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Cover Story

Rocky Road to Recovery

The economic managers seem to be totally ignorant of the mechanics of tax evasion, controlling inflation, POL pricing and legal aberrations involved in it.

By M. Abbas Raza | April 2023


Pakistan today stands at a crossroads and is faced with socio-economic and political challenges. One wonders how to prioritize the causes of instability and deterioration. Turkey separated religion from the state to set herself on the road to modernization and development through secularism and the Muslims of India started their struggle for the establishment of Pakistan to enable them to protect their religion, cultural, economic, political, administrative and other rights. What was undone in Turkey was symbolically re-established in the creation of Pakistan. In the process Pakistan could neither become a developed modern state nor could it assume the status of a true Muslim welfare state lurking between the two. Resultantly, most of its population could either not reap the benefits of development nor the process of welfare could come to their rescue.

The overall debt on the country acquired in the guise of economic development and reforms, with stringent economic conditions, has now accumulated to more than USD 130 B. Such colossal amount could have changed the fate of the nation, whereas inappropriate utilization and the conditions attached to such debts and their implications have torn the fabric of the society. The nation is unaware of the head of accounts where these funds were incurred and the economic developments achieved through them if any.

One wonders whether the utilization of these loans was ever put to any detailed audit. During the periods of political regimes in the country the opposition benches in the parliament and the Public Accounts Committees did not question the government on the increase of debt and its utilization. However, the nation is unaware of any such exercise, nor were the economic managers of the country held responsible for not generating the required amount through domestic resource / revenue mobilization instead of acquiring domestic and foreign debts. All we see is felicitations to the nation on even meagre amounts of even a billion USD from friendly countries and some roll over facilities. This is certainly not how the countries in the world manage their financial requirements.

The international monetary arrangement hammered at the Bretton Woods in 1944 for international monetary cooperation to aid international trade along with the establishment of GATT 1947 (now called GATT 1994) has come under a severe strain. The exchange rates with developing countries are no longer stable, nor the foreign exchange they earn from their exports are insufficient even to pay back instalments and the service charges of the foreign loans acquired by them.

The objectives of GATT 1994, now subsumed into World Trade Organization (WTO) under the Marrakesh Agreement establishing the WTO, enunciate that trade and economy should be conducted with a view to (i) raising standards of living, (ii) ensuring full employment and a large and steadily growing volume of real income and effective demand, and (iii) expanding the production of and trade in goods and services. Whereas the IMF’s recent harsh and stringent conditions on account of additional indirect taxation, increase in energy tariffs are in contradiction to GATT objectives.

It has been alleged that Pakistan’s looted national wealth to the tune of about USD 500 B is stored in foreign safe heavens, banks, real estate and invested in stocks. Just to crave the kind indulgence of the readers, on the assassination of Benazir Bhutto the stock markets around the world fell, revealing the stakes and the level of investment by Pakistanis in the stocks listed on them. Both the Bretton Wood organizations and the Financial Action Task Force (FATF) never pursued the banks in Europe, USA and other safe heavens to share the details of ill-gotten and looted money and its return to the government of Pakistan, which was even required under FATF. Whereas the emphasis of the lenders has been to give more loans to her with stringent conditions, now proving detrimental for its economy and the large section of the society.

No compromise on nukes: Ishaq Dar

“Let me assure you that nobody is going to compromise anything on the nuclear or the missile programme of Pakistan – no way...
At the time of the previous reviews, several freindly countries had made commitments to bilaterally support Pakistan. What IMF is now asking (is) that they should actually complete and materialise those commitments. That’s the only delay...
It has been extensive engagement, unusual, too lengthy, too long, too demanding, but we have completed everything,”

(Dawn, March 17, 2023)

The fiscal budget 2022-23 presents a very bleak state of the economy with a soaring fiscal deficit. The budget failed to propose measures on (i) debt retirement, (ii) effective domestic revenue mobilization, (iii) revival of sick industry, (iv) realistic fixation of POL prices, (v) effective inflation control, and (v) overall measures to take the economy out of the current morass. These issues should be the top priority in the budget for 2023-24. Measures being taken by the government for generation of additional revenue by imposing tax on luxury items will increase under-invoicing and mis-declaration causing revenue loss, thus proving counterproductive. On the other hand, the country is faced with serious challenges which could take the economy below the peril point due to depreciation of Pakistani rupee resulting in increase in POL prices / inflation, making life difficult for the low-income group to meet the two ends, unnecessarily increasing the burden of foreign debts. Inflationary impact on industrial inputs and arbitrary increase in energy tariffs is rendering domestic production uncompetitive in the international markets. Balancing trade and current account deficits and settling circular debts will also not be easy.
The general public and the downtrodden is developing a sense of fear and deprivation of being hard hit by the ruthless artificial hyperinflation, rising unemployment, threats of economic collapse and political instability. Increase in petty crime / looting to make the two ends meet for survival has become the only option for them with looming fears of total anarchy in the country.

The economic managers seem to be totally ignorant of the mechanics of tax evasion, controlling inflation, POL pricing and legal aberrations involved in it. Nor they seem to have the vision to propose a debt retirement policy and revival of economy and the industry. The focus, on the contrary still seems to be on ad hoc measures to control inflation by injecting subsidies to the few essential food products. This would, however, again be counterproductive as firstly the subsidy might not reach the intended beneficiaries due to poor economic governance, administrative flaws and corruption in the system. Secondly, the suppliers and producers would each time increase the prices of these commodities expecting more and more subsidies. Thus, prices have to be controlled by stringent economic, demand and supply, and strict administrative measures and not by subsidizing.

The economic managers need to keep themselves abreast of the mega tax evasion cases which are costing the country colossal loss, and if controlled can turn the fate of the nation. Some of the main areas of annual leakages and financial drainage being (a) evasion of taxes and duties to the tune of Rs. 6000 B, (b) POL sector over pricing Rs. 500 B, (c) pilferage of foreign exchange in exports US$1.5 B, (d) counterfeiting of currency and legal instruments Rs. 300 B, and (e) siphoning out of US$10 B from the country in imports.

Controlling pilferages of foreign exchange in exports, counterfeiting of currency and legal instruments and siphoning out of foreign exchange from the country in imports is obviously the sole responsibility of the Governor of the State Bank of Pakistan (SBP) who should take immediate cognizance of the fact if the SBP desires to stabilize the Rupee Dollar parity and controlling depletion of reserves.

During the last couple of years, the food commodities, consumer products and consumer durables, inter alia, have witnessed enormous and manifold appreciation in their prices. In many cases taxes and duties on various industrial inputs have also been reduced yet no price reduction was witnessed and the producers increased the prices under the garb rupee depreciation. If adequate measures been taken to tax these sectors, substantial amount of revenue can be collected.

The review of poorly negotiated tariffs under earlier free trade agreements and careful future market access negotiations with Turkey, Thailand and Korea etc., considering the principles of the GATT / WTO viz. (i) reciprocity and mutually advantageous basis, (ii) individual needs of the country and industry, (iii) the need for a more flexible use of tariff protection to assist economic development and the special needs to maintain tariffs for revenue purposes, and other relevant circumstances, including the fiscal, developmental and strategic needs will be of immense importance.

Development of an export policy with increased market access supported with domestic vocational and educational support and increased international competitiveness for conforming goods to international mandatory standards, etc., is the need of the hour. Revival of sick industrial units and optimization of capacity utilization cannot be ignored and should be one of the priorities of the agenda. One of the major factors of sick industry is substantial under-invoicing by commercial importers and certain domestic industrial units causing colossal revenue loss and clandestine transfer of dollars to the exporters causing PKR depreciation and adversely affecting the indigenous industry.

The other areas which need to be covered under the national economic agenda pertain to the formulation of policies which encourage fresh industrialization and direct foreign investment in the country. Policy to restructure and reform the bleeding government organizations and corporations should also be in the sight while formulating the national economic agenda apart from across-the-board eradication of mega economic corruption and rampant evasion of federal taxes and duties.

It is necessary and expedient that the looted national wealth should be recovered and retrieved from both domestic and foreign safe heavens. The economic managers with applied background, stakeholders and technical experts be tasked to prepare a fool-proof national economic agenda. The agenda should, inter alia, formulate long term debt retirement and domestic revenue mobilization, trade, industrial and tariff policies which could direct the scarce resources towards desired prioritized national objectives.

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