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

Solving Pak’s Economic Woes

The following article has been published in Daily Nation, dated 9th February 2015

(E-Paper (Print Edition): http://nation.com.pk/E-Paper/lahore/2015-02-09/page-9 )

(Online: http://nation.com.pk/business/09-Feb-2015/solving-pakistan-s-economic-woes )

Solving Pak’s Economic Woes

Prof Dp

By: Omer Zaheer Meer

Government of Pakistan borrows more from the IMF. World Bank approves next loan tranche to Pakistan. Asian Development Bank sanctions grant for Pakistan. These are the sort of headlines that regularly defines Pakistan’s economic persona in international media. Why a resourceful country like Pakistan has been caught up in the never-ending web of interest-based borrowings without significant increase in economic output over the recent past is a question that should worry our policy makers. More significant still is the answer to the dilemma of how to solve Pakistan’s economic woes in the short term?

While there are many corrective measures including long-term structural reform that are warranted to ensure a functional, productive and self-sufficient economic apparatus, some short-term measures can provide effective support to the economy till the long-term reforms bear fruits. First and foremost is continuously advocated and inefficiently pursued goal of expanding the tax base. Instead the incumbent government, like many before it, is focused on squeezing the existing limited tax-base, further discouraging people from entering the tax-net and encouraging both tax-avoidance (legal) and tax-evasion (illegal).

Recently when the petrol prices crashed-out in the international markets, first the government was reluctant to pass-on the relief to the masses. However owing to political pressure when the government did reduce the prices eventually, it chooses to increase the General Sales Tax (GST) levied on petrol. At present GST on petrol is up-to 27%, an increase of almost 59% from the previous level of 17%. In simple words it means that app Rs. 25 is collected from everyone on every litre of petrol they purchase, indirectly via GST & PDL. Pakistanis are ending up paying more taxes on petrol than they used to before the huge price drop in international market. Similarly four new taxes (surcharges) have been added to the electricity tariffs. At the same time, for some mysterious reasons, the government seems unwilling & unable to widen the tax net by taxing those with more income.

Pakistan has one of the lowest tax-payers to population ratio in the world where less than 1% of the population pays direct taxes compared to just under 5% in India, approximately 58% in France and almost 81% in Canada. One of the main reasons for this is the huge emphasis on indirect taxation. To elaborate this further let’s briefly overview some key taxation statistics. At present there are only a few million tax payers out of a population of 200 million in Pakistan. While those filing income tax returns (many of which are nil) were a meager 711,000 in 2012 while 800,000 till 16th December 2013 as per official figures released by FBR. This dependence on indirect taxes is worrisome. General Sales Taxes (GST), Federal Excise Duties (FED), Customs Duties, e.t.c. collectively constitute app 74% of all tax collection by the government. I’ve explained before that this high dependence on indirect taxation results in increased costs of production and services, giving rise to inflationary pressures and relatively low economic output results in trade and current account deficits.

This is happening in a country where the bills of import for the luxury items and 4×4 vehicles keep increasing. The property prices are still ballooning with every passing day. In short, Pakistan has no shortage of millionaires and billionaires, let alone a few hundred thousand above the taxable income limit as read from the dismal income tax return filing figures. All that is required is to identify the taxpayers currently not paying their taxes. Integration with NADRA database can be extremely useful for this, more so if various other institutions’ databases can be linked to the main NADRA database. Visualize this, anyone buying a plot in defence or importing a 15-20 million PKR vehicles would be immediately identified by the system and bought in the tax-net (assuming the political pressures are not given in to). As per conservative estimates there are atleast 2-3 million big tax-evaders with due taxes in millions, that can be brought into the tax net in this manner. This translates into hundreds of billions of extra revenue which will greatly reduce the dependence on borrowing. The space provided can then be used to pursue long-term goals to resuscitate the economy. For this we don’t even need extensive time-consuming meetings which lasts the entire tenure of Governments, all that is needed is political will and a few officers willing to implement.

Though FBR has recently taken an important initiative where it has taken data from various institutions including Motor Vehicle Registration Authorities, Car Manufacturing Companies, Electricity Supply and Distributing Companies, Property Registration Authorities, Mobile phone subscribers Cos,  Medical and Dental  council, Pakistan Engineering Council, Pakistan Bar Council and information from Jamal’s Yellow Pages ( about business concerns) and now fed into PRAL’s database, it still needs much to be desired. First of all this data will become outdated soon, secondly each time FBR would need to go through the same exercise to secure the data and thirdly they’ll need to merge it all together in their systems too. On the other hand having a central database where all these and other concerned institutions’ databases are connected with NADRA’s will form a central and continuously updated data pool which can then be allowed to be accessed by FBR. The benefits of such a move would be grand and rejuvenate the ailing taxation system of Pakistan. This would certainly need to be backed with long-term structural reforms including proper resources for FBR along-with an effective accountability system.

Lastly some good news to share about the taxation reforms in the country. A positive measure that has been pursued for quite some time has been approved by the concerned authorities due to the effective campaigning by Lahore Tax Bar Association under guidance of its President Mrs. Ayesha Qazi. The move is to allow the use of CNIC (computerized national identity card) numbers as the NTN (national tax number). This would reduce the hassles in income-tax registrations and will help widen the extremely small tax base. The present system is a sad joke where a citizen has to go and apply for a tax number instead of it being automatically allocated to them via CNIC. If the approved plan is actually implemented (it can later be extended to GST registrations too), this can be a giant leap forward and win accolades for the incumbent government too.

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