Pre-budget Economic Review – Economic Fortress Pakistan – III
(This is the FINAL instalment in a series of THREE articles)
Unlike Deng Tsao Peng who put economic liberalisation in China far ahead of the gradual awakening of political freedom, Gorbachev was so eulogised (and pampered) by the western media that he went overboard and attempted Glasnost (openness) ahead of Perestroika (economic revolution) in the Soviet Union. An inefficient centralized economy under the strain of the extended Afghan War was pummelled by Gorbachev’s ill-planned denationalisation and disinvestment, raising the expectations of the masses beyond the capacity of the State to fulfil and resulting in economic disaster. By focussing on Gorbachev’s ego, the west succeeded in its aim of disintegration of the Soviet Union, winning a war “without bloodying swords” (Sun Tse Tsu) against one of the two communist Superpowers. The same was precipitated to short-circuit China’s process but failed because of China’s refusal to cow down before student pressure in Tianenamen Square on prime time TV. Germany and Japan had surrendered unconditionally to the western powers, fifty years later they have put the victors to the economic sword without fighting a single battle. Arguably Soviet Union’s economic fate was best depicted by former Warsaw Pact’s Russian Commanders selling arms and equipment in Eastern Europe in order to pay salaries to their soldiers. For those keenly interested in the direction national security is taking in Pakistan, this should serve as a horrible example.
For years we have been fighting an unimaginative battle of matching numbers in Budget-making. Projecting glowing statistics in 1994, the Federal Government has had to revise all its targets downwards. On the other hand the twin menace of budget deficit (5.8% of GDP) and inflation (14-15%) have rocketed upwards. One cannot blame it on Ms Benazir or the PPP alone, they have simply been caught in a variety of a long established tradition of living with the recommendations of our financial bureaucracy, very much under the direct tutelage of the IMF. In fact one has to give credit to our successive political governments for being somewhat sensitive to the mass reaction and for not rolling over and playing dead to all the proposals made by the bureaucracy.
Except during late ZA Bhutto’s reign (who was almost the last of the Third World leaders opting for the then fashionable socialist-oriented centralized economy), controls have been more or less in the hands of a closed circle of bureaucrats who were mostly lacking the necessary qualifications and/or expertise in the managing of a nation’s economy. The Martial Law regimes were simply glorified uniformed front men for the real civilian economic bosses. Whenever such civilian technocrats were able people, like in the decade of late President FM Ayub Khan’s rule, the country’s economy grew at an assured pace. This resilient strength was manifest in absorbing the shock of East Pakistan’s separation and later the disastrous nationalization of the first PPP regime that set us back 25-30 years economically, reversing the economic lead we had in the 60s among Asian Countries other than Japan.
In 1993-94 the Consolidated Revenues of Federal and Provincial Governments was Rs 290 billion but the current expenditure (including funds for development) went upto Rs 371 billion, showing an overall deficit of Rs 91 billion. In 1994-95, (5.8% of the total GDP of Rs 1569 billion), this was expected to come down to
Rs 72 billion (or 4% of the GDP of approximately Rs 1800 billion), but the revenue collection shortfall of Rs 33 billion, raising the deficit to Rs 105 billion (5.8% of anticipated GDP), a recurring negative phenomenon in a society and environment that is deeply suspicious of (and resists) documentation. Our total indebtedness exceeds Rs 1430 billion (almost 80% of the GDP). More bank borrowing to meet our commitments will mean increasing the Debt Servicing which is already Rs 11,000 per capita and which, along with Defence Expenditures, accounts for more than our total tax receipts.
The FIRST principle to break this disastrous cycle should be decentralization of income and wealth tax (except for Multi-National Companies, Federal State Enterprises or financial institutions), i.e. no income or wealth tax is to be assessed or collected by the Federal or Provincial Governments. Decentralisation of direct taxes should be at the grassroots Local Bodies level under the aegis of the Provincial governments. In turn, the Federal Government does not have to give share of Federal receipts to the Provinces. Individual income taxes on the salaried class and self-employed should be ABOLISHED forthwith. A Community tax and a Wealth tax should be imposed by the elected representatives at the Union Council level, a direct relationship between taxation and spending with every citizen content that at least a major portion of the taxes he pays would be spent for his own community’s betterment in the form of roads, water and sewerage, parks, schools, etc.
The SECOND principle is to tax credit at source. Instead of having a full blown Federal tax structure, the banks can levy tax on credit disbursed and pay the proceeds to the Federal treasury. Since almost Rs 300 billion credit is projected to be disbursed in 1994-95, the Rs 30 billion (at 10% deduction) would be more than double the Income Tax collected by employing over 90% of the Income Tax staff.
The THIRD Principle is that Federal funds acquired through Customs & Excise Duties as well as taxing credit at source should be primarily used for Federal commitments, viz. Debt servicing, Defence Spending, Federal expenditures, etc, with money going to Provinces on the basis of (1) matching the local funds appropriated in developed areas (2) on an escalated basis as outright Grant meant for development of socio-economic infrastructure in undeveloped or underdeveloped areas and (3) phased reduction in subsequent years if no self-improvement is seen, no community should be encouraged to live on handouts.
The FOURTH principle is to curtail the powers of bureaucracy to interfere in the lives of common citizens at every level, by cutting down interference the economy will be allowed to flourish without check.
The FIFTH principle should be to wage a relentless war against corruption, but first the salary and working conditions of the bureaucrats should be put at par with top-grade commercial and industrial enterprises to do away with the have-not status of honest government servants. Reduced powers of interference on one pretext or the other will restrict the capacity for misdemeanour of the corrupt ones. Available funds must be made to stretch, economising may be done by suitable planning, avoiding duplication, streamlining procedures, cutting down paperwork, computerizing, etc, etc.
The SIXTH and LAST principle must therefore be to conserve each penny by not acting as a State having surplus financial and economic wealth. For example, instead of status symbol Pajeros for government departments, Suzuki cars and/or jeeps (1000 cc or less) would do very well at the same time we must cut down on all imports of goods and commodities, particularly consumer items. When we are ready to adhere to the afore-stated principles, we shall find that the Federal Budget responds favourably to supply-sided economic proposals.
The two sacred cows that eat up all the government’s revenues, viz. (1) Debt Servicing and (2) Defence Spending, are unavoidable in the present circumstances for the foreseeable future. We can reduce our monthly/annual debt load if the PPP Government is tempted to use the Privatisation Funds, expected to reach Rs 100 billion in the next year, to meet the annual budget deficit instead of paying off part of our national debts. It is a Catch-22 for the PPP as imposing such fresh taxes would be resisted by the common man. The only solution remaining is to ask for a “Debt Moratorium” for a period of 3-5 years, which our IMF-trained and oriented technocrats would think is heresy. Debt moratorium would ensure our external debts will be frozen for instalment repayment as well as interest allowing us to use funds generated by ourselves for development purposes and for critical defence purchases, which otherwise we would seek to accomplish through borrowed funds.
As regards Defence Spending, we must ensure more “Bang for the Buck” in a security environment that does not allow us to put our guard down. This can be done by (1) Reorganization that would drastically reduce (a) the number of HQs right down the line (b) the number of staff in each HQ and (c) the ancillary troops in each HQ to have a better ratio between the men actually expected to do the fighting and those in supporting roles, (2) Strictly control the use of front-line equipment and transportation, using only soft vehicles for administrative use in urban areas. Drivers training must be done through civil Driving Training Schools to control wear and tear on first-line transport. (3) Do away with batsmen and save 40,000 – 50,000 manpower, making them available for front-line duty, giving an allowance in lieu (4) Use the National Logistics Cell (NLC) and Frontier Works Organisation (FWO) to do all the Military Engineering Services (MES) and related work for the Armed Forces on a no-loss no-profit basis. In the same manner, it should be obligatory for Military Farms to use its available lands to feed all the troops with Fauji Foundation/Army Welfare Trusts putting up industrial and service units related to war material e.g. uniforms, boots, helmets, etc (5) use of combat troops for any other purpose than military must be forbidden e.g. National Horse and Cattle Shows, Jashans, etc (6) gradually reduce standing army so as to increase professionalism of a small nucleus force which will form the backbone of our reservist-heavy Armed Forces. (7) Practice strict fiscal control in the areas of leakages, viz. Defence Procurement, Military Engineering Services (MES), Army Supply Corps (ASC), Army Medical Corps (AMC), Electrical & Mechanical Engineers (EME) and Ordinance, contracting out our services through NLC and FWO type organizations under the aegis of Fauji Foundation, AWT, Shaheen Foundation and Bahria Foundation (8) Innovative Schemes and improvisation must be implemented down the line (9) standardised list of weapons and equipment to be made indigenously manufactured on a buy-back basis so that reliance on foreign imports is removed (10) We must sell Cantonment Real Estate in Karachi, Lahore, Sialkot, Rawalpindi, Peshawar, etc and use the proceeds to make Brigade-strength cantonments so that operational units are closer to their operational areas (11) Decentralize overseeing of Budgets to the Corps Command level to ensure that every penny is usefully utilised by inducting civilian specialists and computerisation of financials and (12 ) Prepare our logistics for war on a practical basis based on land routes rather than sea-routes.
Given three to five years of Debt Moratorium and a judicious implementation of the SIX principles as well as measures on Defence Spending, there is no reason why we, with our tremendous resources of manpower and raw material, cannot become an Economic Fortress Pakistan.
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