Who will micromanage the economy?

Published April 29, 2019
Led by Advisor on Finance Dr Abdul Hafeez Sheikh, the government’s economic team has been officially ‘empowered’ to work towards lessening the hardships of people. ─ File photo
Led by Advisor on Finance Dr Abdul Hafeez Sheikh, the government’s economic team has been officially ‘empowered’ to work towards lessening the hardships of people. ─ File photo

Led by Advisor on Finance Dr Abdul Hafeez Sheikh, the government’s economic team has been officially ‘empowered’ to work towards lessening the hardships of people, keeping in view the prime minister’s vision. It goes without saying that the team is expected to finalise the best possible deal with the IMF.

In his latest book on ‘People, Power and Profits’, Noble laureate Joseph Stiglitz writes “often economists think in terms of trade off: if you want increase of one thing, you have to give up other things”.

When technocrats take the driving seat to address a crisis the worst sufferers are the common citizens. And the major issues requiring corresponding changes in the political economy, outside their domain, remain unaddressed.

Historical record shows that it is the joint efforts of all stakeholders which can resolve the most sensitive issues as demonstrated by the 18th Constitution Amendment, 7th NFC Award and irrigation water distribution accord among the provinces. These are outstanding achievements of a democratic process.

Being a former senior World Bank official, Dr Sheikh is generally seen as more qualified than his predecessor to negotiate with the IMF. But it is more likely that the Fund’s own perception on how to improve the ground realities will prevail, keeping in view the incumbent government’s economic performance of over the past eight months.

When technocrats take the driving seat to address a crisis the worst sufferers is the common citizen

It is the IMF agenda which is likely to set the timing, sequence and speed of reforms. This is evident from the very brief tenure proposed for the Asset Declaration and Tax Amnesty Scheme which is being fine tuned by the Federal Board of Revenue.

The scheme will come to an end by June 30, before the IMF programme is expected to take effect from July 1. The business community wants a much longer period of time to suit its convenience in availing the amnesty.

The Fund is opposed to amnesty schemes and IMF’s resident representative in Islamabad, Teresa Daban Sanchez, reiterated the Fund’s position earlier this month: such schemes fail to achieve their intended objectives.

Former Finance Minister Asad Umar, who initiated the move, has also rejected a perception that the amnesty scheme is meant for revenue generation. “We want to bring maximum untaxed wealth into the tax net,” he said.

However, former Finance Minister Shuakat Tarin says, to document the economy and for the asset declaration and amnesty scheme to succeed, three holes — located in real estate, agriculture and high tax exemption ceiling — have to be plugged.

The MTMF document stipulates ‘drastic reduction in tax expenditure by removing exemptions and excessive tax credits from income tax, sales tax, federal excise duty law.’

His proposals include: a) tax the real estate transactions on real value but reduce the registration fee and capital value tax to 1.2 per cent from the current 12-13pc b) transfer collection of agriculture tax to FBR c) reduce tax exemption limit drastically from Rs12m to Rs0.1million subject to a tax of Rs1,000 per month. Income of Rs40,000 should be liable to a tax of Rs100 per month.

The undertaking given by the government to the IMF in the Medium-Term Macroeconomic Framework (MTMF) envisages increase in federal and provincial tax revenue by Rs1.25 trillion in three years. The federation’s share has been set at Rs1.08tr.

The corporate tax is to be frozen at 30 or 29pc instead of the rate being reduced by 1pc per annum to 25pc as per government’s earlier firm commitment.

The MTMF document stipulates “drastic reduction in tax expenditure by removing exemptions and excessive tax credits from income tax, sales tax, federal excise duty law and moving to a single VAT regime by doing away special procedures and reduced rate taxation.”

This year’s target was set at Rs4.4tr but the collection has fallen short by Rs303bn in the first three quarters. One estimate is that the shortfall may increase to Rs450bn by the end of this fiscal year.

Such huge transfer of resources from the private sector to the government may be seen as an imperative to slash consolidated fiscal deficit but would be a setback to the prime minister’s efforts to promote wealth creation.

It is possible that tax incentives to spur capital formation, effective from July 1, may be postponed for better times. In cyclic crises, speculative trading accelerates.

Under IMF-led stabilisation programmes, the Fund micromanages the borrowers’ economy. Latest media reports suggest that during the fiscal years 2019-20 and 2020-21, the Fund will ensure effective implementation of its conditions while it may lower its oversight in the third year, probably on the basis of the economy’s 2-year performance.

On the other hand, the business community is looking for tax incentives to spur industrial investment. The country’s apex trade body - the Federation of Pakistan Chamber of Commerce and Industry (FPCCI) — has demanded a comprehensive industrial policy including tax exemptions for 10 years for those who set up their industries within a period of three years.

The FPCCI was part of group of trade bodies which briefed National Assembly’s Standing Committee on Finance, Revenues and Economic Affairs on April 16 on their views as to how to reduce cost of doing business, enhance tax revenue, and boost economic growth.

There is some merit in the proposals made by business representatives: that the number of taxes should be slashed to five by clubbing labour-related taxes and federal and provincial sales taxes besides others listed by them.

The greatest challenge in formulation of next year’s budget is to how to incentivise industrial investment and promote employment while boosting tax revenue.

Published in Dawn, The Business and Finance Weekly, April 29th, 2019

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