M Ziauddin

                                                                                                                                                          zia3

M Ziauddin, one of Pakistan’s most respected journalists. His career spanned over 50 years. Earning a Master’s degree in Journalism from Karachi University in 1964, he entered the profession with Pakistan Press International, a local news agency, as a cub reporter in the same year. Over his rich and illustrious career, Ziauddin sahab (as he is known) served as Assistant Editor in the weekly Pakistan and Gulf Economist (PAGE) and in the now defunct Morning News. He then worked as Commerce Editor for The Muslim.

With daily Dawn, a paper with which he had the longest association, he served as Resident Editor in Islamabad and in Lahore as well as the paper’s correspondent in London between 2006 and 2009. He also did a brief stint as Editor of The News in Rawalpindi.

M Ziauddin has long distinguished himself for his reporting and columns, which continue to be read by many all over the world. In 1983-84, he was awarded the APNS best scoop award and he brought honour to the country in 2014 when he was named one of world’s 100 information heroes by international body Reporters Sans Frontiers (RSF) in 2014.

He also served as president of the South Asia Free Media Association between 2002 and 2006 and earlier as Pakistan Federal Union of Journalists’ Assistant Secretary General when he was elected in 1982-83. He has also been associated with media-related issues like journalism safety and ethics.

In 1977, Ziauddin sb also served as visiting lecturer in his alma mater – the journalism department of Karachi University. However, most of his teaching was done in the newsroom where he groomed and trained hundreds of budding journalists, many of who now hold key positions in the media in Pakistan and abroad.

Growth with equity

One hopes that the IMF program to be signed in June this year would also consider the positive/negative impact of the parallel economy on the overall economic reality of the nation before discussing conditionalities for a new bailout package

Pakistan is awash with black cash. Since we, as a nation, are generally averse to documentation, it is not possible to know exactly how much black cash is currently in circulation. But if one went by the astonishing rush in our shopping centres and eating places in both urban and rural Pakistan, it becomes too difficult to not question the socio-economic profile of the country put out periodically by the official statisticians.

Since the rich and the not-so-rich agriculturists do not pay any income tax, official statisticians simply have no way of knowing what happens to the cash in the hands of these agriculturists belonging to a sector which makes up 20 to 22 per cent of the economy. Even most of those belonging to the manufacturing sector, which makes up 25 per cent of the economy, are known to have been adjusting their incomes against barren lands they have purchased for just this purpose.

And, of course, most of the professionals, like doctors, lawyers, engineers, most self-employed persons, private hospitals and private educational institutions — which have mushroomed by the hundreds over the years, surpassing now by thousands the number of hospitals and educational institutions in the public sector — either do not pay any tax on their incomes or pay only a paltry sum.

And since the ruling elite, in collusion with the big business, has consistently nipped in the bud attempts to document the economy by opposing with religious zeal all attempts to introduce measures like the General Sales Tax (GST), the government is being deprived of billions in taxes annually from those operating in the legal economy as well.

Add to this the money made in bribes, smuggling and by over-and under-invoicing foreign trade. Power, water and gas are also pilfered by the big business and feudal aristocracy, which if monetised would also amount to billions of rupees lost to the formal economy. Obviously, the official figures of GDP growth of three to four, or even eight per cent, would not reflect this massive amount of black cash in circulation and the growth in the size of the black economy it finances.

An official report has noted that the resilience of the informal sector appears to be pushing the formal economy forward. Everything from auto parts to sports goods, knitwear, clinics and beauty salons fall into the informal economy. All these make a significant contribution to employment and income, and that’s one reason why the economy Is still growing.

The undocumented demand from Pakistan’s 2007 million people means the nation’s purchasing power is more than estimated. Rising crop prices have pumped an extra more than one trillion rupees into the rural economy in the past years, most of it undocumented.

Evidence of consumer demand is everywhere as new shopping malls and restaurants in Karachi, Lahore, Islamabad, Rawalpindi and Faisalabad are filled to capacity. Car sales have been rising without any abetment except in the current year, as more people could afford a Toyota Corolla or Suzuki Mehran.

One hopes that the IMF program to be signed in June this year would also consider the positive/negative impact of the parallel economy on the overall economic reality of the nation before discussing conditionalities for a new bailout package.

Meanwhile, the problem to understand in a nutshell is that not everything that is profitable is of social value and not everything of social value is profitable. Reality TV, fashion, sports and gambling are all of questionable social value, but each is quite profitable and exists in the private sector. On the other hand, few would argue that the Army, Navy, Air Force, Coast Guard, police department, fire department, libraries, parks and public schools are of no social value, and yet, they could not exist if they were required to be profitable. To reiterate, the key issue is this: not everything that is profitable is of social value and not everything of social value is profitable. The proper role of government is the latter.

A government has no business doing business. Sounds logical. But a government devoid of the necessary instincts of a sharp businessman would find it almost impossible to frame socio-economic policies that ensured progress with equity. Such governments either end up widening the gap between the rich and the poor, or failing them both miserably.

Governments in poor countries, especially those which are totally dependent on imported fuel, need to be necessarily business-minded to be able to not only rationalise the dependence, but also reduce the burden on the import bill by being an expert of the market as are the international oil sharks, racking in millions on price fluctuations of as little as a minimal most fraction of a cent.

Donor-driven poor countries need business-minded governments even more because if you are not well versed in what is happening in international trade, more likely than not you are going to end up returning almost the entire aid back to the donor country in import bills.

Also, it is only a business-minded government, which can make a distinction between an enterprise that yields profits of immense social value and those that yield purely financial profits.

Take for instance, the Steel Mill. No matter how you run it, at the production capacity of 1.1 million metric tonnes, it can never be financially profitable even if you cut its fat to bare bones. Its social value is too dubious to merit any consideration. So sell it today even if it brings in only one dollar (the land in its possession should, however, be sold at market rates) because every passing day would only add to its losses and increase the burden on the national budget. This is true for most of the items earmarked by the government for privatisation and disinvestment.

However, this will never be true for PIA, Pakistan Railways, power generation and distribution entities, Oil and Gas Development Company Limited, Pakistan State Oil, utility stores, National Bank of Pakistan, Civil Aviation Authority, Pakistan National Shipping Corporation, Karachi Port Trust and Port Qasim, etc. In rich countries perhaps, these entities would be better off in the private sector. But in poor countries like Pakistan, these entities have as much social value as the armed forces, security agencies, libraries, parks, public schools and public health institutions.

A government without business know-how would hardly be able to maximise social benefits of a public sector entity at a minimum financial cost. In most developed societies, this is done by letting the public sector compete with the private sector but with keeping the latter’s profit motive within reasonable bounds by establishing legally sound autonomous statutory regulatory mechanisms.

And even after such mechanisms are developed, air, road and rail transport, energy-related units, public schools and public health institutions, at least up to primary levels, would need to be kept under government control, no matter how much the cost.

A big chunk of unnecessary financial losses that these public sector entities of social value are incurring currently can be eliminated by cutting down on waste and replacing inefficient managements with efficient ones. Also, their burden on the budget could be significantly eased if the government were to collect the taxes that are due to it from all its citizens who earn taxable incomes. Only a business-minded government would know the importance of enforcing tax laws strictly across the board without exception and exemption.

And you need a government well-versed in doing business to negotiate an IMF program that ensured growth with equity.

Going back to the basics

During the postwar era governments actively shaped economic outcomes with the help of state capital in response to the needs of their citizens. During the late 20th century, however, this postwar order began to decay and today private capital through markets dominates politics, leaving governments unable to shape economic outcomes and respond to the needs of citizenry.

In some Western advanced countries, the period after World War II was one of inclusive economic growth as more and more use of state capital was the name of the economic game then. Indeed, income inequality fell and stayed low in most Western countries roughly between 1910 and 1980. What made it fall?

In the earlier years of the 20th Century, there was a clear trend of state intervention in the economy, albeit institutionalized differently across countries. It was generated by a mix of factors: social solidarity engendered by the wars, wartime experience of governing the economy, unemployment in the 1930s and the rise of socialist ideas. It accelerated for a decade or so after the World War II.

Key features were nationalization, increased provision of welfare, public health and education, and the development of public amenities. Arguably the most important aspects that directly affected income inequality were state involvement in wage setting and redistributive taxes and transfers.

In many countries there were moves to centralize collective bargaining over wages and conditions of work.

Taxation was changing as well. In most Western countries, income tax became a major revenue source in the early 20th Century. As the political tide changed, both Reagan and Thatcher heavily reduced the progressivity of income tax – the extent to which the rate of taxation increases with income.

There is also international evidence that increases in tax and transfer progressivity, do reduce income inequality directly. Calculations have shown that changes in progressivity and changes in income inequality across the OECD countries 2007-2014 are strongly negatively correlated.

Norway the small Scandinavian country of 5 million people has the lowest income inequality in the world, helped by a mix of policies that support education and innovation. Norway does not have a statutory minimum wage, but 70% of its workers are covered by collective agreements which specify wage floors. Furthermore, 54% of paid workers are members of unions, compared to 11% in the United States and 25% in the United Kingdom. Overall, Norway tops the employment part of index, both in terms of how accessible and stable employment is, and how well workers are paid.

There is, therefore, a lot of economic sense in discarding the practice of using private capital through markets and instead investing the limited resources we mobilize through various means, including costly borrowing in public-sector projects aimed at expanding the much-needed physical infrastructure, like irrigation systems, power plants, roads, bridges, housing schemes, motorways and metro buses, etc. Such projects generate all kinds of jobs and most of these are highly labor intensive. Also, such projects do give a fillip to the manufacturing sector as demand for building material, such as cement, electrical fittings, plastic materials, etc., goes up. More jobs would mean more money in the hands of more people belonging to all classes: upper, middle and lower. More money in the hands of more people would mean steep escalation in the demand for all kinds of essential and non-essential consumer goods, necessitating expansion in production capacities of the goods in demand leading to significant growth in the real economy.

If one were to follow this economic path single-mindedly, totally ignoring the needs of the social infrastructure like health, education, potable water etc., one cannot rule out the possibility that the pace of economic growth will slow down considerably because an illiterate and physically unfit manpower, with only limited access to even clean drinking water would hardly be able to accomplish all that the front-loading of investment in accelerated expansion of physical infrastructure requires. It would need a great deal of balancing in the allocation of limited resources to physical and social infrastructure so as to make the two develop in a way that the opportunity cost is not too high. The notion of opportunity cost plays a crucial part in ensuring that scarce resources are used efficiently.

According to one of Pakistan’s most renowned economists, the late Dr Mahbubul Haq, approximately 40 per cent of money allocated to brick and mortar projects disappear without any trace. The implication was, either it was siphoned off or just slipped through inefficient fingers. This was actually the manifestation of believing in the magic of free market and its underpinnings, the so-called 3Ds – decontrol, disinvestment and deregulation.

The result has been devastating. Today, the top 20 per cent of the population accounts for almost 52 per cent of property income, while the top one per cent of depositors account for 80 per cent of deposits. Banks extend 77 per cent of credit to the top one per cent of borrowers.

And due to continued under-investment in the people, the rate of improvement of Pakistan’s Human Development Index is estimated to be slowing down considerably. The reason why this is so is the regulatory bodies constituted under the Constitution for intervening in the market to ensure equitable distribution of the fruits of development are not doing what they are supposed to be doing.

There are about 18 regulatory bodies in the country: the State Bank of Pakistan, the Securities and Exchange Commission of Pakistan, the Competition Commission of Pakistan, the Pakistan Electronic Media Regulatory Authority, the National Electric Power Regulatory Authority, the Oil and Gas Regulatory Authority, the Drug Regulatory Authority, the Civil Aviation Authority, the Pakistan Nuclear Regulatory Authority, the Pakistan Standards and Quality Control Authority, the Public Procurement Regulatory Authority, the Private Education Regulatory Authority, the Pakistan Medical and Dental Council, the Pakistan Engineering Council, the Pakistan Nursing Council, the Pakistan Tibb Council, the Pakistan Veterinary Medical Council and the Pakistan Environmental Protection Agency.

But all these regulatory bodies function directly under the government and those who man these bodies are also hired and fired by the government, which makes a mockery of the very concept of market regulation. It is, therefore, necessary to liberate these bodies from government control and turn them into autonomous statutory bodies. Delegation of authority away from the government would prevent these bodies from becoming partisan entities and would also make them more accountable.

This brings us to the most worn-out story line in our decades-old economic narrative which has not changed a bit since independence: the promise of successive governments, both the military and the civilian, to broaden the tax base. Most of the revenues collected are through indirect taxation which is a regressive practice and a big chunk of direct taxation is collected through what is known as withholding taxes which again amounts to no more than a minuscule residual of huge settlements made through black cash in most of the major transactions.

All attempts to document the economy over the last so many years have been foiled by the personnel of the Federal Board of Revenue with the connivance of the ruling elite, political as well as the military. In this digital age, there is no reason why there should be any physical contact between the taxpayer and the tax collector. But no government seems willing even to take a look at this aspect of governance.
Another impediment to growth has been the IMF. We go to the Fund because we have explored and exhausted all other avenues except our own ability to raise the required resources from our own economy. The Fund in order to ensure that it would get back its loan imposes a lot of austerity conditions on the borrower assuring it at the same time that in the long run its economy would start growing at an accelerated rate.

‘In the long run we are all dead,’ so said John Maynard Keynes (1883-1946). But the fundamentalists of the so-called ‘Washington Consensus’ have been coming up with their own self-serving definitions of the term ‘long run’ so as to sell ‘austerity’ to the poor countries of the Third World as the panacea for all their economic ills. But the austerity formula has proved, in the long run, to be a stagnation trap for countries that went to the Fund seeking help.

Preventing misuse of cyber laws

A case was registered recently against a senior journalist, Shahzeb Jillani under sections 10(a) (cyber terrorism), 11 (hate speech) and 20 (offences against the dignity of a natural person) of the Prevention of Electronic Crimes Act 2016 and sections 34 (acts done by several persons in furtherance of common intention), 109 (abetment) and 500 (defamation) of the Pakistan Penal Code. The allegation against him was that what he had said in a TV program fell under the ambit of cyber terrorism. Section 10(a) is punishable by a jail term of up to 14 years or a fine of up to Rs50 million or both, Section 11 is punishable by a jail term of three years and/or a fine of Rs250,000, Section 20 is punishable by a jail term of up to two years and/or a fine of Rs1 million and Section 500 is punishable by a jail term of up to two years and or a fine. The complainant had claimed that Jillani, as a guest on and producer of two Dunya News programmes, one on December 8, 2017 and another on March 18, 2019, made “defamatory remarks against the respected institutions of Pakistan”.
Jillani’s lawyer told the judge that the remarks made by his clients in the TV shows and a tweet from his account did not amount to an act of cyber terrorism. But FIA’s investigating office saidJillani’s remarks fell under the ambit of cyber terrorism. A global media watchdog, Reporters Without Borders (RSF), has already slammed attempts to “intimidate Pakistan’s journalists” and said a reporter was being prosecuted for “cyber-terrorism”. The global watchdog said Shahzeb Jillani, who worked for Dunya News and had also worked for BBC and Deutsche Welle in the past, was facing charges under a controversial electronic crimes act and two criminal code provisions.
The charges include “defamatory remarks against the respected institutions of Pakistan” and “cyber-terrorism”, the RSF said, calling on a Karachi court to dismiss the charges. The cyber laws with which both the government of Pakistan and general public are grappling with a lot of confusion and more of dread on the part of the latter need closer scrutiny to ensure that the law is not be used by the government to suppress political dissent and the democratic rights of the citizens to hold the government accountable for its errors of commission and omission.
According to Janjira Sombatpoonsiri (Weaponizing cyber law—published on May 16, 2019 in International Politics and Society’s newsletter)previously, autocratic regimes relied on legal and bureaucratic tools to impede civic activism. Now, they also use cyber law. Having watched popular protests, from the colour revolutions in the former Soviet Union to the Arab Spring, challengetheir counterparts’ power, the world’s autocrats have been adopting legal measuresaimed at incapacitating media, civic groups, including pro-democracy movements and human-rights NGOs. Among the most sweeping measures are those enabling officials to monitor and punish activists’ online activities.
Over the last decade, he continues, these countries have augmented their dissent-stifling legislation with computer-related and cyber-security laws, all of which follow a similar script. Cambodia’s cyber law, enforced by a new cybercrime unit, uses ambiguous language to facilitate the suppression of free speech. In Singapore, this function is served by the Internet Code of Practice and recently the Protection from Online Falsehood and Manipulationlaw. In Myanmar, it is achieved with the 2000 web regulations, which limit what can be posted online; the 2013 Telecommunications Law, which criminalises online defamation; and the 2004 electronic transactions law (amended in 2013), which imposes heavy penalties for a long list of nebulous offenses.
Similarly, laws purportedly aimed at preventing the spread of false information – such as Article 65 of Laos’s criminal code – are said to have been used against opponents. During the 2018 election campaign in Malaysia, the ruling party enacted an anti-fake-news law to emasculate the opposition, which won anyway. In the opinion of the author for activists, pushing back against draconian cyber laws and other forms of digital repression will not be easy, not least because it remains uncharted territory. A key component of these repressive cyber-strategies is said to be expansive surveillance. Thailand’s recently-enacted cyber-security bill – which complements the Computer Crime Act, adopted in 2007 and revised in 2016 – authorises the state to expand surveillance and strengthens its hand against vaguely defined cyberattacks. The Thai government – like those in Azerbaijan, Malaysia, Morocco, and Qatar – has reportedly purchased spyware from companies, including the Italy-based Hacking Team, that would allow them to hack into citizens’ computers, mobile phones, and even GPS systems.
Data-localisation requirements – which compel tech firms to store their citizens’ data on local servers – facilitate these efforts. Vietnam – along with China, Nigeria, Pakistan, and Russia – recently introduced such requirements, supposedly to prevent data theft. But keeping data within a country also allows governments to exercise control over it. Vietnam’s cyber-security law, which took effect in January, allows the government to access locally-stored social media data and remove content deemed to oppose the state. China takes this a step further: with its vast resources, it is said to be able to use advanced artificial intelligence to analyse the data that flow in, and thus to monitor its citizens.
In addition to legal repression, the use of fake videos (‘deepfakes’) and troll armies helps governments propagate their agenda and discredit activists. Cyber trolls in Thailand, the Philippines, and Vietnam reportedly engage in systematic bullying of online dissidents. Activists across Southeast Asia and in autocracies worldwide are feeling the effects of these initiatives. Malaysia’s Communications and Multimedia Act was said to have been used to prosecute individuals for criticising the authorities or monarchy in at least 38 cases in 2017. In Myanmar, more than a hundred cases have been litigated under the Telecommunications Law since 2013, and in 2016 alone, 54 people were prosecuted and eight imprisoned for dissension on social media.
The Thai junta has jailed several dozen citizens for sharing ‘sensitive’ information on social media sites. With the 2019 election approaching, it has used the Computer Crime Act to press unfounded chargesagainst opposition parties, while turning a blind eye to its trolls’ fake news. In Vietnam, where hundreds of dissidents were charged in 2017-18 for alleged anti-state activism both online and off, the new cyber-security law is expected to only make matters worse. For activists, according to the writer, pushing back against draconian cyber laws and other forms of digital repression will not be easy, not least because it remains uncharted territory. But that has not stopped some from trying. And, already, protests such as those in South Koreaare said to have had some success in inducing increased legal oversight.
Many civic education groups have also been promoting digital literacy, so that citizens can help monitor the abuse of cyber laws. At the international level, advocacy networks have lobbied democratic governments and international organizations to put pressure on autocratic regimes. But there is also a broader need for a coordinated global responseaimed at protecting civic space. Only through sustained public pressure can one hope to persuade autocratic regimes to revise, or reverse, their cyber policies.
— The writer is veteran journalist and a former editor based in Islamabad.

Puppet on a feeble string

The appointments of Hafeez Shaikh, Reza Baqir and Shabbar Zaidi has reinforced the impression that now the government is being run not by Imran Khan and his coalition partners but by what was earlier (during the pre-and post-election days) referred to as Khalai Makhlookh

Both the PPP and the PMLN have come out of their seeming political hibernation with guns blazing threatening to launch street protest against the 10-month old PTI-led coalition government.

The leadership of both the main opposition parties are talking tough. Their target: incompetent management of the national economy by the new government; the IMF agreement; the shock devaluation of the rupee against the dollar; the amnesty scheme; the appointment of Hafeez Shaikh as the PM’s adviser on finance and that of Reza Baqir, an ex-IMF man as the Governor of the State Bank of Pakistan.

The PMLN, in the immediate run has reshuffled its office bearers. And on the directive of the incarcerated Nawaz Sharif the Party’s General Secretary Ahsan Iqbal has convened a meeting on May 20 in Islamabad to discuss the option of taking to the streets against the government.

On Friday Shahbaz Sharif, the president of the PMLN and the leader of the opposition in the National Assembly talking to the media in London took the government to task accusing it of selling out to the IMF. He was very hard on Prime Minister, Imran Khan calling him a shameless liar. On the same day in Karachi Muhammad Zubair, former Sindh Governor read out a long list of failures of the government on the economic front. He reserved his bitterest criticism for Hafeez Shaikh and Reza Baqir alleging that the two had no roots in Pakistan as, he alleged, they preferred to keep their properties in foreign countries, not in Pakistan.

Meanwhile, PPP Chairman Bilawal Bhutto Zardari is said to have invited all opposition party leaders to an Iftar-dinner party. He is also said to have had telephonic conversation with Maryam Nawaz. Ms. Nawaz who was recently appointed Vice President of the PMLN is said have decided to start taking active part in politics.

Clearly, the opposition seems to have decided to bring under further pressure an already faltering government by fully exploiting the general public’s suffering induced by the recent all-round price-hike.

The opposition seems to have been emboldened by the successful street power that the PMLN could mobilize on the night of May 7, 2019 when an emotionally charged, fairly large slogan-chanting crowd accompanied Nawaz on his way back to Kot Lakhpat jail from Jati Umra. The show of street power that one witnessed in Lahore was unexpected, at least, for most of our political pundits. And they were certainly not expecting to hear the crowd shouting in resounding unison the GT Road mantra ‘vote ko izzat do’.

And all of a sudden somebody appeared to be feeling too nervous because the broadcast media, with no exception, relayed highly ‘self-censored’, ‘muted’ video clips of the event in patches pointing to a new twist in the tale that had begun with the ouster of Nawaz from government and then from politics midway through 2017 when the Supreme Court found him, according to a self-serving interpretation of the relevant law, guilty of not being ‘Sadiq’ and ‘Ameen’.

Most of the political pundits had woven a fiction about the PMLN leadership in the wake of the second incarceration of Nawaz following NAB court’s guilty verdict in the Al-Azizia case and kept repeating it so many times, from so many angles that they started believing it to be a fact.

One fiction that was most popular was that Nawaz and his daughter were trying to cut a deal and go abroad doing a repeat of 2000 when the Sharif family preferred a decade-long exile to Nawaz’ incarceration in Pakistan after having been found guilty of an abortive plane hijacking case.

And when Shahbaz Sharif, known to be the proverbial ‘good cop’ in the PMLN with a reputation of being close to the Army was nominated as the President of the PMLN, the move was taken as proof of a deal-in-the-making. The PTI helped promote the fiction when some of its leaders like Murad Saeed claimed that they were privy to such a deal being sought. And Prime Minister Imran Khan lent further credence to the fiction by declaring, every time he made a public statement, that he would rather die than grant ‘NRO’ to the ‘corrupt’ leadership of PMLN and PPP.

During this period, that is leading up to the new year the PMLN under the leadership of Shahbaz Sharif went about planning its post- election strategy. Understandably, the opposition decided to accept the results, under protest though. Rejecting them immediately following their announcement would have meant going back to the streets to prove the point which, considering the post- election national mood in the immediate run, did not seem a politically savvy move or even practical. And the fear that if the move succeeded the system itself would be wrapped up by the establishment (read Army) as it would never contemplate letting the opposition PMLN led by Shahbaz return to power so soon.

Then it was time for oath taking ceremony for the newly elected NA members followed by elections of the Speaker and his deputy, the leader of the house (Imran Khan) and the leader of the opposition (Shahbaz).

The long drawn tussle between the ruling coalition and the opposition over the election of the Chairman of the Public Accounts Committee (PAC) which finally ended with the election of Shahbaz Sharif on December 13 was a classical demonstration of how an experienced opposition could make rings around an inexperienced government benches.

By this time the utter incompetence of the PTI and its leader were on full display. Indeed, it was not a government in full command of parliament that entered the new year, thanks largely to the aggressive posturing that the opposition had adopted under the leadership of Shahbaz and the young PPP Chairman, Bilawal Bhutto Zardari. They did not let the PM dominate the NA even for a single day from day one which actually forced Imran Khan to keep away from the House. He is yet to attend a single session of the Upper House. On the two occasions that the Opposition allowed him to speak in the NA—once taking the House in confidence on why he was releasing the Indian pilot brought down by Pakistan Air Force men in a dog-fight over Pakistani air-space and the other occasion when he stood up in the House the other day to hail the passage of the 26thConstitutional Amendment with the full cooperation of the Opposition— he was totally lackluster and uninspiring, seemingly lost for the right words and the right language to express his feelings.

He does appear in his elements and passionately convincing only when attacking the opposition and calling them ‘Chor, Dakoo’. But while speaking on policy issues in or out of NA or when delivering written speeches on ceremonial occasions or at official events, he appears almost tongue tide, as if his heart is not in it—his facial expression, eyes and the pitch of his voice usually don’t match the words being spoken. He sounds more like an automaton.

Most of the second half of February and early March were taken up by Indo-Pak clash which Pakistan had won hands down. The opposition, naturally, was completely one with the government on this occasion.

Most of his team along with Imran Khan himself being outsiders, having never before managed the affairs of a government (the KP experience was too meagre compared to the challenges of the federation) they were finding it increasingly difficult to make the federal bureaucracy work the way the government wanted. Most of the civil servants had stopped working because of the NAB sword over their heads.

Meanwhile, the price hikes, the steep devaluation and foot dragging on the matter of going or not going to the IMF led to total chaos on the economic front creating the impression of a government collapsing under its own weight. The emerging situation was something like god-sent for the opposition which exploited it the hilt by attacking the government both inside Parliament as well as in the Punjab provincial assembly and out-side in the prime-time talk-shows matching the government’s media trial being conducted using half-truths against the main leadership of the opposition PMLN and PPP.

And when the PM mid-way through April replaced his finance team which was being led by PTI poster boy Asad Umar with a brand new team led by Hafeez Shaikh who is a technocrat and certainly not a member of the Party in power it was seen as the beginning of the end of the Prime Minister Imran Khan’s lead role in the affairs of the PTI-led coalition government.

The appointment of IMF’s country mission chief in Egypt, Reza Baqir as the Governor of State Bank of Pakistan (SBP) and a third technocrat, Syed Shabbar Zaidi, Senior Partner in Ferguson Associates, a tax consultancy firm as the Chairman of Federal Bureau of Revenue (FBR) has reinforced the impression that now the government is being run not by Imran Khan and his coalition partners but by what was earlier (during the pre-and post-election days) referred to as Khalai Makhlookh (KM).

The lingering fear that the KM would wrap up the system itself in case it appeared that the selected government would collapse in the face of street protest leading to fresh elections, opening up the possibility of the PMLN returning to power is likely to make the opposition to think twice before deciding to cross the Rubicon. Most probably, it would refrain from taking the plunge. But perhaps the selectors would not mind if the opposition could maneuver an in-House change with Imran being replaced by Shah Mahmood Qureshi.

This will allow the PTI-led government to complete its five-year term as did the PPP and the PMLN governments despite each losing one PM, warding off, in the process, the possibility of KM wrapping up the system and taking over setting the country back at least by a decade once again, in terms of democracy.

 

Technocrats Takeover Government Via IMF

The PTI-led ruling coalition has inducted three technocrats – Hafeez Shaikh, Adviser to the PM on finance, Reza Baqir, Governor, State Bank of Pakistan and Syed Shabbar Zaidi, Chairman Federal Board of Revenue – to manage our national economy. Since each one of these three gentlemen has come from different backgrounds, it would be wrong to expect them to gel into a well-oiled team immediately following their joining the government. But that is exactly what one saw happening as within a couple of days the trio in a unified move successfully managed to negotiate a deal with the IMF that had appeared over the last so many months an unachievable goal.

Even from what little one knows about their respective careers, experiences and academic backgrounds it would not be difficult to conclude that none of these three official economic managers of the government subscribe to the political philosophy of the ruling Party, Pakistan Tehreek-i-Insaf (PTI), whose main political objective has been to establish an Islamic social welfare state in Pakistan on the lines of Madina ki Riaysat.

On the contrary, all the three belong to Milton Friedman’s school of thought which is based on the principle that ‘small is beautiful’ and ‘greed is good’. They are believers in free market economy, in trickle-down theory and in the motto that ‘it is not the business of the government to be in business’.

That is why perhaps even without having gelled into a team the three have, within days of their induction in the government, successfully finalised a staff agreement for an Extended Fund Facility (EFF) of three years amounting to about $6 billion from the IMF which is subject to approval by the Fund’s Executive Board. And now the three are busy putting together the next year’s federal budget which is expected to be a document reflecting more or less the conditionalities listed in the agreement signed on May 13, 2019 between the government and Fund’s technical team.

Non-PTI Official Economic Managers

But the question is why has the ruling Party handed over the national economy to a trio which not only does not subscribe to its political philosophy, but instead has been known to have worked to demolish this very political philosophy?

PTI Chief Imran Khan has taken a number of unexpected political U-turns since coming to power but the U-turn that the trio managing his government’s economy is expected to force on him would negate the very raison d’être of his being in politics.

The EFF agreement signed between the IMF’s technical team and the official trio managing the PTI government’s economy flies directly into the face of PTI’s election manifesto. And here is what Imran Khan said in his brief victory speech on July 26, 2018: When I came into politics, I wanted Pakistan to become the kind of country that our leader Muhammad Ali Jinnah wanted.

He said his inspiration was Prophet Muhammad (PBUH), “the city of Medina that he founded, how it was based on humanity. For the first time, the state formed was based on humanitarianism.”

That is my inspiration, that Pakistan should have that kind of humanitarian state, where we take responsibility for our weaker classes, he added.

But those who subscribe to the trickle-down theory of the infamous Washington Consensus work against the very weaker classes while pushing for macroeconomic stability.

Indeed, while macroeconomic stability is a highly-desirable goal yet by the time a country succeeds in achieving this goal, it invariably ends up with high debt, chronic resource constraints, high current account deficit, unemployment rate shooting through the ceiling, inflation spiraling out of control, causing widespread poverty and increasing inequality to criminal levels.

Big Business Takes Over

Meanwhile, it appears that big business has taken over the PTI-led coalition government. All those powerful lobbies representing various vested interests like the automobile industry, the sugar mafia, the real estate racket, the engineering bonanza etc., led from behind the scene by the even more powerful Overseas Investors Chambers of Commerce and Industry have over the nine months chewed away the entire socio-economic road-map of Naya Pakistan to implement which the ruling Party had entered the government in August, last year.

Signaling the complete take-over was the ouster of Asad Umar from the finance ministry. Asad’s team has disappeared along with him. The Finance Secretary has already been changed. The SBP governor, Tariq Bajwa withdrew submitting his resignation and the FBR Chairman, Dr Jahanzeb Khan stood transferred.

But then the big business on its own would not have accomplished all this. Someone with a bigger political clout must have decided to detach the government from what had appeared in the last nine months to be highly incompetent hands of Imran Khan and his under-16 team before bringing in Hafiz Shaikh, Reza Baqir and Syed Shabbar Zaidi. Could it be the all-powerful establishment (read Army)? But those who claim to have inside information insist that it is not the omnipotent establishment but Jehangir Tareen who they claim is now functioning as the Prime Minister with Imran having been reduced to no more than an impassive façade.

Hard to believe. But with the economic management going out of the hands of the ruling party, such stories, even if they are no more than self-serving gossip start sounding authentic.

Failed Economic Model

No matter how it has been maneuvered the management of our economy is now back in the hands of those people who have shaped and served the economic model that this country has been using all these 71 years and which has consistently failed to deliver.

n early decades this model was based on the so-called ‘trickle-down’ theory propounded by the Harvard Advisory Group and since mid-1970s on the one propounded by Milton Friedman’s Chicago School. Interestingly the Chicago School also promoted almost the same ‘trickle down’ theory with three trade-mark demands: privatisation, deregulation and deep cuts in social spending.

This economic model has served to expand the size of Pakistan’s economy to about $300 billion in the seven decades that it had been put to use. But it is too small an economic size compared to the size of our population. In this context even an annual average growth rate of 7 to 8 per cent remains meaningless in view of its gigantic lags in terms of physical and social infrastructure, stagnating export volume and ever-higher volumes of its imports.

Pakistan’s economy needs to grow at an annual average rate of at least 10 per cent of the GDP over the next 10 to 15 years to be able to lift the teeming millions from below the poverty line and generate enough jobs to absorb its ever-expanding youth bulge in gainful employment, provide to the majority of its population affordable educational facilities, health cover, public transport, telecommunication facilities and housing. But in order to grow at this rate, the economy would need investment to the tune of at least 35-40 per cent of the GDP at an annual average for the next 10 to 15 years.

However, our current rate of savings has been stagnating at around 12-14 per cent of the GDP for the last several years. The gap of almost about 25-30 per cent between the required rate of investment and the existing rate of saving could be filled with borrowed resources and FDI. Borrowing is not bad as long as the borrowed resources are invested in economically and socially-profitable avenues.

But over the years, resources from this source, especially the concessional loans, have come down to no more than a trickle because our traditional lenders now feel that it would be unfair to their own taxpayers to keep pumping their hard-earned resources into a country which has shown no willingness to tax the incomes of its own citizens.

Black Economy

But most of the revenues collected domestically are through indirect taxes which are regressive in practice and a big chunk of direct taxation is collected through what is known as withholding taxes which again amounts to no more than a minuscule residual of huge settlements made through black cash in most of the major transactions.

The biggest source of black economy which has reached almost the size of the white economy is the exemption allowed to incomes from agriculture. Today, most big businesses own huge land-holdings in barren regions.

On books they show the profits earned from their other businesses as income from agriculture and declare losses from the former. Most of the professionals like doctors, engineers, lawyers, high-end educational institutions, hospitals, etc., share their taxes in three ways keeping a large part of the amount in their own private lockers, distributing the remaining balance between the tax collector (bribe) and the treasury (under-declaration).

During General Zia’s rule of 11 years and that of General Musharraf for nearly nine years, absentee land-owners (including mighty generals who received state lands as gallantry awards or otherwise!) did not pay a single penny as agricultural income tax or wealth tax.

Taxation of ‘agricultural income’, at present, is the sole prerogative of provincial governments under the 1973 Constitution. All four provinces have laws to this effect, but total collection in 2013-14 was less than Rs2 billion (share of agriculture in GDP was about 22 per cent). No one has calculated how much tax loss Pakistan has suffered perpetually since 1977 on account of non-taxation of agricultural income alone as suggested under the Finance Act, 1977.

If we add total loss of revenue through various exemptions, non-taxation of benefits given to the state oligarchy and through Statutory Regulatory Orders issued during the last four decades, the number comes to more than Rs100 trillion — this explains how unprecedented concessions to the rich has made the state poorer, rendering every citizen of this country to enormous indebtedness. We would not have required any borrowing at all, if tax losses were historically not incurred.

Simplistic Assumptions

The model of Imran’s Naya Pakistan was presumably built around simplistic assumptions such as, tax collection would double to Rs8 trillion simply because people trusted Imran Khan and therefore would pay their due taxes honestly, that foreign exchange reserves would go up steeply because Imran’s well-wishers in foreign countries would start remitting billions of dollars because they trusted him, the annual loss of $10 billion due to money laundering would stop forthwith because the corrupt rulers would have disappeared as soon as Imran took over the reins of the country, and the siphoned off money amounting to $200 billion stashed outside Pakistan would be brought back the very next day after he is installed in the PM’s office, with this money all our foreign debt would be repaid and Pakistan would still be left with $100 billion, with no more foreign debt to repay and foreign reserves going up by a colossal $100 billion, the PTI government would be able provide 10 million jobs over five years and construct 5 million housing units for the poor in the same period.

Most of his team along with Imran Khan himself being outsiders, having never before managed the affairs of a government (the KP experience was too meagre compared to the challenges of the federation) they were finding it increasingly difficult to make the federal bureaucracy work the way the government wanted. Most of the civil servants had stopped working because of the NAB sword over their heads.

Political Blunders

The biggest political blunder that the PM committed was the appointment of Usman Buzdar as Punjab Chief Minister which led to an unending political chaos in Pakistan’s biggest province with three centres of power, the other two being manned by Governor Sarwar and Speaker Pervez Elahi.

The next blunder of the PM or for that matter, one bigger than that of Buzdar was his misplaced faith in the financial acumen of his finance minister, Asad Umar. His third blunder was to gather around him as many as half-a-dozen media experts. And a couple of members of his team, like health minister Kiyani and Hoti were seen indulging in blatant corruption.

Indeed, it is not very difficult not to disagree with Mohammad Taqi, a Pakistani-American columnist of the Wire (Pakistan Army’s Imran Khan Project Is Going Belly Up) that Pakistan’s government and its army handlers are in a disarray and the reason is not some concerted domestic political opposition or foreign pressure; it is the sheer incompetence of the army’s political protégés and the outfit’s ignominious tradition of biting off more than it can chew.

“Pakistan’s economy is in a virtual free-fall … [since the engineered ouster of] former Prime Minister Nawaz Sharif’s ouster in 2017. Within a span of the past few weeks, finance minister Asad Umar – touted for a decade as the economics whizz-kid – was unceremoniously shown the door, the State Bank of Pakistan’s governor eased out and the chairman Federal Bureau of Revenue fired.

“In the face of a massive economic turmoil, cricketer-turned-politician Imran Khan’s Pakistan Tehrik-e-Insaf (PTI) government … is running around like a chicken with its head cut off.”

Muhammad Ziauddin in this article discusses the apparent takeover of the government by technocrats like Hafeez Sheikh, Reza Baqir and Syed Shabbar Zaidi. The EFF agreement signed between the IMF’s technical team and the official trio managing the PTI government’s economy flies directly into the face of PTI’s election manifesto, Ziauddin argues.

Towards Riasat-i-Madina type social well-fare state via IMF!

Big business seems to have taken over the PTI-led coalition government. All those powerful lobbies representing various vested interests like the automobile industry, the sugar mafia, the real estate racket, the engineering bonanza etc., led from behind the scene by the even more powerful Overseas Investors Chambers of Commerce and Industry have over the nine months chewed away the entire socio-economic road-map of Naya Pakistan to implement which the ruling Party had entered the government in August, last year.

Signaling the complete take-over was the ouster of Asad Umar from the finance ministry. Asad’s team has disappeared along with him. The Finance Secretary has already been changed. The other day the SBP governor, Tariq Bajwa submitted his resignation and the FBR Chairman, Dr. Jahanzeb Khan stood transferred. The incoming PM’s advisor on finance Hafiz Shaikh is expected to bring his own team. Shaikh is a former IMF man who has also worked with the Musharraf government, first as Sindh’s finance minister and then as privatization minister at the Centre. Next we see him as the finance minister in the Zardari cabinet. And not surprisingly he is being joined by an IMF man as the SBP governor. The new faces that appeared on scene following the mind-boggling changes at the top mark the unfolding of a new socio-economic road-map that leads Pakistan straight into the Washington Consensus trap. 

Fund’s policy prescriptions  

This trap is made up of a set of 10 economic policy prescriptions considered to constitute the “standard” reform package promoted for crisis-wracked developing countries by Washington, D.C.-based institutions such as the International Monetary Fund (IMF), World Bank and United States Department of the Treasury. The term was first used in 1989 by English economist John Williamson. The prescriptions encompassed policies in such areas as macroeconomic stabilization, economic opening with respect to both trade and investment, and the expansion of market forces within the domestic economy. 

Subsequent to Williamson’s use of the terminology, the phrase Washington Consensus has come to be used fairly widely in a second, broader sense, to refer to a more general orientation towards a strongly market-based approach (sometimes described as market fundamentalism or neoliberalism). 

The Consensus as originally stated by Williamson included ten broad sets of relatively specific policy recommendations:

  • Fiscal policy discipline, with avoidance of large fiscal deficits relative to GDP;
  • Redirection of public spending from subsidies (“especially indiscriminate subsidies”) toward broad-based provision of key pro-growth, pro-poor services like primary education, primary health care and infrastructure investment;
  • Tax reform, broadening the tax base and adopting moderate marginal tax rates;
  • Interest rates that are market determined and positive (but moderate) in real terms;
  • Competitive exchange rates;
  • Trade liberalization: liberalization of imports, with particular emphasis on elimination of quantitative restrictions (licensing, etc.); any trade protection to be provided by low and relatively uniform tariffs;
  • Liberalization of inward foreign direct investment;
  • Privatization of state enterprises;
  • Deregulation: abolition of regulations that impede market entry or restrict competition, except for those justified on safety, environmental and consumer protection grounds, and prudential oversight of financial institutions;
  • Legal security for property rights.

 

The main reason why the PTI’s socio-economic road-map could be chewed away so easily and that too by the lobbyists of the big business was that it was based on unfunded information and unconfirmed reports without any underpinning by universally recognized principles of political economy.  

Road-map for social well-fare state

An elected Prime Minister or/and his finance minister need not be professional economists. But since the manifesto of the PTI had promised to establish a social-welfare state on the lines of Riasat-i-Madina, one had expected the two, Imran Khan and Asad Umar to know as to what socio-economic policies were needed to be followed to achieve this objective. It turns out, they didn’t even know what they were talking about or promising from the container. For example, in the very first month of his term the PM was talking about creating wealth by promoting the country’s private sector. He seemed totally ignorant of the fact that no social-welfare state can be established by promoting the private sector. It only inequality that gets promoted when you promote the private sector This is what free market economy has proven: The world’s 62 richest billionaires have as much wealth as the bottom half of the world’s population, according to a new report from Oxfam International. The wealthiest have seen their net worth soar over the five years ending in 2017. Back in 2010, it took 388 mega-rich people to own as much as half the world. And the Top 1% own more than everyone else combined — a milestone reached in 2015, a year earlier than Oxfam had predicted. 

State capital

It was state capital not private capital that had actually created any assets and/or wealth in the country during all these 71 years of our existence as an independent country. 

Most of the major industries in the country in the early days were set up using the state capital and not by private capital. In fact, even textile and chemical industries used to be set up with state capital by the PIDC and then sold to private sector for peanuts. 

One of the main policy points in the ten-point Washington Consensus is broadening of tax base. We have had about 12 Fund programmes in recent years. But none of these programmes could succeed in broadening the tax base because our private sector does not want to pay its taxes. On the other hand, the IMF since it is basically a developed world’s instrument for promoting free market economy and discourage planned economies has readily given a waiver on this issue every time a government failed to accomplish what the Fund had prescribed. 

The interregnum provided by the nationalism spree is another story deserving a separate treatment. But here again there is enough evidence that ZA Bhutto was sent to gallows on trumped up charges because of, among other things, he was all but ready to implement radical taxation reforms with tax on agriculture income as its flagship reform. One must also keep in mind that ZAB did not nationalise any of the privately owned textile mills or industries that were set up in the country by foreign investors. And in the short span of four years he had also created assets like Heavy Mechanical Complex, Heavy Electrical Complex, Fertilser factories, Machine Tool factory and Special Steel factory etc. in the public sector. All essential for setting up import substitution industries.

During President Zia’s regime with Ghulam Ishaq holding the finance portfolio in his economically ignorant hands the regime not only ate away the assets created by ZAB in the public sector but it made the country go into the reverse direction while trying to denationalize the units that Bhutto had nationalized, ending up bureaucratising the economy. For running the government GIK would borrow from nationalized banks at rates less than 06 per cent while the banks were mobilizing resources at 10-15 per cent. This was the surest way to destroy the country’s banking system and keep a legitimate tax culture from taking roots in the country.

And it was about this time that the term users’ charges was introduced in our socio-economic litany. This was the beginning of the end of the social welfare model of economy the first PPP government had tried to introduce. We suddenly entered the luxury of free market economy which has led us into the trap called Washington Consensus.

And by this time the infamous multilateral aid agency, the Paris Club had started dictating our annual budgets. Successive annual budgets were being framed on the basis of the anticipated project and non-project aid for the year which were chosen keeping in mind the economic interests of the donors and not that of the recipient. Once when the then planning minister Dr. Mehbubul Haq was asked about being a consistent client of the Paris Club, his answer was revealing. He said the foreign aid is in fact an expression of confidence of donors in our economic health! 

What the then official economic managers had refused to see was that out of each aid dollar, 99 cents would go back to the donors in the shape of consultation fee, imports from donors dictated by transfer pricing system, shipping charges etc. And the residual cent would be pocketed by the corrupt civil-military bureaucracy.

An impossible task

The model of Imran’s Naya Pakistan was built around simplistic assumptions such as: tax collection would double to Rs8 trillion simply because people trusted Imran Khan and therefore would pay their due taxes honestly. Or that foreign exchange reserves would go up in large numbers because Imran’s well-wishers in foreign countries would start remitting billions of dollars because they trusted him and were certain that he would not steal from the public exchequre as did the Sharifs and the Bhuttos. 

The annual money laundering amounting to $10 billion, as estimated by Imran would be saved because the corrupt rulers would have disappeared as soon as he took over the reins of the country

And the siphoned off money amounting to $200 billion stashed outside Pakistan would be brought back the very next day after he is installed in the PM’s office. With this money all our foreign debt would be repaid and Pakistan would still be left with $100 billion. With no more foreign debt to pay and foreign reserves going up by a colossal $100 billion, the PTI promised the following: one crore jobs over five years and making 50 lakh housing units. 

It did not take more than eight months to burst the Naya Pakistan bubble. And now he wants to build his social welfare state on the lines of Riasat-i-Madina with the help of the IMF! An oxymoronic idea, to say the least.

Testing times

With both revenue collection and exports continuing to remain largely unresponsive to efforts being made on these two fronts since the advent of the PTI-led coalition government in August last year the chances of the current fiscal year ending with any significant reduction in economic challenges confronting the country are looking too dim. 

If anything, these challenges are expected to become even graver because the conditionalities accompanying the IMF programme, negotiations for which seem to be in the final stages, are likely to slow down the economy considerably resulting in further adversely affecting the revenue collection and our exports, as a consequence, losing further their competitive edge in the world markets because of an anticipated steep rise in cost of money as the discount rate is expected to swell significantly in response to significant hikes anticipated in the domestic inflation rate. Stagflation in the immediate run cannot be ruled out, as a result.  

The one- size –fit- all Fund conditionalities are based on the following non-negotiable 10 policy principles:

  • Fiscal policy discipline, with avoidance of large fiscal deficits relative to GDP;
  • Redirection of public spending from subsidies (“especially indiscriminate subsidies”) toward broad-based provision of key pro-growth, pro-poor services like primary education, primary health care and infrastructure investment;
  • Tax reform, broadening the tax base and adopting moderate marginal tax rates;
  • Interest rates that are market determined and positive (but moderate) in real terms;
  • Competitive exchange rates;
  • Trade liberalisation: liberalisation of imports, with particular emphasis on elimination of quantitative restrictions (licensing, etc.); any trade protection to be provided by low and relatively uniform tariffs;
  • Liberalisation of inward foreign direct investment;
  • Privatisation of state enterprises;
  • Deregulation: abolition of regulations that impede market entry or restrict competition, except for those justified on safety, environmental and consumer protection grounds, and prudential oversight of financial institutions;
  • Legal security for property rights.

The finance team led by Asad Umar has been completely replaced by a new one led by Hafeez Shaikh. This has happened, it is assumed, during the last phase of negotiations with the IMF for a crucial, make or break programme amounting to $6-8 billion, and certainly at the fag- end of budget making process for the next fiscal year (2019-20).

One only hopes that the timing of this abrupt change at the top would not drastically impact on next fiscal year’s income and expenditure estimates. Likewise, the final Fund programme too would, hopefully, remain immune to any adverse consequences of the late hour change in the negotiating team.  

Both the next budget and the success of the Fund programme would crucially depend on the new finance team’s ability to broaden the tax base, a conditionality the country has consistently failed to fulfil. And looking at the team made up of two highly qualified technocrats with IMF background—Hafeez Shaikh, adviser to the PM on finance and Reza Baqir, Governor SBP— one would certainly feel reassured. More so, because the IMF background of the Advisor and the Governor would hopefully add extra technical depth to our team negotiating with the Fund which one is certain would more than neutralise any adverse impact of the timing of the change in the team’s leadership. 

The Fund appears rather suitably serious about its conditionality pertaining to the exchange rate and at the same it would want, as per one of its non-negotiable conditionalities, for Pakistan to continue with a liberal import policy. This is going to be too tough a call for our new official economic managers to deal with. A possible way out of the testing situation could be by rationalising tariffs—high for finished goods and almost zero for raw materials and intermediaries. Of course, in the immediate run this would cause a significant decline in the collection at the customs. But cheaper availability of raw materials and intermediaries could serve as an incentive for our entrepreneurs and foreign investors to set up fabrication units for goods whose import would become prohibitive due to high tariffs, opening up in the process new avenues for additional revenues, especially under the sales tax head.

Another challenge that our official economic managers would be facing would pertain to the conditionality regarding broadening of the tax base without causing any major disruption in the economic activity which one fears would, in any case, take place if economically undesirable tax exemptions were withdrawn and traders and manufacturers were subjected to stricter application of tax laws.

This has happened in the past and is not likely to be not repeated again in case the rich in the country are made to share the hardships of reforms the nation is undergoing currently and a huge burden of which has already been shared by the not-so-rich as well as those living below the poverty line following massive increases in the prices of essentials, like gas and electricity including a hefty increase in fuel prices. 

Big business seems to have already taken over the political decision making process in the country. Lobbyists of powerful vested interested like the automobile industry, the real estate racket, the sugar mafia, the chemical conmen, the engineering elite, etc., are said to have already forced the political government to concede a number of fiscal and monetary concessions.

This perhaps is going to be the biggest test the new finance team would be facing once a Fund programme is signed and sealed. Both the PM’s adviser on finance and the Governor of the SBP being formerly of the IMF decidedly belong to the Milton Friedman’s school of economic thought, therefore, they are expected to bend backwards to facilitate the private sector to operate in an environment of free market economy without any let or hindrance.  But the biggest hindrance the two would be facing in this particular task would be the very private sector they would like to facilitate and promote because our private sector considers tax evasion to be the foundational underpinning of free market economy. Therefore, it believes, the Fund’s conditionality regarding broadening of tax base does not apply to its members. 

Last month, PM Khan ordered the FBR to flex its muscles against big tax evaders and make them cough up nearly Rs200 billion in the next four months. With every passing month, the FBR’s tax shortfall is widening.  

The government has set the budget deficit target for the current fiscal year at 5.1% of gross domestic product (GDP). But in the first half the deficit widened to 2.7% of GDP or Rs1.03 trillion due to a steep shortfall in tax revenues and higher expenditure on debt servicing and defence needs. The FBR has so far issued more than 6,500 tax notices and recovered nearly Rs1.4 billion in the current fiscal year from these people.

The political government, meanwhile, is said to have included media persons, sportsmen and real estate tycoons in its hunt list of top tax evaders amid increasing pressure on the Federal Board of Revenue (FBR) to give quick results to address one of the biggest issues of Pakistan’s economy – the yawning budget deficit. 

It has been decided to pick top 100 cases from every Regional Tax Office (RTO) and Large Taxpayers Unit (LTU), which will expand the final list to 2,400. These 2,400 people are politicians, celebrities, sportsmen, media persons and real estate tycoons, according to the FBR. 

The FBR also has already directed its field formations that a sizeable number of parliamentarians should also be selected for sending tax notices on the basis of income declared in their tax returns for tax year 2017. 

Top 10 parliamentarians in terms of tax contribution paid Rs322 million in taxes, which was equal to 60% of total taxes paid by all members of parliament in tax year 2017. The fifth tax directory of parliamentarians showed that lawmakers, including members of the federal cabinet, paid Rs535 million in taxes during tax year 2017, up Rs139 million or 35%.

The hanging sword of FATF

A face-to-face meeting with FATF’s Asia Pacific Group with Pakistan is scheduled later this month to be followed by the Task Force undertaking its penultimate review of Pakistan’s progress early next month. The sword of FATF, it seems, will continue to hang over our heads until after September this year when we would know our fate: whether we continue to remain in the grey list or are taken out of it or consigned to the black list.    

It is perhaps because of our entanglement with the FATF that the IMF was seen to be dragging its feet on the matter of finalising a programme that we needed urgently as our foreign exchange reserves mobilised through short-term loans from friendly countries (Saudi Arabia, UAE and China) of around $ 9 billion have already disappeared.

What is extremely worrying is, the very governing structure of the APG is exceptionally unfriendly. A very hostile United States is the president of FATF represented by Mr. Marshall Billingslea, a serving Assistant Secretary of US Treasury who also heads the office of Terrorist Financing Crimes. Australia which is part of the anti- China (read Pakistan as well) Indo-Pacific alliance is the president of the APG and India which has already vowed to isolate Pakistan economically and just a few weeks back had violated our physical sovereignty by sending across the international borders jet fighters and bombed Pakistani territory is the Co-chair of the APG. With such a formidable combination of hostile forces sitting on the review panel one cannot rule out the possibility of handing out a rigged judgment. The only redeeming feature in the administrative set up is China which sits on the FATF as its Vice- President represented by Mr. Xiangmin, Director General of the Legal Department at the People’s Bank of China.

Equally worrisome is the fact that the European Commission (EC) has already placed Pakistan in its list of inadequate jurisdiction on Anti-Money Laundering and Counter Terror Financing regimes. If in such a situation we are pushed into the ‘black list’ by the FATF for no genuine fault of ours it will unleash serious economic and financial impact down the stream causing immense damage to Pakistan’s economy.

The most obvious result would be cost of doing a financial transaction through established banking/ financial system, increased premium on Pakistani instruments in the international capital markets, and the multilateral financing organisations would add risk premiums on any money borrowed. Black listing will squeeze Pakistan’s economy further and make it harder for the country to meet its mounting foreign financing needs, including potential future borrowings from the IMF. And if we remain in the ‘grey list’ it could lead to a downgrade in Pakistan’s debt ratings, making it more difficult to tap into the international bond markets.  Further, it would lead to down grading of Pakistan’s financial viability. 

The situation becomes all the more critical when seen in the context of the country’s current economic data: Exports-$23 billion, Imports-$42 billion, Remittances-$19 billion, Fiscal deficit 6% of GDP, Tax-to-GDP ratio-12%, Inflation-8%. 

And if this data is analysed against the projections of GDP growth rate by the three major multilateral aid agencies, we seem to be falling off the cliff sooner than later. According to World Economic Outlook report of IMF, Pakistan’s GDP will grow at 2.9% in FY 19 and 2.8% in FY20. Similarly, the World Bank has also projected lower growth trajectory in coming years with GDP growth for FY19 at the rate of 3.4%. Similar projections have been made by the Asian Development Bank and according to its estimates growth would decline to 3.9% in FY19.

This would mean Pakistan’s GDP currently estimated at $320 billion would shrink by 2020 to around $280 billion which would mean our revenue collection ability would decline further even with accelerated efforts to expand the tax base ending next financial year with a fiscal deficit much larger than the current estimate of an unsustainable 6%.

In the meanwhile, the indirect costs like increase in inflation, increase in the discount rates, decline in industrial productivity, decline in exports, deterioration in currency etc., and stagnant inflow of FDI will impact adversely on the overall economy. 

Legalized plunder of the State

We are just a few weeks away from the next federal budget. The months leading to the drafting of the proposals for the 2019-20 balance-sheet have been chaotic, to say the least. With only a couple of months from the announcement of the next fiscal year’s budget, the three main official economic managers were replaced by a team of none-PTI persons. Not that all the three of the ousted team were from the ruling party. But the abruptly dismissed finance minister, Asad Umar, was not only from the party but was actually the economic poster-boy of the PTI. The other two—the Governor of the State Bank of Pakistan ((SBP) and the Chairman of the Federal Bureau of Revenue (FBR) were civil servants.  All the three of the incoming team are technocrats. Hafeez Shaikh, adviser to the Prime Minister and Baqir Reza, the SBP Governor have served the IMF, with Mr. Reza coming in directly from Fund’s assignment in Egypt. Shabbar Zaidi, the honorary Chairman of the FBR is from the private sector, senior partner of Ferguson Associates. None of these three have ever worked for a government or multilateral or private sector organization together at the same time. Nor are they known to have had any political affiliation with the PTI. It is Mr. Reza’s first government job. Mr. Shaikh has served the Musharraf regime, first as finance minister of Sindh and then federal minister for privatization. He has also served the PPPP-led government as its finance minister for three years from 2010 to 2013. Shabbar Zaidi is Pakistan’s top-notch tax lawyer whose clients are said to adorn most of the country’s rich on the ‘who’s who’ list. 

This is the team which is finalizing our next year’s budgetary proposals. Since none of these three is known to have had any links with the PTI’s leadership or known to subscribe to the Party’s political ideology, one does not expect them to come up with budgetary proposals for the next year other than a repeat of a status quo document.

If what is being assumed is what we are going to get next month then the poor and the not-so-poor of this country are expected to suffer the most. The inequality between the handful of Pakistani rich and the rest of the population is bound to enlarge further. 

The handful of the rich that has cornered the country’s wealth include, the feudal aristocracy, the military, the multinational companies, the real estate owners, MNAs/MPAs and senior civil bureaucrats.

How this small privileged group exploits the majority and denies it the fruits of developments is summarized in a short chapter- State Capture by the Elite- in a 537-page book ‘Growth and Inequality in PakistanAgenda for Reforms’ by Dr. Hafiz A. Pasha launched last month:    

“The process by which ‘state capture’ takes place is by the promulgation of rules, procedures and laws which confer special privileges to these Elite.

“The feudal class —13438 large land owners, representing only 0.2 percent of the total population of farmers who own over 11 percent of farm area with average landholding of 435 acres—enjoys numerous privileges including a very low income tax, extremely small water charges, input subsidies, high procurement and support prices and low electricity charges on tube wells. The solutions are obvious, including the levy of the AIT at the same rate as non-agricultural income and pricing of output at world prices and inputs at their cost or a subsidy in the case of fertilizer. This faces formidable opposition because of the strong representation of the feudal class in the Assemblies.

“The military has diversified its role to areas which do not have a link with the defense of the country. Today, the Army is the owner of the biggest conglomerate of housing societies for the upper income groups and of companies producing a variety of goods and services. The Fauji Foundation and the Army Welfare Trust have assets of Rs 382 billion and net profit of over Rs 30 billion. The Chief Justice of the Supreme Court has advised that the Army ought to be only involved in low cost housing for the common soldier. Also, the various tax privileges, like the exemption from sales tax in Cantonment Areas, need to be withdrawn.

“Multinational companies in Pakistan generally operate behind high tariff walls, set up to attract them. The best example is that of foreign companies assembling and selling automobiles. In addition, there is no vigilance over transfer pricing, especially by pharmaceutical companies. The Chinese companies that have entered Pakistan recently enjoy virtually tax free treatment from all taxes, including income tax exemption of 23 years. The basic principle that ought to be followed is that the difference in treatment of foreign and local companies should not be too large.

“Urban real estate developers and owners also enjoy the benefits of very low taxation including hugely under assessed values of rents and capital value for determination of tax liabilities. Influential property developers have either had vast tracts of land allotted illegally or new development of housing schemes at the urban periphery has been kept outside the tax net because of the lack of extension of metropolitan boundaries.

“MNAs/MPAs have been able to legislate generous increases in emoluments for themselves. For example, the annual cost of the National Assembly has more than doubled since 2012-13. A very unusual and unacceptable practice is the allocation of development funds to MNAs/MPAs, which provides scope for big leakage of funds.

“Senior bureaucrats skillfully perpetuate and enhance their salaries, pensions and other privileges virtually on an annual basis. Benefits which have been monetized are subject to very low tax rates or exempt. Recently, a huge tax break has been given to salaried tax payers. Senior officers are also given plots in Islamabad at nominal prices.

“The list goes on and on of privileges enjoyed by the elite due to state capture. A conservative estimate of the additional income or increase in wealth that accrues annually to these groups is almost Rs 2 trillion. This implies that the tax and other revenue foregone is over Rs 500 billion. The people have to wait for the time, which may never come, when this type of mostly legalized plunder of the State will come to an end.”

No surprises

The technical agreement reached between the IMF and Pakistan does not carry any surprises except, of course, the matter about market determining the
exchange rate. But over the last several months this issue has been discussed and debated so threadbare that it would have been a surprise if the
Fund’s technical team had withdrawn this conditionality.

The agreement will come into force after it is approved by the IMF Executive Board, sometime in mid-June after the announcement of our budget for the next fiscal year. Being front loaded, the first instalment of the agreed loan amount is expected to be released after we had fulfilled all conditionalities related to the   first tranche. There is, of course, an emphatic declaration in the agreement that the withdrawal of subsidies from electricity and gas bills would not affect 75 per cent (electricity) and 40 per cent (gas) of the population respectively—considered to be poor—still, the impact of steep increases in the tariffs of electricity and gas otherwise would surely cause most other essentials like a two square meals a day, clothing, housing, education, health and transport to go out of the reach of majority of the population forcing a significant number of Pakistani middle classes to fall below the poverty line.

With the cost of production going up because of steep rise in most of the inputs including capital as the interest rates are expected to increase to around 11 per cent driven by a double digit inflation rate, our exports are likely to remain largely uncompetitive, not making much of difference to the trade deficit despite the expected decline in imports because of market determined exchange rate aswell as due to higher tariffs on non-essentialimports causing, on the other hand, in the process, a significant decline in revenue collection at the customs stage. Because of relative higher cost of production, the private sector investors are likely to adopt a wait- and-see approach rather than risk their capital in a market sans enough consumers as unemployment is expected go up because of a slow down in economic activity. This is going to lead to stagflation and at the same time cause, among other things, a significant decline in revenue collection.

Meanwhile, with debt obligations, defence needs and expenditure on safety nets going up, the yawning gap between income and expenditure is most likely to end up expanding the budgetary deficit beyond the number of primary deficit fixed by the IMF for the next fiscal year. So, on the face of it the very first year of the three year $6billion Extended Fund Facility (EFF) programme of the IMF the fiscal as well as current account deficits are most likely to expand further, going perhaps even beyond the targets fixed by the Fund. This would lead to either the Fund ending the programme on its own because the recipient had failed to fulfil its first tranche related conditionalities or Pakistan withdrawing from it unilaterally as the ruling elite finding that the next phase of structural reforms would cause it to share hardship with the not –so- privileged a majority of the population, would force the government to throw in the towel. But like in the past the Fund, if the US so wished, would offer as many waivers as it would take for Pakistan to complete the programme.

According to a statement issued by the IMF the EFF aims to support Pakistani authorities’ "strategy for stronger and more inclusive growth by reducing
domestic and external imbalances, removing impediments to growth, increasing transparency, and strengthening social spending" The authorities recognise the need to address these challenges, as well as to tackle the large informality in the economy, the low spending in human capital, and poverty.

The IMF mission chief said: "The budget (2019-20) will aim for a primary deficit of 0.6 per cent of GDP supported by tax policy revenue mobilisation measures to eliminate exemptions, curtail special treatments, and improve tax administration.

“Priority areas include improving the management of public enterprises, strengthening institutions and governance, continuing anti-money laundering and combating the financing of terrorism efforts, creating a more favourable business environment, and facilitating trade." While in the brief appraisal made above the picture of the economy that emerges post the latest EFF signed between Pakistan and the Fund appears rather gloomy, it would not be out of place here to compare it with the picture that has emerged in Egypt which had signed an EFF with the Fund in 2016 for an amount of $ 12 billion. The case of Egypt is being reviewed here for comparison because the Fund’s country head in Egypt, Reza Baqir, a Pakistani, has taken over as Governor, State Bank of Pakistan, the other day after having resigned from his Egyptian assignment. The Egyptian EFF had pledged to unleash the economic growth in the country aiming as well to bring down public debt, stabilise the foreign exchange market, lower the fiscal deficit, and contain the inflation.  But today almost three years hence, Egypt with its GDP at US$ 300 billion is showing signs of strain. Poverty is on the rise and much anticipated economic stability continues to be elusive.

A net importer of food, the country needed to grow at a rate of more than 7 percent to accommodate its ever building youth bulge. According to IMF’s own estimates, almost 34 percent of Egypt’s population is under the age of 15 and each year around 700,000 people enter the labour market in search of jobs which are being suppressed under IMFs structural adjustment programs.

Besides poverty and unemployment, other macroeconomic fundamentals are also very depressing, inflation is touching new highs with the passing of each day as subsidized food and fuels are being phased out by the government. Once upon a time, the fastest growing economy of the Middle East, Egypt is now struggling with stagnant exports and non-existent entrepreneurship. According to World Bank’s estimate, nearly 60 percent of Egyptians are either poor or belong to the poorest groups. The World Bank further pointed out that economic decisions, such as lifting of subsidies and others, have affected the middle class, which is unable to cope with increased cost of living.

According to Egyptian Ministry of Local Development, the most alarming trend currently is the rise in poverty in upper Egyptian centers where the increase is more than 50 percent i.e. almost double the national average elsewhere. Though
Egypt has been one of the oldest clients of the IMF and has been coordinating with the Fund on economic policy management since 70s, the most recent EFF inked in November 2016 appears to have only further deepened its economic crises. The fourth executive review completed in April 2019 indicates that Egyptian economy is not showing any signs of turnaround.

It is worrisome that right under the direct supervision of IMF, standards of living in Egypt are deteriorating as cost of living is increasing. Middle class is shrinking and more and more people are being added to the poverty pool. According to a
recent report issued by Central Agency for Public Mobilization and Statistics, the percentage of people living below the poverty line has risen from 28 percent to 30 percent within three years i.e. 2015-18. Due to law and order situation, the tourism sector is not picking up and due to lower growth in the broader Middle East and other parts of the world, workers remittances have been on a decline.

The cumulative effect of IMF reforms has contributed to steep inflation (officially its 24.3 percent) and phasing out of food and fuel subsidies in next budget is expected to render it impossible for the majority of population to make two ends
meet. Accordingly, fuel subsidies will be reduced by 40 percent while electricity subsidy will be reduced by 75 percent in FY 2019-20. Thus cumulatively subsidies amounting to more than $ 5 billion will be slashed in the coming days.

The IMF prescription has devalued the Egyptian currency and led to increased cost of manufacturing which ultimately has resulted in noncompetitive export sector. IMF programme was aimed to unleash private sector economic growth and job creation, but by the end of April 2019, when IMF has completed its 4 th review, none of these objectives were achieved.