Pak economy: curing cancer with anti-fever medicines?

The following article has been published in Daily Nation, dated 4th May 2015

(E-Paper (Print Edition)http://nation.com.pk/E-Paper/lahore/2015-05-04/page-9)

(Onlinehttp://nation.com.pk/business/04-May-2015/pak-economy-curing-cancer-with-anti-fever-medicines)

Pak Economy: Curing Cancer with Anti-Fever Medicines?

 Prof Dp

By: Omer Zaheer Meer

Due to some personal engagements, a write-up dated 22nd March 2015 by Mr. Ejaz Wasti, a gentleman working for finance ministry, questioning my 16th March 2015 article published in The Nation, titled “IMF-Driven policies: Destroying Economy & inciting revolts?” missed my attention. Recently it was brought to my notice. The initial thought was to let it be but the lack of substance all but forced this scribe to pen this piece in the hopes that it may be taken not as a rebuttal but as constructive feedback aimed at helping the decision makers improve for the betterment of our beloved Pakistan. For, while we appreciate the positive endeavors of our policy makers as evident from the past articles of this writer, pointing out the shortcomings is also our moral obligation.

Unfortunately Mr. Wasti ignored important questions raised in the original article of 16th March and instead focused on inking a column seemed to have been compiled in a rush. What’s more tragic is that just days afterwards the denial penned by the gentleman, World Bank as well as Asian Development Bank issued damning reports vindicating this writers’ perspective while blowing off the lid of the misconstrued arguments of the finance ministry employee/consultant. It’d therefore be surprising to see how any neutral economist could possibly justify the worst growth rate in the region even below the likes of Afghanistan and Bhutan as outlined by the above mentioned reports?

It’s tragic that the stats often shared by certain quarters of the ministry reminds us of Mr. Shaukat Aziz who pursued similar gimmicks, building an economy on a bubble rather than on solid foundations of increasing GNP and GDP by focusing on national output. Remember, Shaukat’s bubble got busted not long after the end of his Government. This time around we don’t want a similar “feat” from a Government famous for its economic achievements.

Coming back to the 16th March write-up, some of the major questions were left unanswered including the fact that why the whole 500 billion payment to IPPs was made in one go without ensuring the availability of the loudly trumpeted “40%” unused capacity? Why the payment of this huge sum was not done in installments with ensuring availability of additional capacity in the national power system at the release of each tranche, particularly considering Pakistan went to IMF for a $ 6.7 billion installment based bailout package, 75% of which was paid to IPPs?

Furthermore, I humbly dare to question why has the circular debt again reached Rs. 600 billion, surpassing the previous level? Would it not have been better to focus on structural reforms and cutting the line losses as proposed earlier by this writer instead of treating it as a matter of wounded ego?

Furthermore as to the claims of adding 1700 MW “additional” capacity in the system by “IPPs”, can Wasti provide any evidence to this since it has not even been claimed by the IPPs or even the finance ministry represented by him. Having said that, the claims of forensic audits and verification by Ministry of the huge payments are commendable and should be released to the public, but the question of bypassing AG office was still left unanswered.

Next the scribe from finance ministry referred to income tax notices issued with the aim to broaden the tax base. Perhaps he should spare some time to check the ground realities. Never mind, let us try to assist our decision makers here.

Recently notices claiming no existing tax registration based on “economic activities”, usually citing vehicle purchases were sent out to masses. Sounds good? Hang on, what if it’s shared with you that many of those receiving these notices were not only tax payers already registered but paying millions in Income Taxes annually? This exemplifies a total lack of coordination within the systems and functions of FBR. Missing out on the records already held by FBR simply reinforces the misconceptions that Government policies are to bother the already registered tax payers and not to act as a facilitator or initiator of genuine drives to catch tax evaders. Instead of helping the underlying objective, the manner in which this drive is performed is actually pushing genuine tax payers on the brink of undesirable actions.

What’s tragic is that while on one hand such steps are undertaken citing the need to broaden the tax base but on the other hand proposals with huge potential to achieve a larger tax base such as brining agricultural income within the tax net as well as allowing use of CNIC as National Tax Numbers (NTN) and Sales Tax Registration Numbers (STRN) have been falling on deaf years for almost a decade now. Of late, there has been news that CNIC may finally be allowed as NTN. If done, this will be a step in the right direction.

Similarly the question about the petrol crises was also conveniently ignored. While repeating the point outlined by this writer that the incumbent Government did pass on some of the benefit of reduction in Oil prices in international market owning to political pressures, he again preferred to ignore the question of how much? As per last available data, Government of Pakistan amassed a benefit of $ 2 billion by the price reduction and as per most mainstream studies (as the government has not shared the exact data), not more than a quarter of this was passed on to the people of Pakistan. Perhaps the finance ministry can share exact data about this to enlighten us all in this regard.

To sum it up, let’s examine an extract from my original 16th March article: “While we can give some space to government’s economic team citing the tough challenges they inherited and are facing, what is unfortunate though is that even the steps possible within the ambit of Finance Ministry are not taken ……. the painful but obvious fact remains that the necessary reforms required to revamp the tax system and structures are not been followed either. Instead of extending the tax base by bringing in Agriculture and other exempt areas in the tax net the existing base is being taxed more along-with higher indirect taxes imposed on the common citizen, both of which are disastrous in the long run. Had we actually taken the tough but necessary decision to broaden our tax base and executed proper financial management especially in the power circular debt payment we would not need to go to the IMF. The lack of these reforms has led to exorbitant borrowings, with the internal borrowings alone reaching the mark of a trillion.”

With this, let’s conclude by asking whether those officials representing the present Government will review the IMF driven economic policies and carryout the necessary reforms while providing relief to the ordinary citizens or will they continue to focus more on short-term cosmetic measures without any bearing to the economic condition of a common man? Perhaps even more important is the question whether these officials have the stomach to digest constructive criticism and engage positively to ensure beneficial proposals for the national economy?

Links to both articles are as below:

http://nation.com.pk/business/16-Mar-2015/imf-driven-policies-destroying-economy

http://nation.com.pk/business/22-Mar-2015/pak-economy-the-right-perspective

The author is Director of the think-tank “Millat Thinkers’ Forum”. He is a leading economist, chartered financial analyst, fellow chartered certified accountant and certified anti-money laundering expert with international exposure who can be reached on Twitter and www.myMFB.com @OmerZaheerMeer or omerzaheermeer@hotmail.co.uk

IMF-driven Policies: Destroying Economy

The following article has been published in Daily Nation, dated 16th March 2015

(E-Paper (Print Edition): http://nation.com.pk/E-Paper/lahore/2015-03-16/page-9 )

(Online: http://nation.com.pk/business/16-Mar-2015/imf-driven-policies-destroying-economy )

IMF-driven Policies: Destroying Economy & inciting Revolts

 Prof Dp

 By: Omer Zaheer Meer

Pakistan is going through an economic slump; some would even argue a meltdown. With rampant lawlessness, terrorism, rising inflation and severe electricity and gas load management especially for industry, the economy is in dire need of a revival. Many of these problems were inherited by the incumbent administration from the previous PPP government with the economy on the verge of collapse. It was against this backdrop that the PMLN government decided to go to the International Monetary Fund (IMF) for a $ 6.7 billion loan.

The IMF offered a package based on austerity, asking to cut subsidies in a very short duration, seeking reduced public spending and privatization of national institutions like PIA in addition to devaluation of Pak Rupee.

These measures led to unbearable levels of inflation, making an already tough situation worse. Even the prime constituency of the incumbent Government, the business community has been protesting but at the end of the day they will still be able to simply pass on the effects to the consumer. It’s the masses that would ultimately be hit the hardest. With the industry already in tatters due to the energy crisis, law and order situation and ever increasing input costs, they are shifting base overseas resulting in a flight of local capital. The gigantic increases in the power tariffs until recently were serving to worsen an already dire situation for the local industry. On the other hand national institutions, instead of being revamped and properly managed are being planned to be sold off in non-favorable conditions when they could end up being sold for peanuts.

POL products are treated as a cash-cow for revenue generation, ignoring the super-inflationary effects of increases in their prices. It is indeed ironic that while the prices in international market fell, the benefit was only partially passed on to the consumers in Pakistan and that too owing to the political pressure from the opposition of Pakistan Tehreek-e-Insaf.

While the IMF program may serve to stabilize the national exchequer in the longer term, the economic opportunity costs, resulting unemployment and the high risk of an economic meltdown makes it a non-prudent choice. Instead it is pretty obvious that Pakistan’s economy requires an impetus, a stimulus to revive the economic activity and not the program agreed with the IMF.

While we can give some space to government’s economic team citing the tough challenges they inherited and are facing, what is unfortunate though is that even the steps possible within the ambit of Finance Ministry are not taken. There seems to be a lack of understanding and political will to actually carryout the reforms necessary to resuscitate the failing economy.

Financial management and transparency is one such area. I’ve written before that the manner in which the circular debt of app PKR 500 billion was paid to private power generators and similarly the funds released for Petrol import earlier this year were astounding to say the least. There were no audits, no checks and no proper incentives negotiated for the masses. Whether right or wrong, some sections of the intelligentsia believe these crises to be manufactured, aimed at getting around the checks and balances in order to oblige party financiers and key supporters.

For example, despite claims of around 40 % unused capacity of private power companies, un-tapped owing to the outstanding circular debt, the promised increase in the electricity generation was never delivered despite payment of the same. Pakistan had to approach IMF for $ 6.7 billion to be released over several years, while 75% of that amount was distributed to private power companies without any verification as if it was an immaterial amount. What’s more, the genie of the circular debt in the power sector is back to haunt the nation again.

We must ask the finance ministry why no proper audits were performed? Why could we not negotiate with the power companies the terms for payments in four or six installments with the next installment payable only on achieving an additional power generation as agreed? Furthermore, there has been no effective national energy conservation drive or campaign to cut the line losses to the minimal possible. Similar mismanagements resulted in the infamous petrol crises too.

Furthermore, the painful but obvious fact remains that the necessary reforms required to revamp the tax system and structures are not been followed either. Instead of extending the tax base by bringing in Agriculture and other exempt areas in the tax net the existing base is being taxed more along-with higher indirect taxes imposed on the common citizen, both of which are disastrous in the long run. Had we actually taken the tough but necessary decision to broaden our tax base and executed proper financial management especially in the power circular debt payment we would not need to go to the IMF. The lack of these reforms has led to exorbitant borrowing with the internal borrowings alone reaching the mark of a trillion.

Alarmingly, there are noises about a very powerful industrialist from Punjab with stake in the power sector besides others, dictating the economic policies of the current government. On the backdrop of this, a list of public sector power companies was also announced for privatization. Guess where are they based? Yes, all of them are based in Punjab. The Prime Minister needs to take corrective measures. As a minimum the finance ministry should be directed to undertake independent forensic audits into all future payments as well as those made till now including circular debt payments to the power companies in addition to the implementation of other measures to ensure transparency. Corruption scandals of the likes of the last PPP Government should not be tolerable anymore. This, along with tough decisions to extend the tax base with a focus on direct instead of indirect taxation and proper financial management can still lead to a turn-around.

The biggest question is will the present Government review its IMF driven economic policies and carryout the necessary reforms while providing relief to the ordinary citizen or will it continue to focus exclusively on temporarily filling up the coffers of the national exchequer without any bearing to the economic condition of a common man and risk a revolt? It should remember empty stomachs breed anarchy.

The author is Director of the think-tank “Millat Thinkers’ Forum”. He is a leading economist, chartered financial analyst, fellow chartered certified accountant and certified anti-money laundering expert with international exposure who can be reached on Twitter and www.myMFB.com @OmerZaheerMeer or omerzaheermeer@hotmail.co.uk