BY many accounts we are now hitting the moment of peak adjustment. Everybody knew when this government came into office last year that it would soon have to raise taxes and interest rates, depreciate the currency and cut spending. This is the basic package of policies that economists call adjustment, and it is designed to bring two of the most critical deficits — the fiscal and the external — into control.
In the course of doing so, however, the government has to preside over a sharp slowdown in growth and increase in inflation and unemployment. Democratic governments find it very hard to face this combination since elected representatives have no choice but to heed the voices of those in their constituency, and few things hurt like inflation and unemployment. Especially in a society where the majority has to spend more than half of its income just to pay for food needs.
We all knew this adjustment would have to be undertaken even if there was debate over the required size. By the time the full scale of the adjustment came before us, when the documents linked to the IMF’s programme were released in July, we were already a good portion of the way down the road. Interest rates had already been raised by more than 100 per cent since the cycle of monetary tightening began in early 2018, and the exchange rate had already been depreciated by almost 30pc. What was now set to begin was the most aggressive revenue collection drive that we have seen in almost two decades.
The first quarter of the fiscal year has ended, and the data tells us that we are now in the darkest moment of this dark night. Revenues have risen by 15pc, which sounds impressive until you recall that inflation is already at 11pc, so much of this increase is attributable simply to that. Below the surface, industry is approaching a near collapse, caught between high debt service costs, rising cost of inputs due to exchange rate depreciation and a collapsing market as incomes fall and people curb spending to face the challenges that rising inflation presents.
The PM is feeling the heat. He is urging his team members to focus their energy and attention on providing some ‘relief’.
Meanwhile, the revenue effort has disrupted vendor and distributor networks, in some cases almost to the point of closure. FBR chairman Shabbar Zaidi says that a widening of the tax base is necessary and the services sector must bear the brunt of this effort since it comprises more than half of the GDP of the country, yet contributes less than a quarter of the revenues collected by the state. There is no option but to bring these people into the tax net, he argues, and since the services sector consists mainly of small- to medium-size enterprises, one has to get innovative to reach them.
So now the FBR has required all manufacturers dealing with vendors and distributors to collect their CNIC, which will help the FBR document the size of the transactions these people are dealing with and identify them. Additionally, they have compiled lists from utility companies of those entities that have been granted a commercial or industrial connection, whether for gas or electricity, yet they file no returns. Notices are being sent in very large numbers to all these entities. For small shopkeepers, they have come up with a fixed tax regime, where the shop owner can simply pay a fixed amount to be calculated using the size of the shop area, and consider it a full and final settlement for that tax year.
So far so good, but there is a problem here. The services sector is not responding well, and thus far the number of parties that have willingly submitted their CNICs to document their transaction, or those who have decided to become filers, is a very small fraction. Data has not been released, but going by conversations with factory owners who are trying to get their vendors and distributors to become compliant, it appears that there is still massive reluctance.
All this is fuelling anxiety. Industry faced with rising costs and falling sales has started cutting down on production, very sharply, and the number of daily wage earners they used to hire has dropped precipitously. Industry leaders are now taking delegations to the army chief himself, in an open acknowledgement of who calls the shots in this dispensation. Parliamentarians, even from the ruling party, are complaining loudly on the floor of the house about inflation.
The prime minister himself is feeling this heat. He is urging his own team members to focus their energy and attention on providing some ‘relief’, whether in ramped-up activity under the Ehsaas programme, or the Naya Pakistan housing project (for which they are not able to locate financing at the moment due to sharp expenditure cuts mandated by the ongoing adjustment), or through rollbacks in gas price adjustments for tandoors to help keep food inflation in check.
In a recent conversation I had with the IMF’s visiting delegation, Jihad Azour, the division head told me that the prime minister “strongly owns the programme and is very, very interested in poverty alleviation”. The added emphasis shows that in his meeting with the prime minister, the focus was more on how to mitigate the impact of the ongoing adjustment on the people.
So this is peak adjustment, and the State Bank is careful to warn in every forum that things are likely to continue like this for at least another six months. The rising anxiety will test the government’s commitment to the adjustment even more. The prime minister is likely to cut a more harried figure, searching hard but in vain for avenues through which to ease the pain. No speeches, no made-for-TV gimmickry will help. The game is now about tangible outcomes for the masses, controlling economic forces that are impervious to emotional entreaties. Khan’s style of leadership will have to change.
The writer is a member of staff.
Published in Dawn, October 3rd, 2019