It will provide trigger for economic growth without any major investments
It is natural that citizens and voters build up expectations from a new government to deliver them relief. A newly elected government, which will hopefully take the reins soon in Islamabad, will also be under pressure to make such announcements, which can earn them acceptability.
A new government is often expected to announce a 100-day agenda, and in this article, I propose one. The announcements should, in my opinion, be on the one hand meaningful enough to create an impact and should be bold enough to signal a change on the other hand.
There is the usual caveat of pragmatism, especially given the IMF programme, but I also see there is always room for the new government to take such decisions, which are difficult politically. Let me present the 100-day agenda for the new government.
Abolish non-electricity dues
According to the information available at the Ministry of Energy website, electricity consumers pay eight different types of taxes and charges, which include electricity duty, general sales tax, PTV licence fee, finance cost surcharge, extra tax, further tax, income tax and sales tax.
The withholding tax collected is not adjusted because of the lack of an automated mechanism and is appropriated in the case of non-filers of income tax returns. Deduction of sales tax from commercial bills of non-filers gives legitimacy to the non-filers.
Electricity users should be obliged to pay only electricity dues. They do not need any subsidies, however, they must not be penalised for failure of the country’s tax administration.
That is why it is important to remove electricity distribution companies from the clutches of the federal government, while strengthening the institutional regulatory framework. The job of electricity companies is to sell electricity to consumers efficiently and not to collect taxes on behalf of the Federal Board of Revenue (FBR).
Announce tax holiday for small businesses
Despite claims of automation and simplification, the tax policy and tax administration in Pakistan pose a major stumbling block for the registration of new businesses.
There is a steady flow of new companies being formed under the SECP, however, a majority of entrepreneurs start informally or as a sole proprietor. We need to encourage them to join the formal economy and help them to become profitable.
The new government should announce income tax holiday for three years for all micro and small businesses registered within 100 days of the new government provided they open a bank account and register with the FBR to file returns.
Open trade with India
Food items constitute the bulk of Consumer Price Index (CPI) basket, particularly for the low-income households, reaching 60% of their average household expenditure.
The new government should resume trade in fruits and vegetables with India, allowing consumers and farmers on both sides to enjoy benefits of continuous supply of eatables at affordable prices.
Allow formal oil trade with Iran
According to official estimates released in 2023, almost 18% of the oil consumed in Pakistan is smuggled from Iran, which is then distributed across the country.
As Pakistan has announced the completion of its side of the Iran-Pakistan gas pipeline recently, its calculations show that it is ready to take the risk to avoid $18 billion of penalties, which is three times more than the IMF programme.
In this environment, it will be beneficial for Pakistan’s economy and its government to open formal oil trade links with Iran. This will also bring back Rs60 billion to the exchequer, which is the lost tax revenue.
Announce scholarships for young people
We are wasting billions of rupees each year in the higher education system. We need to divert a major chunk of this budget to technical and vocational education of our qualified young population.
The rate of unemployment is significantly higher among university graduates (about 30%, according to PIDE) as compared with those without university education.
On the other hand, Pakistan’s technical and vocational system continues to fall short of producing the required number of trained workforce to meet the national requirement. A major re-allocation to upgrade this system and the announcement of scholarships for at least 100,000 young people who qualify will be a great boost to the job market.
By announcing this 100-day agenda, the elected government can quickly create a positive environment for the country’s aspiring youth and help provide a trigger for economic growth without any major investments.
The potential for sustainable economic growth lies within our reach if we are ready to take such bold decisions for the welfare of people.
The issue of privatization of the SOEs is reflective of the complexity, ambivalence and indecisiveness of the public policy in Pakistan. These three traits are embedded in the politics and political struggle and form the core of political opportunism.
So, the fundamental question is how to decide: What to privatize and what not to privatize? What's the criteria? Also, why to privatize and why not to privatize?
Or, other than the security concerns, what criteria can be agreed upon regarding the question: what to privatize and what not to privatize?
In this regard, a historical review of the attempts at privatization of the SOEs reveals the two significant aspects the issue of privatization needs to be tackled with.
First is the theoretical and political side, and the other is the practical side of the issue of the privatization. Logically speaking, the second one depends on the theoretical and political side of the issue. That is, here in this case the issue of privatization depends on one's theory of state, that is, what political philosophy is working behind the various approaches to the issue of privatization.
But as is evident, mostly there is no theoretical and political clarity as the case of Pakistan Peoples Party shows; it favors both nationalization and privatization at the same time. Or it’s political populism that determines their politics.
That means there is too much confusion on the political front. As far as privatization of the SOEs is concerned, almost all the political parties position themselves as it suits them. Now they favor it and now they don’t.
It is only the Leftist groups that have political clarity and a clearly defined position regarding the privatization of the SOEs.
And there is another factor and that is, vested interests of various actors, such as labor unions, including the political actors.
So, to say, from the beginning, the state of Pakistan took itself as an all-powerful state, leaving no space for the private initiatives to try their hands. And somehow that was the expectation created by the political-electoral struggle also. That is how the statist political ideology formed and grew.
Though, Pakistan has never been a totalitarian socialist state, but the political adventurism made use of the recipe of a mixed-economy (the third way) dominated by the public sector (1971-76) in Pakistan. That wiped out the gains made out of an experimental approach by the state which believed in extending a helping hand to the nascent private sector (1958-67).
That dealt, and proved to be a devastating blow to the sentiment of the private investors both local and foreign for a long time to come. (The foreign investors that came to Pakistan sought such protections that in the longer term burdened the people unbearably.) And it is that environment that strengthened the Pakistani version of the ideology of statism: it is the state that has to do everything.
That thinking resulted in an economic legacy consisting of a heavier footprint of the state (more than 200 SOEs, and 70% state footprint), that includes from commercial SOEs to non-commercial SOEs and what not.
Then, economically speaking, the pendulum oscillated to the other side. A period of correction ensued: De-nationalization, privatization and liberalization provided an impetus to the economic and financial activities still benefiting the society at large (1978-1986).
Another fact that must not be ignored is that some commercial monopolies, such as Karachi Electric (KE), Pakistan Telecommunication Corporation Limited (PTCL), were privatized in a way that was like a monopoly changing the hands only, and that brought no benefits to the consumers. That strengthened the statist ideology since the privatization proved not beneficial.
Not surprising that the statist ideology still prevails. The voices of nationalization of this or that privatized SOE, for instance, KE, are still heard. And it is this ambivalence of political philosophy on the part of political parties and political circles that don’t allow the private sector to take root, and thus competition. No doubt, that environment influenced and nurtured a specific section of the private sector also that is dependent on the doles from the state.
In the final analysis, that ambivalence, instilled by the various political parties attempting privatization while in government and opposing it while not in government, that is, their opportunistic behaviour, and an anti-privatization environment, kept and keeps the state and its institutions confused as to the role of the state and indecisive as to the determination of the economic character of the state: To do business or not to do business.
Also, there is no clarity that how the privatization of the SOEs, by opening competition, brings not only political and economic stability, but prosperity also, and would allow the state to focus on its protective function.
Now even after 45 years, we are still considering of running the SOEs under this or that regulatory framework. We still lack and need theoretical-political clarity on the one hand, and on the other, equipping the government/political parties with regulatory tools that would help them accelerate and strengthen the process of privatization of the SOEs.
There is too less here to celebrate and too much to reflect on. No doubt, that’s the story more of failures.
Despite subsidies and social programmes, inflation has driven 5% rise in poverty
What is particularly noteworthy is that the poverty level now is higher than it was five years ago. This is a worrisome departure from Pakistan’s earlier success in steadily reducing poverty over the preceding decade.
Despite Pakistan’s recent focus on welfare, including increased spending on social programmes and widespread subsidies, the results have been concerning.
Efforts such as the Benazir Income Support Programme (BISP) aim to safeguard the underprivileged, while subsidies aim to shield the masses and the economy from the shock of rising food and energy prices.
However, citizens are facing more difficulties, with rising poverty rates and stagnant per capita income over the past five years. This outcome contradicts the anticipated improvements.
The preceding government purposefully ramped up spending on subsidies and social protection programmes in pursuit of a stronger social welfare system. Over the past five years, allocations for subsidies, BISP, and social protection surged, averaging 14.2% of the federal government’s expenditure – an uptick from the previous five-year average of 7%, which saw spending on a declining trend.
The trajectory depicts a clear increase: it began at 5.9% in 2019, doubled for the following two years, and peaked at an unprecedented 23% in 2022.
The effectiveness of these policies remains in question. While correlation isn’t causation, one must question why poverty reduction has reversed despite a greater focus on social welfare and subsidies?
The primary driver behind the resurgence of poverty has been the unexpected surge in inflation. The surge has had far-reaching implications on the overall cost of living, impacting the populace at large.
However, the middle class and impoverished citizens are the most affected, as their real incomes diminish and fail to keep pace with the inflationary pressures. The runaway inflation has rendered basic necessities prohibitively expensive, resulting in an estimated 20 million people slipping into poverty – a stark contrast to declining poverty rates in previous years.
The government attributes high inflation to the international commodity super cycle; however, this claim is untrue. Other countries in the region haven’t witnessed such a spike in inflation. This is because inflation is inherently a local phenomenon shaped by local policy decisions.
At its core, fiscal indiscipline stands as the root cause. The surge in subsidies amid growing fiscal imprudence and record deficits is not without repercussions. The government finds itself in a net borrowing position, with soaring debt levels nearing the point of unsustainability.
Financing the escalating fiscal deficits through bank borrowings has fuelled the expansion of the monetary base, contributing significantly to the inflation rate, which peaked at an alarming 38%.
Contrary to their intended purpose, substantial subsidies have negatively impacted the economic landscape by distorting the price system. The resulting adjustments are considerably more painful and less subtle.
While broad subsidies lack merit, there is a case for a targeted programme like BISP. However, it demands a more deliberate and focused strategy with clear milestones to uplift families from poverty within specified timeframes and the establishment of performance metrics to gauge progress.
There’s a necessity to transition away from providing indefinite monthly stipends and to measure progress not solely based on the number of beneficiaries and total cash disbursed.
While there is much rhetoric advocating for the continuation of subsidies and the expansion of social protection, these measures rarely assist people in breaking out of the poverty cycle. This is evident in recent years despite a focus on welfare policies.
It’s apparent that the current approach falls short, especially considering Pakistan’s consistent reduction in poverty rates over the previous decade with relatively modest subsidies and safety nets. The unintended consequences – high inflation and a reversal in poverty reduction – underscore the necessity for a more balanced and sustainable strategy.
The best way forward is for the government to stop fuelling inflation. It needs to prioritise fiscal prudence across its expenditure spectrum, which involves enhancing the efficiency of public spending, reducing the government’s footprint, phasing out subsidies, and establishing clear milestones to limit welfare spending.
In essence, creating a supportive business environment and expanding employment opportunities through growth stand as the viable means to alleviate poverty. Prioritising fiscal responsibility and nurturing economic growth are crucial steps towards reorienting Pakistan’s course for effective poverty alleviation.
The Story of privatization in the Czech Republic has many lessons Pakistan should learn from.
Dr Vaclav Klaus, once a finance minister, prime of minister and president of the Republic, quite innocently made a statement, which became well known. He said, “No, I am not ready to pay hard money for soft advice.”
And Milton Friedman called it the ‘Klaus Law,’ which Dr Klaus liked very much!
On such an unexpected response form Dr Klaus, the likes of International Monetary Fund (IMF) were absolutely shocked because that was exactly what they wanted to organise – soft advice for hard cash - technical assistance, sending experts, entertained in the best hotels in Prague and spending most of their time in the lobby bars of those hotels discussing transformation.
As to the objections on the mechanism of privatisation from its own protagonists, Dr Klaus speaks from the point of view of a government (but sure a limited government): We were confronted with an enormous naivety with regard to the formation of legislation, its enforcement and the relationship between formal legislation and informal rules, etc.
And we have been especially criticised for our inability to create perfect legislation. I have to argue that there is no perfect legislation. You have parliaments just for the fact that you need to make changes to and add new legislation to improve it – to fill some of the gaps and holes in the legislation – it’s a permanent evolutionary process in any country in the world.
He further states that the formation of legislation is and must be slow. It can’t be just a quick process. I must say that what I consider to be very important is that legislation is the outcome of the process of evolution; it is not of anyone’s dictate (and if it is a dictate, it plays havoc as has been the case in Pakistan. KA).
As you know very well, legislation is not the outcome of abstract rationalism. Legislation is the result of a very complicated political process, a very very human political process. You don’t create legislation by picking the five best lawyers from the best universities and asking them to “Please be so kind as to give us legislation.” It is discussed. Every sentence is discussed, in your and our parliament.
And, Dr Klaus admits: I’m sure you know very well that legislation is influenced not only by political or ideological arguments, but by vested interests, by lobbying, by what we economists call ‘rent-seeking’ activities. So there is nothing quite like a body of legislation, which you can simply transfer from one country to another and decide that this is true. There is just one example of such a transfer of legislation in modern history, and you probably know what I have in mind – the reunification of Germany.
It was even the identical language. Even to translate the legislation, Dr Klaus tells, is difficult. And it was the same language, so it was easy just to announce that the next morning the old legislation is no longer valid and the new legislation is valid.
And Dr Klaus hastily adds: I always say that our critics probably assume that we are still a totalitarian state, where the appropriate legislation can be simply introduced. But we know it is a very complicated political process.
This is how Dr Klaus sees the whole process of transition including privatisation. But, sure, if we need free markets and do not need over-regulation or a paternalistic welfare state, we will have to go for the three liberalizations, that is, price liberalization, business liberalization, trade liberalization, knowing well that no single liberalisation can bear fruit.
In the context of privatisation in Pakistan, following points are of utmost importance:
1. Changing the economic system (in Pakistan also) is not an easy task as it involves conflicts of interests, that is, it threatens vested interests. Hence, it needs a principled stand and a will to bring it about. It must be taken as a matter of policy.
2. Privatization is part of an overall economic change, a first step and a very important one. But it will be of no use in the absence of price, trade and business liberalizations.
3. As in other cases, in doing privatisation also, a government may makeor makes mistakes unintentional as well as deliberate.
4. If privatisation is to be done, do privatise all of the business enterprises, and let there be a competition. Keeping some selected enterprises with the state with a privileged status will hurt the competition.
5. The cost of transition, or say privatisation, must be kept in mind.
6. The privatised units may or may not succeed; as un-protected private sector, in sharp contrast to the protected public sector, faces competition, and, as happens with such businesses, may meet failures.
7. Like all other legislations, privatisation legislation may be wrong, manipulated, manoeuvred, vested, rent-seeking, etc, and its implementation and execution partial or flawed or skewed, but what is needed: it must be discussed, exposed, criticized and improved.
Finally, (and so far no one has been making this point) it must be demanded that as privatisation is lessening the size and burden of the government; in turn, burden of taxes on people must also be lightened. This will spur both growth and development.
[Note: This article is based on a lengthy interview of Dr. Vaclav Klaus]
Consensus on privatisation, power sector restructuring can steer towards stability
The caretakers have been busy dealing with economic crises following constitutional amendments that empower them to implement long-term measures.
Along with the support provided through the Special Investment Facilitation Council (SIFC), the government seems to have done well in reducing the level of uncertainty in economic outlook through various administrative measures.
Some of the praiseworthy steps include reforms in the privatisation process, power sector governance, exchange rate management, facilitation of business visas, and forex liberalisation for IT companies.
The government secured an ordinance setting up a special tribunal to hear petitions against privatisation transactions. The stock exchange has been a source of good news for many weeks, though it remains inconsequential.
Ultimately, this setup needs replacement with an elected government, putting politicians back in the driving seat.
A common theme emerging from pronouncements by senior political figures across the spectrum as an electoral promise is restraint on public spending. Nawaz Sharif has already included this in his nine-point agenda, and more recently, Bilawal Bhutto-Zardari has also promised to close 17 federal departments and included this point in his 10-point agenda.
Bilawal stated that this would help the government save Rs300 billion every year, indicating an emerging consensus.
The root cause of our economic woes lies in fiscal matters, especially on the spending side. However, the closure of 17 federal government departments, while a positive step, will only translate into saving approximately 0.35% of gross domestic product (GDP).
The bigger problem lies elsewhere. In its Fiscal Risk assessment for FY 2023-24, the government acknowledged that the federal government’s exposure to state-owned enterprises (SOEs) in the form of outstanding loans and guarantees stood at 9.7% of GDP in 2021, having increased since.
The circular debt in the electricity and gas sectors at the current value adds another 7% of GDP in the exposure, increasing daily. The gas sector is losing Rs1 billion every day.
As net federal revenue squeezes in the coming years, despite nominal increases in tax collection, the risk of corporate default will rise despite International Monetary Fund (IMF) assurances.
A political consensus must evolve on public spending restraint. This consensus should have two components: privatisation of 85 commercial SOEs and radical restructuring of the power sector, whereby the government must stop financing theft, default, and inefficiencies.
The old trick of political economy should be put to rest. This trick, whereby losers are juxtaposed against beneficiaries of reform, has done us no good. If our politicians can agree on this argument, it will be a big win for democracy.
Significant cuts in public spending will reduce the pressure on federal government revenue substantially. The savings, or parts thereof, can be redirected to more investment in human capital, which is crucial.
The pressure to collect more taxes will also subside, and the government will not have to increase the electricity tariff each month.
Importantly, the government will be able to increase its spending on strengthening institutions responsible for the protection of life and property. The political consensus should evolve on managing our federal government better.
It may be worth noting that while we have recently seen a new SOE policy, our privatisation policy is a one-page shallow document dating back to 1994. Recently, PRIME has conducted a consultative workshop under the chairmanship of the federal minister for privatisation, leading to an unofficial framework for a new privatisation policy that Pakistan needs to debate.
Pakistan also needs a new policy to restructure the power sector; increasing the tariff rate is no reform. The current cost-based model of electricity distribution companies guarantees the longevity of a failing system.
While the SIFC is primarily working to attract FDI, it should also investigate why our domestic investors are shying away. In this context, privatisation of 85 commercial SOEs, distributed across 10 key economic sectors, can unleash a new wave of productivity, wealth, and job creation.
These include power, oil and gas, infrastructure, transport and communication, manufacturing, mining, engineering, finance, industrial estate development and management, and wholesale, retail, and marketing.
The continued government presence in these sectors as a business player constitutes a major roadblock to economic prosperity, which needs complete removal.
Contrary to common perceptions, four governments of PML-N and PPP during the 1990s had a complete consensus on privatisation. In fact, under Benazir, the government sold more assets under state control. This continued under General Musharraf, only to be halted by the Supreme Court.
It’s time for leading parties across the spectrum to develop a consensus on public spending restraint. They have done it in the past. They should do a better job now.
THE WRITER IS THE FOUNDER AND EXECUTIVE DIRECTOR OF PRIME, AN INDEPENDENT ECONOMIC POLICY THINK TANK
The Article was originally Published on The Express Tribune, on January 8th, 2024.
Non-standard methods, experiments of privatisation may be good for Pakistan
Altering the economic system is not an easy task. It is more complex when carried out half-heartedly. Privatisation is only a part of this process. It may not succeed if done in an isolated manner. Among other things, it requires a competitive environment to bear fruit.
A case in point is the erstwhile Czechoslovakia. It provides us with a good learning experience to see how after the fall of a collectivist state, the gigantic task of changing the economic system was handled.
Dr Vaclav Klaus was one of the key members of a movement, Velvet Revolution, which overthrew communism in Czechoslovakia. He was the prime minister (1993-1997) and the president (2003-13). An economist and politician, he was the first non-communist finance minister of Czechoslovakia.
According to Klaus, the starting point of a change in Czechoslovakia was liberalisation and deregulation of markets. And this move consisted of three main liberalisations: i) price liberalisation, ii) trade liberalisation, and iii) business liberalisation.
As to the price liberalisation, for 40 years the people in Czechoslovakia had totally frozen and administered prices. So, liberalising prices was a dramatic shock.
He makes a comparison. The Australians spent years or decades discussing liberalising the price of milk in Australia. But in Czechoslovakia they didn’t have just one case of milk. They had hundreds and thousands of prices with possibly the same impact on individuals in different groups of society.
The second move, trade liberalisation, was also a dramatic one. It meant opening the country after 40 years of semi-autocratic and protected economy.
And, the third move was liberalisation of entry into market for all types of enterprises, both private and foreign.
These three liberalisations represented the first stage of transition, and not only changed the whole society but also enormously increased the supply of goods and services.
It brought equilibrium in the market overnight. It interrupted some of the old, deeply built-in behaviour of citizens, and it attacked and endangered various old habits they inherited from the communist past.
Klaus readily admits that realising such changes was socially difficult, politically brave but technically easy because most of the measures required just had to be announced.
Again, citing the case of milk price, he says that to deregulate or liberalise the price of milk, Australians, or for that matter anyone, don’t need sophisticated theories.
It doesn’t need the involvement of university professors or experts on micro- or macroeconomics. It is sufficient to meet at eight o’clock in the evening and announce on TV that tomorrow morning at 8am the price of milk is free to move. That is what they did in Czechoslovakia.
However, he admits, the second stage of transition was not an easy one. It required more positive and constructive activity from the government. Because, it was necessary not only to introduce such passive transformation measures, but also to implement some active measures. It was necessary to build, establish new and/or transform old institutions and organisations.
And, of course, he says, the crucial point in this respect was privatisation. But it was really impossible to wait for the slow emergence of hundreds and thousands of private enterprises – built from nothing – and for the slow disappearance of state-owned enterprises (SOEs), which 11 years ago in former Czechoslovakia represented almost 100% of the whole economy. He emphatically says: So, we had to privatise. It’s an accepted exercise.
Klaus’s narrative of their privatisation is all but immeasurably instructive. He says: We had to privatise, we decided, and it was necessary to privatise the state-owned firms on a massive scale, on a wholesale basis, not just individual firms.
That is something he always had to repeat and to stress because everyone compares privatisation in post-communist countries with privatisation in France, Sweden and the Netherlands.
I am not an expert on it, he says, but I always say that the brave Margaret Thatcher privatised three or four firms a year, whereas we had to privatise three or four firms per hour! Because otherwise it would have taken a century to do that job.
For that reason, we had to use some non-standard methods of privatisation; we had to do experiments and different exercises.
Lesson to be learnt: In Pakistan, neither the government runs the SOEs successfully, nor does privatise them successfully. So, any non-standard methods and experiments of privatisation would after all be good.
It’s better through political consensus. The way a lot of private entities were nationalised simply by an Act of parliament, all the SOEs be also written off and considered privatised in a wholesale manner by another Act of parliament. Or the executive order will do that
Another lesson: Deregulate and liberalise the sectors the SOEs belong to, and liberalise trade and prices also. These measures would make the existence of SOEs more obsolete.
The writer is a political philosopher and political economist and is a distinguished research fellow at PRIME.
The Article was originally Published on The Express Tribune, on December 18th, 2023.
World Bank approves $350m package
Board members deem 10% tax-to-GDP ratio insufficient to meet growing expenditure
This Article was originally Published in The Express Tribune, on December 21st, 2023.
Now that the Supreme Court of Pakistan has made it clear that no case will be entertained that disturbs the schedule announced by the Election Commission of Pakistan (ECP) for general elections, to be held on February 8, 2024, it is the time that all the political parties unveil their election manifestos. It is high time that agenda for tax reforms should be made the central theme of election manifestos by all contesting parties. Pakistan cannot come out of the prevailing economic crisis, the worst in its 76-year-old history, unless long-delayed and much-needed fundamental structural reforms are made. These alone can ensure self-reliance for the country bringing relief for all citizens and bringing the nation back on the road to prosperity.
Since the adoption Constitution (Eighteenth Amendment) Act, 2010, [commonly called “18th Amendment”], became effective on April 19, 2010 after receiving the assent of President of Pakistan, fiscal management, both at federal and provincial levels, has been posing serious challenges for the country.
In this article an attempt is made for establishing a fair and just tax system. Taxes should be collected justly and spending must be prudent ensuring delivery of social services, equal opportunities and economic justice to all citizens. Reform in one sector ignoring the ills in the other, resorting to improving something at the cost of leaving aside the one interlinked, will not yield desired results. The case of tax reform divorced from elimination of black economy is the point in focus. The main cause of fiscal deficit is allowing an unprecedented size of underground economy to flourish and the perpetual existence of incompetent and inefficient tax machinery as well as borrowing for non-productive projects to receive hefty kick backs.
The inquiry ordered in 2018 on this issue, soon after coming into power on August 19, 2018 by the ex-premier, now serving a jail term, was never completed whereas under the existing bilateral and multilateral tax treaties, this kind of information could have been very easily obtained. In fact information did come, but the Government of Pakistan Tehreek-e-Insaf (PTI) and National Assembly gave unprecedented assets-whitening amnesty, see details in Unconstitutional asset-whitening schemes & amnesties.
The lesson from above is clear that reforms in tax administration without routing the causes of parallel economy and vice versa is not going to improve our fiscal woes. The failure of democracy in Pakistan, among many other factors, is attributable to lack of democratic values within political parties—they do not file their own tax returns. It is highlighted in Civil governments, ‘Ordinance’ factories as under:
“Exemplary punishment should be awarded to all holding public office, members of services, or holding any constitutional position, as custodians of public trust, if they commit corruption or are found guilty of wrong declarations of their assets/liabilities or avoid paying any dues (taxes and/or others).
The main job of the legislators is to pass laws to protect public rights, ensure welfare for all, especially the less-privileged and provide effective justice system safeguarding that rule of law and transparency are key to counter private interests over public interests. On the contrary, since 2008, all successive governments have shown formidable resistance against establishment of an independent anti-crime authority, as National Crime Agency of United Kingdom. We follow its model of democracy but when matter comes to accountability, defy it with impunity. All in power and in opposition know that such a body would expose their corruption and other malpractices—especially the command of the Constitution under Article 17(3) saying: Every political party shall account for the source of its funds in accordance with law.
It is shocking that only two political parties filed income tax returns for tax year 2020 out of 27 registered with FBR and 127 with Election Commission of Pakistan despite section 114(1)(ac) of the Income Tax Ordinance, 2001 that makes it mandatory. How can we expect rule of law in Pakistan, when 125 political parties are committing flagrant violation of Article 5(2) of the Constitution? They keep on bashing FBR but fail to fulfill the commands of the Constitution.
The civil society and media should join hands to force the Parliament to abolish all laws of secrecy and/or immunity and enact a law in terms of Article 19A of the Constitution for compulsory disclosure of assets/liabilities/taxes paid by judges/generals/high-raking civil officers. In 2020, members of Women’s Action Forum (WAF) sought under the Right of Information Act, 2017, information regarding assets, salaries and perks of honourable judges of Supreme Court and High Courts as well as of military leadership. However, none responded, except Justice Qazi Faez Isa, who provided the details of him and his spouse and all family members”.
It is, thus clear that unless the parties reform themselves by introducing fundamental changes in their working, there is dim hope for meaningful (sustainable) democracy in Pakistan. In all established democracies, political parties regularly hold elections, publish their audited accounts, file tax returns, disclose details of expenses and names of donors—all these elements are conspicuous by their absence in our political culture. Media must start a campaign asking political parties to meet these standards.
The agenda/roadmap for reforms to achieve accelerated and sustained growth was launched on April 22, 2021 by Pakistan Institute of Development Economic (PIDE) in ‘PIDE Reform Agenda for Accelerated and Sustained Growth, It must be seriously considered by the policymakers and legislators. In Part 10 of this study, reforms and actions for fiscal consolidation have been discussed succinctly.
As suggested in the study of PIDE, Pakistan has to move towards higher growth for which comprehensive tax reforms are inevitable. We must strive for 7% sustainable growth for at least a decade for achieving desired tax-to-GDP ratio of 20-25%. This is not possible unless we have a paradigm shift in tax policy and revamping of national tax administration for generating sufficient resources for the federal and provincial governments with drastic cuts in wasteful and unproductive expenses and bring innovation and efficiency in public and private sectors. It must be the top priority in national budget 2024-25 after general elections to reduce rate of all taxes and broadening the base.
The enactment of new income tax law, taxing all sources, including agriculture, and harmonised sales tax (HST) on goods and services and establishment of single national tax agency [National Tax Agency (NTA)] are essential. This is possible under Article 144 of the Constitution of Islamic Republic of Pakistan [“the Constitution”]. While the collection will be through NTA, distribution is going to be strictly under Article 160 of the Constitution. The fully automated NTA, operated by professionals under All Pakistan Unified Tax Services, will be supervised by an independent Board of Directors. The status of the NTA should be as provided in Federal Board of Revenue Act, 2007 that after merger will be renamed as Pakistan Revenue Board (PRB).
The crux of two studies [Towards Flat, Low-rate, Broad and Predictable Taxes (PRIME Institute, Islamabad, 2020] and Tax Reforms in Pakistan: Historic & Critical View [Pakistan Institute of Development (PIDE) 2020] is: lower, predictable and broad-based taxes, administered through efficient tax apparatus enabling Pakistan to achieve fairness in taxation system. It will create incentives for better compliance and lead to accelerated economic growth. A paradigm shift is required to restructure the entire tax system to induce more investment, accelerate growth and ensure economic prosperity for the country benefitting all members of society.
These studies analyse the structural and operational weaknesses of the existing tax system at federal level and suggest alternate solutions in the following areas that require fundamental reforms:
Area Solution
Complex Income
Taxation: Low-rate Income
Taxation
Distorted/Multiple
Sales Taxes Single-stage,
single-digit Sales Tax
Customs/SRO Culture Single-rate Customs Duty Multiple Tax Collection Agencies National Tax Agency
Inefficient Appellate System Federal Tax Tribunal
The PRB, unlike FBR, should not have any role in framing tax policy. For this a permanent Tax Policy Board should be established in the light of Article 156(2) of the Constitution with Planning Commission to become a permanent secretariat for federalised economic development. The role of Policy Board in this permanent secretariat should be of a think-tank to recommend policies for equitable and accelerated growth on national level as well as helping all assemblies and Senate for legislation to achieve the desired goals. For example, 2% cess exclusively for debt retirement, imposed on the ultra-rich.
Through democratic process, all the provincial parliaments may pass resolutions under Article 144 of the Constitution, giving powers to the National Assembly and Senate to enact laws for harmonising sales tax on goods and services and income tax from all sources to be collected through PRB. It would facilitate people to deal with a single body, one-window facility at national and provincial levels.
The mode and working of PRB can be discussed and finalised under Council of Common Interest [Article 153] and its control can be placed under National Economic Council [Article 156]. Tax collection and compliance at national level cannot be improved without establishing NRB and introducing an integrated Tax Intelligence System (ITTS) that can correlate imports, exports, sales tax collection on goods and services with income tax returns and monitor all transactions. A fully automated, professional and efficient PRB would alone be in a position to improve capacity by detecting tax avoidance and evasion through ITTS.
India, after long consultations and deliberations enacted the Central Goods and Services Tax Act, 2017 (CGST Act). The CGST Act, through harmonising indirect tax on goods and services, has broadened the tax base. Voluntary compliance, due to a robust IT infrastructure, has increased registration by almost 90% (23 million active CGST Act registrations, as on March 31, 2022). Collection showed substantial growth, from INR 7.7 trillion in FY 2018 to INR 11.7 trillion in FY 2019 to 18.2 trillion in FY 2022. Due to the seamless transfer of input tax credit from one state to another in the chain of value addition, there is an in-built mechanism in the design of CGST Act that incentivizes tax compliance by businesses.
It is thus imperative that the new elected federal government with the consultation and consent of all provincial governments introduce Harmonised Sales Tax (HST) on goods and services in Pakistan that will foster a vibrant market and contribute significantly to the growth of economy. Pakistan needs to move fast towards harmonising taxes and collection through PRB. In India, this is under Goods and Service Tax Council. It will not only reduce the cost of collection of taxes but help in creating a centralised data bank for efficient collection of taxes and counter avoidance and evasion.
Before establishing PRB as an efficient and integrated tax administration, major information technology and human resource improvements in tax collection methods as well as effective audit techniques should be developed along with development-oriented tax policy. Tax reforms are meaningless without an effective tax administration and rational tax policy that can ultimately provide funds for social services to all citizens at grass root level as envisaged under Article 140A of the Constitution.
As a long-term reform measure, we must concentrate on devolution of political, administrative, financial responsibility and authority to the elected representatives of the local governments, after training candidates (preferably fresh graduates) with millions near home getting jobs for secretarial support, achieving the much-desired target for employment.
Tax reforms undertaken to date, have mainly been patchwork, and proven to be an exercise in futility. Tax reform commissions and consultative committees, constituted for reforming the system, have proven to be unsuccessful as they have been suggesting remedies for curing the incurable or otherwise curing symptoms rather than addressing the causes.
The reforms, including World Bank-funded six-year-long Tax Administration Reforms Project (TARP), have failed to encourage people towards voluntary tax compliance. The number of tax filers has fallen since 2003 (excluding those filing income below taxable limit of paying negligible amount to become part of Active Taxpayers List to avoid higher incidence of withholding taxes).
In 2020, the Federal Government obtained loan of US$400 million for Pakistan Raises Revenue (PRR) Project. It may be mentioned that the total cost of Pakistan Raises Revenue (PRR) Project is estimated at US $1.6 billion, of which counterpart contribution is $1.2 billion and IDA financing is US$400 million. Following in the footsteps of the Federal Government, the Punjab Government also decided to borrow US$304 million from the World Bank for tax reforms and it was approved by Planning Commission on September 16, 2020. Like earlier programmes, these are also bound to fail as the consultants of lenders/donors have not idea of our constitutional framework and mundane realities.
The only viable option for meaningful change is to replace the existing tax system with lower, flat and a predictable tax system that is simple, pragmatic, growth-oriented, and broad-based. With such a system in place, those who are not into the tax net or who avoid true disclosures would be induced to pay their taxes voluntarily. This should be coupled with transparent and quality spending of taxpayers’ money for welfare of society as a whole and incentivizing growth and economic well-being of every individual.
The study, Towards Flat, Low-rate, Broad and Predictable Taxes, suggests not only we have s single tax agency, the same should also administer various social and economic benefits and incentive programmes, otherwise tax compliance will remain a distant dream. People must get free education, quality healthcare, decent housing/transport plus social security schemes, such as, disability allowance, old age benefits, income support, child support, pension, just to mention a few, in lieu of paying fair taxes.
The existing four-tier tax appellate system has also failed to deliver. The problems faced by taxpayers in appeals/references speak volumes of the ineffectiveness of various judicial forums that have been assigned the statutory obligations to safeguard them against unjust imposition of taxes. The revenue authorities are also unhappy with the tax appellate system as litigations take years for settlement of tax disputes. Therefore, in order to make the appellate system more responsive, the existing tax tribunals dealing with direct and indirect taxes need to be restructured.
The above study proposes a two-tier tax appellate system where first appeal goes to National Tax Tribunal with the right of another appeal in the form of intra court appeal. Subsequently, if any substantial question of law needs consideration, it can be referred to the Supreme Court by way of leave to appeal. This will help in achieving uniformity of decisions since at present High Courts in different provinces sometimes differ on identical questions of law and it takes years for final authoritative pronouncement by the Supreme Court. The two-tier tax justice system can ensure expeditious settlement of tax disputes, preferably within a year’s time of first order.
Income taxation at the moment is highly complex and fragmented. There is classical taxation under various heads of income, while many transactional taxes, presumptive and minimum, alternate corporate tax have been added to distort the entire concept of personal income taxation.
Towards Flat, Low-rate, Broad and Predictable Taxes also suggests simple and flat rate taxation of 10 percent or 2.5% of net wealth exceeding Rs. 10 million, for all individuals and for AOPs and companies, 20 percent. It proposes single-stage, single-digit sales tax on goods by federal government at the rate of 8 percent across the board with no exemption, albeit exporters shall have zero-rated regime. The only exemption shall be on food, life-saving drugs, books, children’s garments and educational equipment. Provinces can also consider imposing harmonised sales tax (HST) at the same rate on services, details of which requires a separate study. Alternately, we should move towards a unified sales tax on goods and services through national consensus whereby provinces give right under Article 144 to the National Assembly.
Under the current Customs Act, 1969, exemptions/concessions are granted to goods in three categories under Pakistan Tariff: (i) Fifth Schedule of the Customs Act and Statutory Regulatory Orders (SROs), (ii) Chapter 99 of Pakistan Customs Tariff and (iii) export promotion schemes announced time to time. There are over 5,000 effectively traded tariff lines and 2448 tariff lines (33% are under 20% slab). Heavy taxation at import stage (50% of FBR revenue is collected at import stage) encourages smuggling, undervaluation, misreporting, misdeclarations and tax evasion.
The SRO-based customs policy has rendered the actual tariff different from the standard tariff. As a result of this, customs tariff has multiple rates and several exemptions, and various “conditions and requirements” are to be fulfilled to avail those exemptions. This creates opportunities for the discretionary use of powers by officials, raising the cost of doing business and incentivising malpractices and misdeclarations for evading duties. Recognizing these problems, this paper proposes that there should be a single slab of for all imports to end these undesirable practices.
The traditional approach adopted for decades in Pakistan for balancing the books, levying more taxes, containing fiscal deficit and other number games will have to be reconsidered in totality under the prevalent exceptional circumstances. The only viable option for meaningful change is to replace the existing tax system with simple, low-rated tax on a broad-base, pragmatic and growth-inducive. With such a system in place, those who are not into the tax net or who avoid true disclosures would be encouraged to pay their taxes voluntarily, honestly and diligently.
It will create incentives for better compliance and lead to accelerated economic growth. A paradigm shift is required to restructure the entire tax system to induce more investment, accelerate growth and ensure economic prosperity for the country benefitting all members of society. This should be coupled with transparent and quality spending of taxpayers’ money for welfare of society as a whole and incentivizing growth and economic well-being of every individual.
The nation should demand that all political parties evolve consensus on areas of reforms highlighted by PIDE and many other institutions and individuals. There should be pre-election agreement on one point: We all want to make Pakistan a true egalitarian state as envisaged under the Constitution. For achieving this goal, political parties must debate for comprehensive reforms in all areas pointed out by PIDE with the aim to move towards the cherished goal of self-reliance and becoming a welfare state. It is not possible to make Pakistan a welfare state unless we undertake structural reforms in the prevailing politico-economic system that favours the minority elites against the majority that is less-privileged.
Everyone agrees that the only way out of the abyss that Pakistan's economy finds itself every few years is to increase our dollar income substantially. These non-debt creating inflows can only materialise through an increase in exports, investment or remittance. In this article, I will focus on the export part of this equation.
From my perspective, an increased reliance on remittance serves as a disincentive to produce and facilitates only consumption with inflationary impact. Similarly, foreign investment flows are accompanied with liabilities, particularly when they are directed towards infrastructure, such as power and highways. The China-Pakistan Economic Corridor (CPEC) is a case in point.
Over the decades, Pakistan has used various policies, incentives and schemes to enhance exports. The fact that the exports-to-GDP ratio has fallen over time dramatically is a sufficient indicator of the failure of our export paradigm. We touched a maximum of 17% exports to GDP ratio in early 1990s- an era of trade liberalisation and economic reforms, as well as positive trade balance. This ratio today is hardly 10% with a widening trade account gap, where other regional economies have managed to increase this ratio.
We extended all kinds of incentives to the private sector and developed export processing zones in the 1980s. Despite this, to date, their contribution in total exports is less than 3%, compared with Bangladesh where it is above 15%. To determine the causes, the government recently commissioned a study to our institute, and a report has been submitted to the government which offers recommendations on improvements.
The government offered export finance schemes like TERF and LTTF with credit supply at a discount. Additionally, they offered duty drawback incentives to our exporters. These schemes helped to some extent and have proven advantageous for incumbents. Moreover, our product complexity has not improved implying low value that our products get in the international markets. The example set by the veteran Industrialist Imtiaz Rastgar whose products are exported to 130 countries is inspiring but exceptional.
Pakistan has persistently used import substitution policies, even with evidence of their failure. One compelling example is our auto industry, which has not developed any export markets for various reasons and prices remained very high. However, our motorbike industry has become far more competitive and as a result, has offered products at reasonable prices.
In 2013, Pakistan received GSP Plus status from the EU, a trade deal with duty free or minimum tariff barrier access for textile and other products. In her paper, Economist Sarah Javaid concluded that Pakistan took maximum advantage of the scheme, with 97% of the utilisation. However, it did not help in product diversification or supply chain development. Some can argue that it might have created an opposite effect by limiting product diversification.
A new study authored by Aadil Nakhoda and published at the PRIME, an independent economic policy think tank, estimated that the possible trade loss in case of revocation of GSP Plus is over $3 billion per year, though there are some estimates which put this possible loss closer to $6 billion. Roughly around 30% of our exports fall under GSP Plus. In comparison, the Philippines, which is another GSP Plus country with overall exports of above $115 billion, has only $2.5 billion exports under GSP Plus, which means that hardly 2% of its exports are dependent on GSP Plus.
When it comes to exports, there is one major policy omission that Pakistan has made, free trade and regional trade blocks. Pakistan has seven PTA/FTAs, though they lack depth, an FTA implies zero duties on 90% of tariff lines, as argued by the former WTO Ambassador Manzoor Ahmad. Therefore, they have not created results which other countries such as Turkey and Vietnam have experienced. Both the countries with more or less similar export level as that of Pakistan hardly thirty years ago shunned protectionism. Since then, they have become export power houses, with Vietnam crossing $350 billion and Turkey above $250 billion.
While there are other factors which have impeded our export potential, I will not discuss them here.
Pakistan requires a new export paradigm. However, for that we have to change the questions we are asking. Instead of asking how we can increase our exports, we should ask ourselves how we can increase our productive capabilities, product quality and competitiveness at the firm level. An isolated focus on exports, through all well-intentioned incentives, is the most important cause of our failure. Once we realise that exports are a part of a greater economic landscape, and can only be enhanced by starting transformation, as we argued in the EAG vision document, we can begin to find answers.
In our contemporary landscape, a ground-breaking financial innovation has emerged - the realm of cryptocurrency. This digital alternative to conventional currency possesses the potential to reshape the global economic panorama. While sceptics often label it speculative or akin to gambling due to its notorious volatility, this judgment is predominantly a consequence of its current lack of regulation and low acceptance compared to fiat currencies. However, with proper regulation and universal acceptance, it could achieve stability at par with traditional currencies.
The cryptocurrency phenomenon is intricately linked to the rise of decentralized finance and is far more than just a financial fad. Its transformative potential lies in its ability to disrupt and reshape the economic system on a global scale. From limiting money supply to crowdsourcing computing power, improving e-governance, and enabling digital contracts, cryptocurrencies offer unique solutions to age-old challenges.
Bitcoin, the pioneering cryptocurrency introduced in 2009 by the pseudonymous Satoshi Nakamoto, has been followed by numerous cryptocurrencies, each offering unique features and serving various purposes. While central banks worldwide are presently attempting to introduce their own Central Bank Digital Currencies (CBDCs), it must be noted that these CBDCs lack the fundamental features inherent to cryptocurrencies such as decentralization and democratization. In essence, they constitute only a slightly enhanced manifestation of conventional digital banking.
Decentralized finance marks a paradigm shift and revolutionizes finance by eliminating traditional intermediaries, enabling direct transactions, lending, borrowing, and trading among individuals through smart contracts and decentralized applications, without centralized institutions like banks. It offers the potential to address chronic economic challenges, especially in developing nations like Pakistan. Many economic upheavals witnessed worldwide over the past century has been precipitated by unwarranted governmental actions stemming from centralized control. Instances of misguided priorities, political agendas, short-sightedness, and miscalculations have served as triggers for economic debacles and rampant inflation.
The unrestrained printing of money represents a significant challenge for numerous economies today. This approach fosters uncertainty and a lack of fiscal restraint. In contrast, decentralized currencies eliminate this risk by being programmed with a fixed supply, predetermined quantity, and annual supply increase that cannot be altered. Adherence to a transparent issuance protocol makes decentralized currencies a bulwark against excessive government printing, potentially curbing inflation and promoting financial stability. This implementation alone can significantly reduce the threat of rampant inflation and provide clear guidance to economic managers and businesses.
At the core of the cryptocurrency realm lies blockchain technology, dependent on a decentralized network of computers for transaction validation, a process known as mining. Miners use computational power to solve complex puzzles, ensuring blockchain integrity through Proof of Work (PoW). Cryptocurrency efficiency thrives on crowdsourced computing power. Unlike centralized systems, cryptocurrencies use a distributed network of miners, enabling anyone with access to computing power to participate in securing and validating transactions. This inclusivity defines cryptocurrency networks, democratizing the system and rewarding contributors from all backgrounds.
Furthermore, incentivizing computing power opens intriguing possibilities for economic growth, especially in remote areas. People can profit from harnessing cheap and small power sources in such regions, potentially transforming connectivity without costly infrastructure investments. Small-scale, affordable, and abundant power generation can seamlessly integrate into the national system, reducing the need for substantial transmission line investments.
An equally, or perhaps even more important benefit of this technology, is the implementation of smart contracts, especially in Pakistan, where commercial dispute resolution processes are slow and inefficient, hindering market-oriented enterprises and discouraging domestic and foreign investment. The judicial system is overwhelmed with over two million cases, with a third related to commercial disputes, highlighting the government's inability to enforce contractual obligations effectively.
On the other hand, cryptocurrencies can streamline the use of smart contracts. These contracts are automated and self-executing, with terms written in code, eliminating the need for intermediaries, reducing costs, and ensuring contract enforcement. This innovative approach has profound implications in Pakistan, where legal disputes often last five to ten years. This transformative shift offers individuals and businesses a more efficient and reliable framework for conducting commercial affairs.
Few studies have identified the presence of a Pareto distribution within cryptocurrencies realm, akin to traditional fiat currencies, where a minority holds a substantial share of the wealth. Critics argue that this concentration of wealth contradicts the principles of egalitarianism and decentralization. It is imperative to clarify, however, that decentralization does not inherently advocate for absolute wealth equality among all participants; rather, it promotes the distribution of power and control. Those who exhibit greater resource productivity will inevitably see their wealth grow, a universal truth regardless of the specific currency system at play.
The concept of decentralization should not be misconstrued or dismissed as undermining the myriad benefits it offers. Despite the challenges associated with embracing decentralized currencies, their adoption is inevitable. As the evolution of Web 3.0 continues, characterized by greater decentralization and personalization, the use of microtransactions is set to increase significantly. Leading social media platforms such as Facebook are actively pursuing the development of their unique digital currencies, aligning with the ongoing technological shift towards a more decentralized web. As a result, the adoption of cryptocurrencies is anticipated to experience substantial growth.
In the face of these dynamic developments, the establishment of a regulatory framework poses a formidable challenge. Nevertheless, it remains of utmost importance for governments to take proactive steps in crafting a policy framework that not only serves as a regulatory mechanism but also positions them as frontrunners in embracing this emerging phenomenon. Such a strategic approach will not only expedite the development of essential ecosystem but also foster the growth of IT human resources necessary for assuming leadership roles on the global stage. This will enable them to become centers of competence and service excellence within this evolving paradigm.