In his first public appearance on October 27 after returning from the talks with the International Monetary Fund (IMF) in Washington, Prime Minister’s Adviser on Finance Shaukat Tarin hinted at ‘rationalisation of taxes’ to bridge over Rs450 billion gap in revenues because of lower than budgeted petroleum levy.
Increase in revenues and electricity tariffs, reduction in circular debt, rationalisation of gas rates and complete autonomy to the State Bank of Pakistan remained some of the key outstanding items on the plate before the revival of IMF’s $6bn programme suspended since April 2020.
“Obviously they ask how we are going to bridge the gap when we do not collect petroleum levy after targeting it at Rs600bn in the budget,” Mr Tarin had explained but happily reported that since the Federal Board of Revenue (FBR) had Rs175bn higher than the targeted revenue collection in the first quarter of the year, the difference would be partially covered. However, the government would then be facing a deficit in non-tax revenues and even though FBR revenues were higher they got distributed among the provinces and had minimal impact on the federal fiscal position.
According to energy minister Hammad Azhar, the government had waived Rs450bn in the form of general sales tax (GST) and petroleum levy (PL) on oil products but was coming under increasing pressure why the taxes had been given up on petroleum items. He said the loss of GST and PL on petroleum items obviously had a revenue impact and the government had to make some alternate route to finance expenditures.
Moving swiftly since then, the finance adviser had been able to increase petroleum levy by Rs4 per litre on both petrol and high-speed diesel on the first available opportunity, slightly delayed by a protest march by Tehreek-e-Labbaik Pakistan. In what appeared to be innovative tax rationalisation, general sales tax has been equally reduced.
Petroleum Levy is purely a federal levy that has now been increased and will keep on increasing gradually to support the federal account while GST goes to the common pool of which almost 58 per cent share goes to the provinces. This would, however, put a question mark on cash surplus targets given to the provinces to contain the overall fiscal deficit.
Increase in revenues and power rates, reduction in circular debt, rationalisation of gas price and complete independence to the SBP remained some of the key outstanding items before the revival of IMF’s $6bn programme
Even more quickly, the government has completed the process for increasing base electricity tariff by an average Rs1.39per unit to improve cash flows of the power companies including K-Electric by Rs168bn and resultantly reducing the requirement for subsidy or circular debt build-up of equivalent amount.
As it turned out, the outstanding issues also include further tightening of the monetary policy and almost a deadlock like situation on State Bank’s autonomy. Mr Tarin has since been bemoaning that an agreement signed by then finance minister Dr Hafeez Shaikh and Governor SBP Dr Reza Baqir to unprecedented autonomy to the central bank had become the stumbling block to completion of the 6th IMF revenue.
It is now a matter of record that those at the helm of affairs at the time had tried to take the political government and the parliament for a ride. The IMF had always been demanding autonomy for the State Bank to take independent monetary policy decisions without government involvement and had repeatedly been resisted by various political governments beyond a certain level.
The central bank management wants complete autonomy for its acts of omissions and commissions without any accountability. The initial draft amendment law shared by the IMF and reconciled by the Ministry of Finance and the central bank was still under vetting of the law division and the Cabinet Committee on Disposal of Legislative Cases (CCLC) when a new draft reached the cabinet seeking exemption from mandatory review by the CCLC in rush.
The cabinet granted the exemption for CCLC review and without a detailed presentation or discussions also cleared the controversial bill on the premise that it would strengthen institutions and unavoidable to secure revival of the IMF programme and disbursement of $500m. The criticism that followed compelled the government to realize why the CCLC review had been bypassed and hence decided to backtrack. The rest is now history.
It is now becoming a ‘prior action’ that the said bill should be passed by the parliament to qualify the government to draw another billion dollars with the approval of the IMF board by December 17. No parliament could accept such a disgrace. No wonder then, Law Minister Faroogh Nasim has explained to the IMF staff that not only such legislation was ultra vires of the Constitution, but the time required for the legislation was also insufficient given the processes involved.
For example, the requirement in the controversial draft law for the parliament to consult the state bank for any legislation relating to the central bank is legally seen as an intrusion in the legislative powers of the parliament protected by the constitution.
This stipulation is “ultra vires the Constitution and is liable to be struck down by the Courts of law if passed. In any event, the Parliament itself will not pass any such amendment, which on the face is unconstitutional”.
The proposed law also envisages that the governor, deputy governors, or any non-executive directors or external members of the Monetary Policy Committee cannot be removed on grounds of misconduct unless a court of law first determines the misconduct committed. This also is unconstitutional, violates the principle of equality under Article 25 of the Constitution, not available even to the judges of the superior courts.
Another clause of the controversial bill proposes blanket protection to the governor, deputy governors, directors including former incumbents of the SBP against proceedings under the NAB Ordinance, 1999 and Federal Investigation Authority Act, 1974 which is also considered “patently in conflict with the Constitution”.
The proposed law also seeks for the SBP chief to speak in the parliament while the existing article 57 of the constitution limited this right only to the prime minister, federal minister, minister of state and the attorney-general to take part in parliamentary proceedings. The law ministry has explained to the fund that the current government did not have the two-thirds majority in the Parliament to amend the constitution to insert proposed changes. Moreover, the parliamentary processes required four to seven months, obviously which could not be completed by the December 17, 2021 deadline.
Published in Dawn, The Business and Finance Weekly, November 8th, 2021