January 30, 2006	Monday	Zilhaj 29, 1426

At the recently held donors’ conference in Islamabad, Pakistan presented a plan for relief and the rehabilitation of the earth-quake victims in Azad Kashmir and the NWFP spread over a period of five years. The donors pledged $5.8 billion, 1/3rd grant and 2/3rd in the shape of loans. The government’s spokesmen said that the bulk of the soft loans will eventually be converted into grants even though such an optimism does not seem to be well- founded.

The loans committed by the international finance institutions like the World Bank and the Asian Development Bank do not have any record of remission of their loans— at least in our case.

In the post-9/11 scenario, a number of bilateral loans were written off or rescheduled but these multilateral lenders did not even reschedule their debts not to speak of remission of such loans.

The current external debt stock is $36.2 billion. Additional $4 billion will be added through disbursement of the soft loans already committed for rehabilitation programme, $10 billion will be borrowed for the construction of a big dam. All this will raise the external debt stock to about/over $60 billion within the next few years.

Will this be a sustainable proposition in the scenario where the current account deficit is mounting, depleting the reserves as the imports out-space exports? Hitherto, the economic managers had maintained that the import bill is increasing because of the import of capital goods which will result in increase in production and export capacity leading to the self-sustenance in the current account. The myth behind the above line of argument seems to have collapsed. A research report issued in December,2005 by a foreign bank tells us that 25 per cent of the machinery import comprise mobile phones and the cars.

The successive governments have been taking credit for development in the telephone and the automobile sectors. The question is: Are the cars and mobile telephones a bare necessity for the nation’s survival and should we continue to create external burden in the shape of recurring foreign exchange liability on account of remittances of profits of the phone companies and the cost of petrol/automobile equipments to sustain [ expand ] these sectors?

Besides, the future savings of common man are now being pledged as the bulk of automobile purchases are being financed by lease finances instead of the existing savings of the purchasers and our national savings are the lowest in the region and are on the decline.

The nation’s survival does not lie in creating debts, domestic as well as external, but in tightening the belts and making sincere efforts to mobilize the domestic resources by putting burden on those who can and should afford. All the governments including the present one do not focus mobilizing the domestic resources by adequately taxing the affluent people. It was due to this reason that the development budget has almost always been financed by external borrowings. The domestic resources hardly sufficed to meet even the current expenditure.

Whenever, there was a pressure from the IFIs including the International Monetary Fund (IMF) to increase the domestic resources, the governments were content with imposing indirect taxes. The rulers, since 1999, have been more cruel as in their tenure, the ratio of direct taxes has continuously been falling while that of indirect taxes hurting the poor sections of the society mounting as would be evident from appended Table:

It will be seen from the table that in FY-99, the direct taxes constituted 36.36 per cent of the total collection which ratio has fallen to 30.98 per cent in FY-05. The direct taxes collection figure of Rs183.1 billion (FY-05) includes Rs109.6 billion on account of withholding taxes which are by and large “indirect taxes”.

If we take out that amount from direct taxes and add the same to indirect taxes, the ratio of direct taxes will come down to merely 12.43 per cent of the total collection (FY-05) and that of indirect taxes to 87.57 per cent. The quantum of the most oppressive tax -sales tax- has grown at a very fast rate after 1999 take-over.

One estimate, perhaps closer to reality, is that the cost of rehabilitation will be over $12 billion. Even this estimated expenditure will obviously be spread over five years and thus yearly expenditure will not exceed Rs150 billion at the current exchange rate of $1/Rs60.

In case, the government endeavours to mobilize the additional domestic resources of the order of 2.5 per cent raising the same from the existing nine per cent to 11.5 per cent of the GDP, it will yield additional over Rs150 billion.

This should not be a difficult job as the tax-GDP ratio in our country is the lowest in the region.

If that happens, the need of moving into the world with the bigger begging bowl will be completely obviated . But this would need touching the affluent by taxing:

(a) capital gains on stock where the big players are earning tax-free billions of rupees daily;

(b) sale of shares: In FY-05 budget, 0.1 per cent tax was levied on the sale of shares but was reduced to 0.01 per cent on the hue and cry of the leading brokers.

Contrary to that 0.1 per cent tax imposed on cash withdrawals from the bank accounts in FY-06 budget remains intact because the account-holders lobby is not so powerful to move the decision makers;

(c) capital gains on the real estate;

(d) re-imposing wealth tax on the houses after carrying out proper survey; one house measuring-say- upto 200 yards under the self-occupation of the owner may be exempt. The people are living in palatial houses built with money acquired without payment of appropriate taxes and they should contribute to the national exchequer.

Incidentally, the rulers taking over in October,1999 had withdrawn the wealth tax.

Belt tightening: (a) some defence expenditure can be curtailed. While the question whether F-16s and the AWACS should be acquired or not can be a debatable issue and the deals may have to be made on the basis of the country’s security concerns, the construction of the “lavish” Army General Headquarter at Islamabad should be avoided at all costs. The resources so saved can conveniently be directed to the rehabilitation work in the earth-quake affected areas and for building of the dams to be taken in hand in a next few weeks.

(b) When General had taken over in October,1999 the air craft purchased by former Prime Minister Mian Muhammad Nawaz Sharif was surrendered to the Pakistan International Airlines for utilization by the airlines in its commercial flights with the enthusiasm that the head of the State would henceforward travel in the public flights. But alas! All this proved mere rhetoric.

Currently, two new aircrafts are being purchased for the prime minister. The media also indicates of a plan for the acquisition of the aircrafts for the Governor and the chief minister of Sindh.