Dr. Ikram is Chief Partner of Lahore Law Associates (fax: +92 42 7226953, e-mail: irm@brain.net.pk; website: http://www.paktax.com.pk). He is a member of the visiting faculty of the Institute of Direct Taxes in Lahore. He served for 12 years as Deputy Commissioner of Income Tax. He studied literature, journalism and law, for his Masters and Doctorate degrees. He has written many books on various aspects of Pakistani law and global narcotics trade, some of which are co-authored with his wife, Mrs. Huzaima Bukhari, Additional Commissioner of Income Tax. He has been awarded Doctorate of Law for his research: Tax Reform in Quasi-Constitutional Perspective.

[2] Dawn, December 1, 2000

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