News Analysis: Time For Empty Promises Now Over

Government needs to take tough decisions, widen tax base, reform power sector

By Amir Zia
The News, Business Section
Nov. 7, 2010

KARACHI: The message from global lending agencies appears stark for the Pakistan Peoples Party (PPP)-led government. The time for empty promises is now over. It has either to bite the bullet and implement the International Monetary Fund (IMF)-sponsored reforms or lead the country towards a graver economic crisis.
The recent talks between the IMF and the country’s economic managers in Islamabad have again highlighted the fact that there is no more free money for Pakistan. The disbursement of the sixth tranche worth $1.7 billion of $11.3 billion IMF loan — originally due in August — is being delayed as Islamabad failed to take practical steps to implement the promised reforms.
In the past, the IMF had been showing an unprecedented leniency towards Pakistan when it missed key performance targets ñ thanks to the United States, which wanted its ally focused in its fight against terrorism. But now the fund appears taking a firmer stance following US Secretary of State Hillary Clinton asking Pakistan in a categorical manner last month in Brussels that it must initiate “meaningful reforms to expand its tax base.”
“The international community has made it clear that it is not going to write cheques for us to run this country,” said Dr Ashfaque Hasan Khan, a former adviser of the Finance Ministry. “Why the taxpayers of the other countries foot our bill when Pakistan’s rich people are not ready to pitch in.”
And that remains crux of the matter. Pakistan needs to generate its own resources, tighten its expenses, control the budget deficit, introduce fiscal discipline and go for the painful reform process, which the PPP-led government has failed to do since it entered into the ongoing loan programme with the IMF in November 2008.
The IMF wants Pakistan to introduce a reformed general sales tax (RGST) along the lines of the value-added tax, eliminate subsidies provided to the energy sector, resolve the circular debt issue as well as the ballooning commodity credit, which now stands at around Rs400 billion. The fund also wants the government to ensure the autonomy of the State Bank of Pakistan by enacting law through parliament and ensure it has zero net borrowing from the central bank at the end of each quarter.
The broadening of tax base through RGST, which earlier the government promised to implement as VAT from the start of the current financial year, remains the most knotty issue given the fierce resistance by various interest groups, political allies and the opposition parties.
The RGST, a diluted version of VAT, had to be implemented by October 1, but even this deadline has slipped to December 1.
Analysts say that VAT remains a successful tool for revenue collection in more than 140 countries ranging from poor to middle-income and the rich, but in Pakistan vested interests prove successful in blocking its implementation.
Dr Khan said that VAT helps control leakages in the tax system and makes it difficult for traders to hide their income.
But the powerful chambers of commerce and industries of Karachi, Lahore and Peshawar successfully managed to win support of various political parties to build a campaign against VAT.
The powerful feudal lords have also been successful in keeping the agriculture income out of the tax net.
Can Finance Minister Dr Abdul Hafeez Sheikh convince his political bosses to take the bitter pill of expanding the tax base and go for reforms, which he so often talks about? The record offers little hope.
The implementation of the World Bank and the Asian Development Bank backed power sector reforms also remain a tough challenge. While raising the electricity tariff alone does not appear the solution, the government lacks focus and commitment to force the power distribution companies to cut line losses, which hover in the high range of 35-40 percent mainly because of the rampant theft and rickety system.
The government should also think withdrawing the facility of free electricity to more than 100,000 WAPDA employees.
While there is an apparent popular opposition to the IMF programme, which is widely seen as anti-people, the country seems to have no other option for now, but to continue with the reforms to put the ailing economy back on the track.
The IMF programme is seen as giving international community and investors’ a signal that not only the process of reforms continue, but there are proper checks and balances in place in this country where unfortunately the credibility and fiscal discipline of the government remains low.
So far, the IMF remains, what one analyst called “exceptionally friendly” towards Pakistan, which failed to honour commitments during the last couple of years, but now the fund appears to go for a firmer approach.
Indeed, in these tough times, difficult economic decisions have their political repercussions, but what the country needs now is some harsh decisions rather than continued politics of expediency.
The government has a choice either to become a willing partner in the reforms process or continue to drag its feet. The first option offers some hope, the second will only multiply the country’s economic woes.