IMF Conditionalities versus Economic Realities
The major reforms that the Bhutto government is depending upon to bail out the economy and the country from its present state of crisis are IMF dictated strictures such as (1) controlling of expenditures (2) increasing revenue collection (3) imposing financial discipline in public sector financial institutions (4) imposition of farm taxes (5) extending General Sales Tax (GST) to cover every product and (6) reduction of defence expenditures. It is only due to the existence of our very vibrant parallel economy that we remain alive and well despite being supervised by the most atrocious team of economic managers that this country has ever known. Since almost all social and political aberrations have origin in the economy, the social divide and political crisis we are immersed in can be said to be caused by the partial failure of the economy, directly attributable to mismanagement.
Whereas most of the reforms sought by the IMF are neither uncalled for nor surprising, at least one does not reflect geo-political ground realities. Almost all governments are guilty of excessive expenditures, mostly because of lack of control or deliberate misuse of funds earmarked for (1) entertainment (2) travel (3) telephone calls (4) transport and fuel (5) medical and (6) personnel. Arguing how to control all this would be futile, let us simply “privatise” the concept of bureaucratic perquisites (“perks”). To provide transportation and fuel, the Government should select a standard economy car (Suzuki Alto, Khyber or Margalla or equipment depending upon the Grade) for the public servant and lease it out at 50% of the lease cost, the government bearing the balance, giving the public servant a fixed amount for a driver and fuel, on a sliding scale depending upon the city classification (whether expensive, average or low cost). Let the bureaucrat contribute to medical insurance from a government approved panel, the government paying for the insurance premium. As regards using government employees as household servants, this should be forbidden except in the case of few public residences such as the President’s, PM’s, Governor’s, Supreme and High Court Judge’s and Minister’s. For telephone calls, give the bureaucrat a fixed amount for local calls and have him justify each long distance call before reimbursement i.e. if it could not be done by E. Mail or courier, if it was that urgent. Elected representatives who become public servants (i.e. Ministers, Advisors etc should have a little variation as aforementioned e.g. their vehicle can come from a small staff pool — and no more than one vehicle, an economy model at that).
Revenue collection for the government’s coffers cannot be increased in the manner being followed today, the more draconian the measure the more the revenue staff will pocket it themselves. The accepted modus operandi to increase taxes on those already suffering under the burden while giving lip-service to snaring bigger fish in the tax net is counter-productive. The additional load put on those who are either (1) entrepreneurial or (2) salaried class dampens their enthusiasm for increasing output, the accepted way in energizing the economy is to decrease taxation so that increased cash flow is infused into the system. Therefore, the first hurdle in rejuvenating the economic paralysis fails in its acid test. Revenue collection must be decentralised in three levels firstly down to the Provinces, then to the District and finally to each Police Station area. By decentralizing the revenue collection system we will have a better chance of collecting revenues, we should also have a direct relationship between taxation and spending. Unless the people see their tax money being spent in improving the socio-economic infrastructure in their own backyard, they will never have faith in the system, shying away from voluntary responsibility towards keeping it afloat.
The public sector financial institutions must have people with credibility at their helm otherwise we should expect more of the same financial indiscipline as at the present time. Each successive government has correctly identified that loan default is one of the major causes hampering economic growth but then goes berserk and makes the situation worse than the previous regime. No matter that the Governor State Bank of Pakistan (SBP) has done yeoman’s work in keeping recalcitrants in line, the disease of money-lending of huge amounts on dubious economic feasibilities has reached endemic proportion. Having identified the major defaulters, they continue to receive credit lines without collateral or economic purpose. For this severe dereliction of responsibility, how many bankers have been held accountable? We must focus on the bankers who gave these loans on flimsy grounds, unless we make examples out of them the system will continue to work in the way it presently does, without inhibition as to the seriously debilitating effect on the economy. Instead of simply publishing lists of loan defaulters, we should get down to taking punitive action against them.
The Bhutto government is to be commended for finally taking the dangerous political gamble of imposing taxes on its most loyal constituents, the farmers. Whether theory will really be converted into practice is another story. One believes that is a theoretical sop to satisfy IMF mores. Farm tax has been given lip service for many years, this year the Provinces are optimistically expected to raise Rs.50 billion. If they raise Rs.5 billion (i.e.10% of the projected amount) they should consider themselves extremely lucky. Knowing that the Provinces will collect taxes at their peril, the Federal Government has in effect passed on the buck to the Provinces while giving the IMF wide-eyed innocent looks about their sincerity in effecting this much-needed reform. The truth is that urbanites have to bear an inordinate (almost 100%) share of the tax burden and unless we can get the rural rich and middle class to share the load, we have no place to go economically but down.
The imposition of General Sales Tax (GST) is a must on manufactured items but it cannot be imposed or collected in the manner being adopted presently. GST should be levied according to capacity and should be collected with the help of Chambers of Commerce and Industry. The present system of Excise and Taxation leaves much to be desired with respect to its honesty and efficiency. While the additionality is desirable, what is going to happen is that (1) the manufacturers are going to raise prices to pass the load onto the consumer and (2) then in connivance with the GST collection people are never going to pay to the government’s coffer what they have added on. Net result richer manufacturers, richer tax people. At the same time these manufacturers who are honest and pay the dues will be at a disadvantage as will those who are unlucky to be governed tax-wise by men of honesty and integrity among the revenue collection staff. In sum GST is necessary but the mechanism needs to be addressed and streamlined.
It is believed that IMF requires that Pakistan should reduce its defence expenditure by 30%, IMF has not fought periodic wars initiated because of the actions of such an implacable foe such as India. Where control of defence expenditures may be considered desirable, reduction of the military budget in the geo-political circumstances we are placed in is not only next to impossible, it would be foolhardy. As it is the Indian defence budget is three times that of ours, one part being hidden in allocations for other ministries. With India maintaining a defence establishment five times our size and its forces positioned in a favourable 3 to 1 attack ratio against Pakistan, our allocations do not even meter the level of the preceding year when adjusted for inflation. For the IMF to ask us to make further sacrifices will be at the cost of our independence, the Bhutan-isation of Pakistan, maybe that is the end objective because of our nuclear prowess. Our planners should be asked why on God’s earth they did not go in for massive indigenisation, particularly when we were the so-called “leading edge” of the “free world” in the confrontation with the Soviet Union in the early 80s? Once we knew that aid was not forthcoming like in the early 80s and our resources were limited, we had no business going for import of expensive defence equipment like submarines which were directly not material to the limited war we are likely to fight with India. We should have got our priorities right. Since diversion of funds on wrong prioritization amounts to criminal negligence of duty and responsibility to the nation, we should hold the persons in and out of uniform directly accountable. Nevertheless notwithstanding the culpable acts of certain people in compromising national security due to the motivation of greed only, we cannot afford to reduce defence spending. In any case, in countries like Pakistan, defence services are a source of employment and expenditures thereof directly and indirectly energises local economies. As such taking money from defence services would be counter-productive except when it involves imports from abroad. Unfortunately our defence services do need constant modernisation and upgradation in the face of a relentless, implacable foe, such expenditure is not only necessary it is of vital importance. Any reduction in expenditure would be counter-productive for national security and nobody in the military hierarchy except a committed party person in uniform will accede to this if so requested by the government. Our major problem stems from a lot of pseudo-liberal Pakistanis in the service of the IMF and the World Bank (or retired therefrom) who want to show themselves to be more loyal to the country of their present residence than that country’s own citizens. In sum, reduction of defence expenditures is a non-starter with respect to IMF conditionalities.
If we were not in a serious economic crisis why should the PM have gone all the way to New York to publicly eat humble pie even as she supposedly should have been in mourning for her dead brother? Certainly some of the IMF conditionalities are a necessary but bitter pill, hopefully one of the IMF conditionalities will also bring the corrupt on earth who have looted this nation to justice. Whatever money has been loaned to this country has landed up in the foreign accounts of our corrupt managers, political and bureaucratic, almost directly in some cases. Are those US and western corporations who have given “kickbacks” and “commissions” any less culpable than the corrupt of this country? What about naming a few among the government or the foreign companies and banks to be held accountable? To energise the economy we have not only to innovate and economize but also bring accountability into the economic process. We cannot blindly allow the IMF to set us on the course of economic oblivion without adjusting for ground realities.
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