Feeble attempt to rope in the parallel economy
Presenting the budget of a cash-starved country like Pakistan is a tough job. It is even tougher to take unpleasant economic decisions in the first year as the unrealistic promises made during the electioneering are still fresh in the voters mind. But then we all know that the time to take tough economic decisions for any government is also before its shine wears off.
Finance Minister Ishaq Dar’s task was difficult particularly when he had to present the budget 2013-14 just a month after the elections. So what did he do? He played the safe game of presenting a budget crafted by the Babus, where those who pay taxes were taxed more and a feeble attempt was made to broaden the tax net to catch the evaders.
Actually, his predicament was that the tax evading bazaar is the major vote bank of the PML-N. In the eighties, dreamer Dr. Mahbub ul Haq made the first attempt to introduce VAT, but the biggest resistance to his attempt came from the bazaar tacitly supported by the Punjab government. Guess who was the Chief Minister? You got it right—Nawaz Sharif. Many attempts were made by the military government of General Musharraf also, but Shaukat Aziz had to step back after announcing Reformed General Sales Tax (RGST) because the political parties which have the bazaar’s support– MQM and PML (N) – revolted. PPP-led coalition was also forced by a powerful business lobby to take back decision to impose RGST. .
That’s why Ishaq Dar has not event talked about this four-letter tax abbreviation–RGST, although this was the breaking point of our relations with IMF. He is given the benefit of doubt that he got very little time to give a budget with a PML-N originality stamp. His critics dismiss this. They maintain that though in Pakistan’s political culture there is no tradition of a shadow cabinet of the opposition, it was always known that Senator Ishaq Dar would be the PML-N’s finance minister. So it cannot be said that he was caught unprepared.
Dar’s one advantage is that he has close relations with Prime Minister Nawaz Sharif. This would at least help him to face the head-wind which is traditionally blown by the political colleagues. I remember gentleman Sartaj Aziz had to face strong criticism from his own colleagues in the cabinet when he was the finance minister in the previous incarnation of Nawaz Sharif’s government.
Dr. Mahbub ul Haq, who was the man with new ideas, had two brief stints as finance minister but was opposed by GIK and couldn’t do much except opening up the strict foreign exchange domain. During PML(N)’s two governments Sartaj Aziz and Ishaq Dar were also not able to present any innovative budget which could boost revenues and investment ratio. In the first few years of Musharraf’s regime Shaukat Aziz did bring in some reforms, but his success owed much to the foreign debt repayment relief given to Pakistan by the donors after 9/11.
Dr. Hafeez Shaikh served as an able Finance Minister of Sindh when he first entered politics. But when he took the bigger responsibility at the center the official economy was being squeezed from three sides. In this environment with no fiscal and political room he just muddled through for three years.
However before attacking the budget, analysts should take into account at least five major factors: one, the country is almost in a civil war – it is facing unabated terrorist attacks in KP, FATA and Balochistan. And Karachi the commercial hub of the country remains destablised; two, volatile regional situation has sucked Pakistan deeper in the quagmire because of its foolish national security and foreign policy; three, foreign assistance and investment has shrunk because of our so-called national pride policy; four, PML-N inherited the heavy baggage left behind by the coalition government which was too weak to take any courageous economic reforms; and five, the global economy has not been able to bounce back from the long down-turn spell.
So in this situation what should be expected from the finance minister who is beleaguered? The usual trick in-hand of each new finance minister is to quote a low GDP growth and consequently higher fiscal deficit of the out-going year as the legacy left behind by the predecessor. This provides a more comfortable base to work on the coming year’s crucial targets. FM Dar said he has inherited the growth of 3.6 percent of GDP and a budget deficit of 8.8 percent. State Bank has estimated a budget deficit of 7.5 per cent. If that is true, then Dar’s promise that he will bring the deficit down by 2.5 percent in 2013-14 becomes easier because that would mean in actual terms a deficit trimming of 1.3 percent only. It would also be aided if the GDP growth was actually higher than 3.6 percent which has been taken as the base of the out-going year.
Contrary to the rhetoric’s that PML-N will break the begging bowl, the hard ground realities have forced Dar to enter into negotiation with the IMF. Besides reaching out to IMF to meet the current account imbalance, the importance of a deal with IMF is that other international donors rely on IMF’s assessment of a country’s economy and its direction before committing their assistance.
Greater challenge for this government is that while foreign assistance and investment inflow have almost dried down, outflow is going up as payment time has arrived. IMF alone has to be repaid in installments over $5 billion in the next four years, including 2013. The aversion to IMF conditions which suggest that the country should cut down it’s budget deficit, increase its tax revenues and slash subsidies is widespread. What one fails to understand is that even if we snub IMF, wouldn’t any sensible government take these measures.
The difference is that if the government is pro-people it would increase its tax revenues by taxing the fat cows who evade taxes, cut down on non-productive expenses like building nuclear arms pile, adopting austerity, remove subsidies that finance the corrupt and inefficient public sector and instead give targeted subsidies directly to the people below the poverty-line.
But unfortunately that is not how every government has approached the issue. Not much can be expected from the PML-N government as its main constituency is small, medium and big businessmen. Only recently we have seen that it has backed out from the meagre measures to broaden the tax net by putting higher withholding tax on unregistered business to please the business community. It suits the big business also to deal with non-registered middlemen because the sales and purchases can be easily under or over invoiced which ever helps in hiding the actual income.
It is this pro-business approach of the PML-N which transmits the feel-good waves to the business community in the country and abroad. First time when the PML-N government came in 1990 its cabinet team gelled well and worked closely with each other. Within three months of taking oath Nawaz Sharif’s government moved on with the privatisation of the Muslim Commercial Bank. This followed by the privatisation of many industries led by Lt. General (Retd.) Saeed Qadir. The private sector responded to this programme though privatisation was dogmatically opposed by the left leaning section of society. But Ghulam Ishaq Khan who had an aversion to the private sector was not happy. Coupled with some political differences GIK removed the PML-N government unconstitutionally in April 1993. The Supreme Court declared GIK’s action invalid but then army generals intervened and forced Nawaz Sharif to resign.
PML-N came back with a bang in 1997 with a two-third majority in the National Assembly. But this time I noticed his cabinet members were at odds with each other. Khawja Asif, who was the Minister for Privatisation at that time admitted to me on camera in an interview for a TV programme Pakistan Business Update that other ministers were not cooperating and each time he is stuck he had to seek ‘Mian Sahib’s intervention’. Ishaq Dar who was Minister for Commerce at time also confirmed to me that cabinet members are not working as a team.
The success of Ishaq Dar and Khawja Asif this time around would thus depend a lot on how much cooperation they get from their colleagues and support from the prime minister. Both have tough jobs to do and show some signs of improvement before the honeymoon is over. Already the first sign of rifts have emerged from the crucial Ministry of Foreign Affairs, where Ambassador Fatami is reportedly elbowing his senior Sartaj Aziz. The country needs a strong management team with cohesion to steer out its sinking ship. Will PM Nawaz Sharif’s team be able to deliver, is too soon to forecast. To be fair let’s give them some months to revisit this question.