Baby Steps Won’t End Pakistan’s Economic Woes

By Amir Zia
The News
Sunday, March 20, 2011

Getting back in the good books of IMF by implementing RGST and other promised reforms remains crucial for the country's economic revival

After a prolonged period of inaction on the economic front, the government finally came out of its lethargic mood to slap 53 billion rupees worth of additional taxes and slash development and administrative expenses by 67 billion rupees. These long-anticipated measures, enforced through presidential ordinances, came following the government’s failure to impose the reformed general sales tax (RGST) because of stiff opposition from its key allies in the ruling coalition, opposition parties and other interest groups, which ignored the urgency to expand the country’s tax base in the wake of last year’s devastating floods that hit the economy hard. The political pressure also forced the Pakistan Peoples’ Party (PPP) government first to keep fuel prices capped in early January by withdrawing a 9.0 percent hike despite a surge in the international crude oil rates and then again in March to slash the increase it made on petroleum products by 50 percent within days of the decision.

The wavering and indecision on key issues triggered fears that the budget deficit, targeted at 4.7 percent for the current fiscal 2010/11 (July-June), may balloon to 7.5 to 8.0 percent and further fuel inflation that already hovers at 16 percent. With global lending agencies and the country’s key allies, including the United States, refusing to extend a helping hand to end Islamabad’s economic woes until it implements the promised reforms, the government appears short of choices. It needed to take at least some baby steps to arrest the rot, which came in the shape of 120 billion rupees mini-budget, comprising new taxes and cuts in expenses on March 15.

But the mini-budget remains a fire-fighting and short-term measure. It does not address the main flaws of the economy, which stems largely from a narrow tax base, heavy government subsidies mainly in the energy sector and loss-making public sector enterprises.

A look at the taxation measures reveals it all. The 15 percent flood surcharge on income tax targets only the salaried class already in the tax net. Yes, in the wake of the national calamity of floods, they need to pitch in their share, but why not include others in this act of virtue through similar direct taxes rather than going for the oppressive indirect taxation? There are affluent professionals, from lawyers to doctors and wealthy traders, businessmen and shopkeepers, who need to pay their share.

The much-talked about tax on agricultural income remains off the government’s radar because it now falls under the domain of provincial governments, where the interests of the landed-class effectively block any such move. The government should try to evolve a consensus with major political parties for the imposition of taxing this sector, which has made a windfall income because of the massive rise in prices of key commodities, including cotton and wheat this financial year.

According to estimates, there has been an additional income of more than 500 billion rupees just because of the rise in cotton prices to more than 12,000 rupees per maund from 4,000 rupees and an increase in wheat’s support price to 950 from 625 rupees per 40kg this year. Not long ago, the support price of wheat was 415 rupees.

The agriculture sector, which remains untaxed since the country’s independence, should not remain a holy cow. It should be taxed. However, there remains a need for proper homework on the mechanism and implementation of tax on farm income that protects poor farmers and targets only the wealthy landlords.

In an important step, the PPP’s finance team targeted the agriculturists in this mini-budget by withdrawing the 17 percent general sales tax (GST) exemption on tractors, fertilisers and pesticides. This may be a good step to generate additional money, but this indirect taxation is no substitute for the direct tax on agricultural income.

For the next budget, the government needs to start doing its homework from now along with the provincial governments to bring the agriculture sector under the tax net.

The cuts in administrative expenses, a ban on new appointments and other austerity measures are, in fact, more symbolic than of any real value, but they should certainly be welcomed.

For a serious push in this direction, there remains a need to reduce the size of the government, its departments and all the public sector enterprises to make them lean and efficient. For this, massive restructuring and revamping of these institutions remains the need of the hour.

In today’s world, it is not the government’s business to provide employment. Its responsibility is to create an environment where the private sector can grow and expand and help rejuvenate the economy, which in turn creates employment opportunities.

While after a long delay, the government has finally come up with its mini-budget, there remains room and a need for those promised giant steps that remove the structural flaws of the economy with an aim to put it back on the high-growth trajectory as it was until 2007. For this, getting back in the good books of the International Monetary Fund (IMF) by implementing RGST and other promised reforms remain crucial. Whether the baby steps of this mini-budget eventually lead to bigger and more meaningful reforms and steps remains a key question.