ISLAMABAD: State Minister for Finance and Revenue Hina Rabbani Khar has termed macroeconomic stability a priority area for achieving sustainable growth. While agreeing that the economic indictors did not presently look good, she remains hopeful that the IMF-backed home-grown economic stabilisation programme will turn things around over the next 24 months.

Talking to Dawn, Ms Hina suggested maximum domestic revenue realization to avoid seeking funds from foreign donors. Otherwise, she said, after every five years we would seek funds from somewhere for financing our budget deficit. The following excerpts from the interview:

Q: The thrust of the IMF package is on stabilisation. How is it going to impact the growth prospects in the current scenario?

A: It has been abundantly clear in the last few months that macroeconomic stability is the prerequisite not only for growth, but for sustainability as well. For instance, businesses that are already operating here and intend to expand, need a stable economic environment to plan their future.

Over the last year, the macroeconomic balance was disturbed that created a tough environment for business. The situation can be attributed to exchange rate fluctuations and the twin deficits. Our first priority, therefore, is to stabilise the macroeconomic indicators to be able to achieve a business-friendly environment.

Q: The cabinet has shot down a suggestion to tax agriculture income. Will the population already in the tax net be targeted for further revenue generation or the government intends to rationalise the taxation policy to make it progressive?

A: I think on the taxation side there is a lot of miscommunication and misrepresentation. Agriculture tax or any other taxes never come to cabinet for consideration. Recently, we held a three-day seminar in Lahore on taxation. This is one of seminars where we brought all the stakeholders together along with some international and local experts. Everybody sat down and discussed threadbare the options available to Pakistan. Not to do anything is not an option on the taxation side. If you increase the taxation net you have to simultaneously remove distortions which exist in our taxation mechanism – may be the tax-collection is not efficient. Some changes have been made in the previous years and we need to do more to make it easier for people and to remove distortions.

To increase the taxes we have quite a few options. One is to increase the tax rate. But I don’t think, we will take this route. The next option is to widen the tax net one way or the other. A lot of sectors that are not in the tax net right now, like services, agriculture etc., need to be netted, but we will have to time it properly to draw the desired results.

In terms of agriculture, I don’t think we should create a controversy right now. Currently even the collection mechanism is not in place. When the sector becomes lucrative enough, we will tax it.

We have to actually amend the constitution that states that income other than agriculture will be taxed. For doing so, we will have to create a consensus for making the necessary constitutional changes. I am against making it a controversial issue by over-discussing the levy at this point. It will be a good idea to bring the issue to parliament. I think our effort is to increase the growth in this key sector that has been under-performing as depicted by the fact that its share in GDP has been shrinking relatively every year. The agriculture income has also been decreasing because of the exorbitant cost of doing business, which is the case in industry as well. However, in industry the profit margin is much higher than in agriculture. Because of the high cost of doing business, farmers were unable to put in fertiliser or pesticides which has led to lower productions.

On the taxation side, we have little time till June 2009, as right now we are in the middle of a crisis. In the medium term, decisions will be taken through the finance bill, while in the next five years, we have to decide where we want to go and how do we want to take care of all the distortions. As a country, we need to move towards maximum taxation. Otherwise, after every five years we will have to return to the donors.

Q: On the expenditure side, the perception is that the cost of government is too high also because of its large size. Do you intend to make the government lean and clean?

A: I think that is something that we would like to really discuss in parliament or in the cabinet. There is already movement towards reducing the expenditure. But as far reducing the size of the government is concerned, that we have not seen so far and that again would be a pertinent discussion in parliament.

Q: There is perception that wastages can be checked by monetizing the perk packages of the bureaucracy. Is the issue under consideration at some level? If so, can you specify a time period over which it would be implemented?

A: I think it is a good idea. This is part of some reform or recommendations that have been made. But I don’t know where it is?

Q: What plan your government has to boost investment in an environment when the private sector is shy and there is pressure from the IMF to chop public expenditure?

A: First of all I think macroeconomic stabilisation is extremely important. Three things — inflation, interest rates, and exchange rate fluctuations – are hurting businesses besides the high cost of doing business. But the cost of doing business is not directly related to macroeconomic stabilisation. What is hurting business more is the unstable environment. We need to concentrate on competitive sectors. Agriculture should have a bigger share in the GDP, but unfortunately it is falling. There are other sectors where there is immense potential for growth, but they are largely neglected. Within textile, there are many sub-sectors that have a scope for growth. We need to develop those areas for investment.

I think the government wants to cut expenditure, but not to the extent where it totally curtails growth. We are trying to create that balance. Our first priority is to control inflation through monetary policy, and to tax income generated through any form of business in Pakistan.

Q: Now that the inflation has finally started to come down, don’t you think it is about time to ease the monetary policy to boost demand?

A: The point is that major world economies are moving towards interest-free regime which is nearly zero in the US and most of the European countries. But the nature of problem is hugely different. The problem there is extreme recession setting for which they have low inflation rate. At our end, the inflation rate is more than our current interest rate.