FINANCE Minister Asad Umar must be a happy man right now, receiving a pat on the back from all his friends, mostly members of elite clubs, for being a friendlier finance minister. How much longer will it take him to realise that there exists a Pakistan beyond the executive corridors?
Does the minister appreciate the country’s ranking in global monitors which highlights the low perception of Pakistan’s economic performance? Does he mind what the sentiments of the households are? My guess is as good as yours.
People in the street in Pakistan are already feeling the pinch of inflation with little hope for an increase in family income in the current environment of job and salary cuts. The next cycle of inflation — induced by the deficit financing required to support the incentive package in the absence of proper resource provision — will generate more economic stress for families.
The goodies being thrown at the propertied segments will be particularly hard to sell to those displaced people rendered jobless or homeless by the anti-encroachment drive. The middle-class that struggles to make a decent living may also not buy the logic of doling out concessions to the rich and trusting them to act socially responsible and invest in the industrial base to create new jobs.
The salaried class appreciates the exemptions, but will it be willing to pay for the concessions for the rich from its pockets?
The track record of the business community in the country has not been good in this regard. It is a known fact that historically big businesspersons of Pakistan have opted for short-term avenues of quick profit over long-term investment in the industrial base. If the country is de-industrialising, can’t compete in trade and lacks exportable surpluses, the business class shares the blame with the policymakers.
The International Monetary Fund (IMF) and other donors are not expected to approve of the selected generosity of a government facing an acute financial crisis.
Teresa Daban Sanchez, the IMF representative in Islamabad aired her reservations in her comments reported in this paper. In her remarks she reminded that the government will need to mobilise resources through new taxes to cover the cost of the announced measures.
Minister Umar, in his post supplementary budget press conference, expressed confidence that the fiscal deficit would remain within limits.
He based his optimism, despite a stated Rs170 billion revenue shortfall in the first half of the current fiscal year, on the expected recoveries from held-up funds in the Gas Infrastructure Development Cess and other administrative measures, without new taxes. He said he was engaging with multilateral donors but denounced strongly the point raised in this regard.
Some economists who have held senior public positions in the past found the PTI ruling team’s confidence misplaced. They warned that the accumulating steam of discontent because of economic mismanagement can erupt with devastating consequences for the country.
“In a society riddled with countless divides the situation can turn ugly on the flimsiest of pretexts. You do not enjoy the freedom to act on your whims when holding public office. Not sure what are they thinking and why?” a former governor State Bank commented anonymously.
The salaried class appreciates the exemption of withholding tax on cash withdrawal for filers and is happy over the push towards low cost housing loans, but will it be willing to pay for the concessions for the rich from its pockets? No one thinks it will.
The supplementary budget presented by Mr Umar last week was loaded with protection, tax breaks and incentives for brokers, bankers and barons.
To prop-up the capital market the government proposed to abolish 0.02 per cent advance tax on sales and purchase of shares and allowed investors to adjust losses against profits for up to three years for the calculation of the capital gain tax.
To put a smile on the face of barons the government offered to remove taxes on undistributed profit, granted a five-year tax exemption to industries for establishing plants to manufacture equipment for renewable energy units and promised to remove 4pc super tax from the non-banking sector from the next fiscal year.
It allowed non-filers to purchase new cars up to 1300cc, declared the issuance of ‘promissory notes’ against refund claims that can either be encashed at a bank or deposited as collateral to earn 10pc interest after a three year period from the Federal Board of Revenue and tax relief on inter-corporate dividend besides chopping custom duties on industrial inputs.
For banks, tax on income from loans to SMEs, housing and agriculture was reduced by 19pc from 39pc to 20pc.
The confidence boosting measures for the private sector are good only if the economy can afford it. The government has projected a net revenue loss of Rs6.8bn that they think will be compensated by the expected gains in the economic activity.
Some members of the Economic Advisory Council (EAC) were not convinced. A member thought that the current package will be followed by another set of measures to raise resources internally.
“Hopefully the government will not be naïve enough to stop here. This must be the first batch of a two-step strategy of growth revival. Step two is going to be a fiscal plan.
“With half a year in office, the government did need to get people to start talking positively. It will help, but not sufficiently enough to revive business confidence. To gain credibility it is very important to enter the IMF programme. The government hierarchy is probably listening to too many people,” he said over phone.
Salim Raza, former governor State Bank and a member of the EAC defended the package. To a Dawn query he mailed the following comments.
“The measures announced are not expected to affect the overall targets for revenue and deficit, but may strain development spending. They provide signals for SME, agriculture and housing credit. A strategy for a more substantive, overall tax policy realignment may still be work in progress.
“It is less a fiscal exercise and more measures for industrial revival through supporting exports and domestic businesses by promoting ease of doing business,” he concluded.
Published in Dawn, The Business and Finance Weekly, January 28th, 2019