Time for a consensus on economic policy
My piece which was published by The News under the title Prospects of change
The recent decision of the federal cabinet to rationalise General Sales Tax (GST) and levy a one-time flood surcharge are much-needed reforms to bolster Pakistan’s elusive and perhaps unattainable ideal of economic self-reliance. A state, which has perfected the art of collecting and negotiating rents for its strategic games, is least interested in creating a redistributive welfare state.
The emergence and fortification of a rentier state, therefore, is neither peculiar nor new as phenomena. However, it has now come to haunt the future of the country due to the evolution of rent-seeking culture, which is almost a way of life. We need no half-baked perceptions-based studies from abroad to know that crude and sophisticated forms of corruption are now embedded in our public life. From the delivery of a basic service to the purchase of a submarine, this is the way the country functions. The elites have strengthened trends such as tax-evasion and made them legit mechanisms of governance and public affairs.
Tragic that the world leaders such as Hillary Clinton had to remind Pakistanis about how they were not willing to pay up in the face of the 2010 floods devastation and were continuously looking towards the West and international community at large. Such a debate should have emanated from Pakistan’s Parliament and its patriotism-obsessed media. But this did not happen as all barons are averse to paying taxes in this country.
GST blues: Tragic as it might be that other than the flood tax, the RGST is an indirect tax and whatever the rationale of such measures maybe, it will lead to inflation. However, it should be recognised that we have no choice to adopt the GST route. A draft bill has been prepared and will be hotly debated in the National Assembly. The proposed bill seeks a reduction in GST rate to 15 percent from 17 percent and ending the illogical and complicated multiple-rates regime. Pakistan has suffered damages worth 10 billion dollars. This figure comes from the Damage Needs Assessment undertaken by the Asian Development Bank, the World Bank and the government of Pakistan and is a cautiously conservative estimate. Pakistan’s reconstruction plan articulates the need for at least one billion dollars in the short term.
According to the Finance Minister, Dr Hafeez Shiekh, Rs10 billion would be generated from an increase in special excise duty on luxury items and another 25 billion would be obtained through the withdrawal of GST exemptions on goods and services. In addition, the flood surcharge will also yield revenues amounting to Rs30 billion. These are desperate measures by a government, which has failed to achieve consensus so far on the imposition of the Value Added Tax (VAT). Despite being an indirect tax, VAT is lesser of evils within the family of indirect taxes and many countries due to right political and economic choices have developed a VAT culture. The provinces have resisted the VAT reform and federal politics has stymied rational thinking on economic policy.
Another debate that has not captured public attention is whether increased taxation is possible or desirable in times of stagflation. Even the optimistic forecasts suggest that inflation will be in double digits and the economic growth rate (of 2-2.5pc) is not going to keep pace with the population growth rate. Therefore, the current measures are stopgap and will need revision in the medium term. There is no option but to resort to direct taxes and imposition of VAT which has been long delayed and requires a political consensus among the political parties and the federating units.
In fact, Pakistan’s political class will need to take its consensus on political governance to another level i.e. economic policy and governance pretty soon. Otherwise, economic downturn and social unrest will fulfill the wily perception that only unelected governments can effectively manage the economy. It is a separate matter that even in these dire times, military budget is on the rise.
In this context, Mian Nawaz Sharif, head of the second largest political party has come up with a sound suggestion which should not be dismissed by those who oppose him, especially the ruling Pakistan People’s Party. Sharif’s call for a ‘National Agenda’ at a recent national conference for the next twenty five years merits serious consideration and debate. Civil society networks have backed this demand and have engaged fruitfully with the popular leader from the Punjab.
After decades of economic mismanagement and seeking life-support from international institutions and Western allies, we have to work towards a holistic reform of the economy. It would be naïve to expect that the national security state paradigm widely etched in public discourse and intellectual activity will give way to an alternative way of thinking in the short term. But the success of the political parties in forging consensus on National Finance Commission award and the 18th Amendment are positive indications that there is room for a consensus.
At a recent national conference these issues were highlighted and Mr Sharif made some reassuring commitments. The conference discussed how a new paradigm of inclusive and sustainable growth was needed. However, it was also reiterated that without the political compacts, it was not possible to revitalize high valued adding manufacturing, agricultural and servicing sectors, and conservation, and development of energy and water resources.
Our sick public enterprises are consuming Rs250 billion each year and their drastic restructuring is required to get rid of “financial hemorrhage”. China has set the example of reforming the loss-making state owned companies and we need to look at them. More importantly, consensus is required to ensure that these do not become patronage-giving bodies but add value to the economy as whole. Otherwise they have to be phased out without harming the interest of the workers.
Most importantly, political elites have to declare that we have to open up our eastern and western borders for regional trade routes to become a hub of trans-regional trade and investment across South, Central and Western Asia. In particular, this is time that all political parties make a case of trade with India. If China and Taiwan can have trade relations, then what stops India and Pakistan?
It is urgent that the National Agenda becomes a point of reference for forging a wider consensus on structural reforms. Five key areas at the cost of repetition are of special importance here: First, improvement of our revenue generation capacity by reforming our tax collection system, including the levy of VAT in the immediate term.
The possibility of levying an agricultural tax should at least be debated and not rejected without a reasoned discussion. Second, trading with India to boost our small-scale manufacturing and light engineering industries is essential. Economists across the spectrum agree that there gains to be made and the fears of Indian domination of the market exaggerated. Thirdly, we have to rationalise the defence expenditure and ensure that cost-saving measures are effected. If there are national security concerns (given the war situation) then this could be done through special purpose commission comprising the Army, civilians and independent experts.
Fourthly, we have to mobilise domestic investment and find innovative ways of doing that. This also requires increased emphasis on nurturing savings culture as we continue to have an extremely low savings rate compared to our neighbours. Finally, political parties and the national security institutions have to acknowledge that while long term reforms will take their time, we ought to be looking at becoming an energy trade corridor. Our neighbors India and China both need energy. In this area, India needs us more than it can publicly acknowledge. This would also require a rethink on the uncomfortable alliance between the non-state actors and the state and the reintegration of militants into the mainstream via enhanced economic opportunities.
Pakistan is facing the lowest growth rate range in its history. We can no longer afford ad-hoc policies formulated on a short-term basis. Through a political consensus, we require a long-term policy that will remain relevant in 2013 and 2018 when the next elected governments take charge assuming that democracy is not scuttled by the current chaos. A consensual plan such as the National Agenda can build investor confidence and enable the state to undertake sweeping systemic reforms without which sustainable and inclusive economic revival is not possible.
The writer is a policy adviser based in Lahore. He blogs at www.razarumi.com and manages the e-zine Pak Tea House.