A meeting of Economic Advisory Council (EAC) held under the chairmanship of federal Finance Minister, Ishaq Dar, reportedly supported an agreement on a non-partisan charter of the economy that would delink politics from playing a role in the implementation of sound economic policies. Dar’s insistence on a charter of economy does have merit.
Six major macroeconomic issues reflecting poorly performing sectors require a political consensus to ensure a move towards improved performance that would benefit all. First of all, the tax sector requires urgent remedial measures through not only reforms in the Federal Board of Revenue (FBR), not an apparent objective given the increasing reliance on higher revenue collections through withholding agents and raising indirect taxes whose incidence on the poor is greater than on the rich, but also through reducing leakages from the FBR that are estimated at over 500 billion rupees per annum. It is, however, unfortunate that the status quo parties notably PML-N and PPP refused to amend the constitution to include farm income tax as a federal subject collectable by the FBR at the rate applied to the salaried class during more than a year long comprehensive review of the constitution that culminated in the unanimous passage of the 18th Constitutional Amendment. This is cited by other political parties as proof that personal interests, given the high representation of feudal and agricultural landlords in our parliaments, override macroeconomic considerations. There is thus an urgent need for all parties to agree on reforming the tax structure with the sole objective of rendering it fair, equitable as well as non-anomalous and to plug FBR leakages. It is noteworthy to mention that the sales tax net that is yet incomplete, because a large number of wholesalers and retailers continue to remain outside the net, should be completed. This would raise FBR’s annual collections.
It is also relevant to note that the decision to pass on the international price of oil to domestic consumers was meticulously adhered to when the price of oil was on the rise, however, through a heavy reliance on petroleum products as a revenue source – a reliance that has increased with time – the government suffered a revenue loss when the international price plummeted massively in recent months. This led to the decision not to pass on the entire decline to domestic consumers. While one is compelled to support the government in this decision yet the need to reform the tax system to ensure that the rich and the influentials pay due taxes requires an urgent visit. The commitment of the federal Finance Minister to the International Monetary Fund to pass it by June this year and include tax evaders under the anti-money laundering bill is a step in the right direction; however, it is unclear whether he would meet resistance on this even from the treasury benches and if passed whether it would be implemented in letter and spirit.
Secondly, there must be greater adherence to parliamentary approvals with respect to the economy. The Fiscal Responsibility and Debt Limitation Act, 2005 specifies a debt-to-GDP ratio of 60 percent, a ratio that has been consistently flouted in recent years. However, there are other salutary components of the Act that have also been ignored by successive governments including “to reduce public debt not less than two and half percent of GDP in every year and keep poverty expenditures minimum 4 percent of GDP,” and “no new guarantees will be issued for any amounts exceeding 2 percent of GDP, including those on rupee lending, bonds, rates of return, output purchase agreements and all other claims and commitments that may be prescribed from time to time.” However, in all fairness the government was allowed to deviate from these rules in the event of a natural calamity and national security; however, parliamentary approval was required.
Thirdly, the power sector reforms require a political consensus as this sector alone has played a major role in the political fortunes of the status quo parties in the 2013 elections. The decision with respect to raising tariffs of bill paying consumers to benefit the non-paying consumers (reminiscent of taxing the already taxed) needs a revisit. In addition, reforms with respect to improving the sector performance, by reducing the extremely high transmission and distribution losses require a consensus.
Finally there must also be a consensus on the privatisation methodology, establishing a system that would ensure transparency in appointments to key state-owned entities and on granting autonomy to the (i) Pakistan Bureau of Statistics to ensure the release of credible data, which would lead to the implementation of timely and appropriate economic policies; and (ii) the State Bank of Pakistan to ensure an independent monetary policy that is the need of the hour. One would assume that no political party is against the policy of privatising badly performing state-owned entities but there are concerns with sale to a strategic investor. And needless to add both the PPP-led coalition government as well as the incumbent, have suffered criticism for making appointments that have proved to be an embarrassment. There is a need therefore of a consensus in these two respects as well.
The PBS continues to be a source of criticism given its obviously-flawed data and here one would like to remind the finance minister that the relevant parliamentary committee has repeatedly advised the government to delink it from the Ministry of Finance – a move which his ministry continues to resist. And independent analysts continue to question the Finance Minister’s commitment to the Fund to grant autonomy to the SBP in letter and spirit.
Notwithstanding the critical role in promoting development that can be played through an agreement on a charter of economy yet this does not take account of two rather basic politico-economic elements: first, there are multiple economic policies that can guide an economy towards development and, second, different political parties in a democracy are associated with different policies towards the achievement of the same objectives namely growth and development. In short, to seek an agreement on a charter of economy would therefore be as much of a challenge as is Dar’s struggle to do the needful in expanding the tax net to ensure all those with a certain income are taxed equally and through enhancing documentation of the economy to ensure that the parallel black economy is brought into the tax net. Last but not least, one would be hard pressed to convince politicians in a democracy to be on the same page with respect to economic policies. But challenging times require compromises and one can only hope that such compromises are on the cards.