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Calculated Risk

After crucial discussions last week between the Finance Minister Senator Sartaj Aziz and the Head of the Fund Mission Muhammad Al-Eryan, the IMF official went back to Washington and made a presentation to the IMF Executive Board that in essence stated that Pakistan’s radical proposals for the revival of the economy was a “risk worth taking”. The major element of the calculated risk is based on the proposed size of reduction in taxes. As such the IMF team has recommended that talks be started with Pakistan to switch-over from the costly Stand-By Arrangement (SBA) to the low-interest Enhanced Structural Adjustment Facility (ESAF). In effect while expressing concern over the proposed massive tax reforms IMF seems to have bought the argument of the Pakistan side that SBA would add to the debt and in effect we would be running in place without any forward movement whereas once the “ball and chain” of high taxes was removed from our legs, our progress would be slow but sure. The logic of the Finance Minister’s arguments, buttressed by the position papers of 11 Task Forces composed of businessmen and senior government officials set up by the PM, impressed IMF that this time Pakistan meant business. We must recognize that the future lies in facing the obvious and determinedly tackling it, not in “fudging” statistics to fool others. In the end not only did we manage to fool ourselves but we had a date with economic disaster that only Presidential action, and subsequently the Herculean efforts of Shahid Javed Burki, managed to avoid.

The reduction in taxes means that there will be a commensurate shortfall of revenues. Senator Sartaj Aziz has taken Pakistan down this road of a calculated risk in the logic of “Supply Side Economics”, made famous in the 80s by President Reagan. In effect this strategy is based on the premise that lowering of taxes will in turn stimulate production and the resultant increased production will mean additional taxes, which being lower, will encourage all concerned to pay. This is an excellent logic because higher taxes meant increasing the cost of the product, putting it beyond of the reach of the consumer to purchase and thus making production stagnant as stocks remained unsold. This lack of demand resulted in most of our industries coming to a dead stop, there was immediate need to revive them by taking pragmatic measures which would increase demand and lead to increased production. The business community must now respond by paying its due taxes.