Two legs of economic management By Khurram Husain

SO the circle is complete. As of this week, we have the two favourite ingredients that have defined our economic management for a decade now: a tax amnesty scheme and an IMF programme, the carrot and the stick. The former held by the FBR chair and the latter in the hands of the ‘new’ finance minister.
What is also complete is the near total handover of key institutions of the state to powerful vested interests. The same week that gave us the Fund programme and the amnesty scheme, saw the country’s central bank handed over to its international creditors and the state’s revenue board handed over to big business.
The first act of the new chair of the FBR, Shabbar Zaidi, who has built his career protecting big business clients from the tax authorities, was to tie the hands of the taxman from attaching any bank accounts of potential defaulters. Granted this power was being misused grossly, but what exactly does the new FBR chairman have in mind to urge better compliance from among our powerful elites?
His next step revealed the answer: a tax amnesty, modelled almost exactly on the one implemented last summer (in which, incidentally, Mr Zaidi played a big part). Some might argue that the amnesty was decided upon prior to his new position as FBR chair, but Mr Zaidi is rarely far when an amnesty is being hammered out.
Don’t believe the hype. The tax amnesty is not a ‘documentation measure’. They are always revenue exercises.
Don’t believe the hype. This is not a ‘documentation measure’. Every amnesty scheme has been announced as such, including the one last year, and the one offered to the traders and the business community as far back as 2013. They are always revenue exercises, disguised as documentation measures. This time, they are hoping to milk the scheme for up to Rs300 billion (at least that was the figure being reported when former finance minister Asad Umar kicked the ball into motion on the scheme), in the hope that it will help meet a steep first year revenue target set in the IMF programme.
Which bring us to the second fiddle at play here. The IMF statement released on Sunday, after talks dragged on for a few days longer than they were supposed to, has a few interesting words in it.
For one, it says the government will reduce the primary deficit to 0.6 per cent of GDP by the end of the next fiscal year. This is interesting because it gives a tantalising glimpse (and nothing more) of the size of the adjustment that is coming.
The primary balance last year was 2.2pc of the GDP, but what it will be this year is not yet known, so we cannot really calculate the rupee value of the new taxes the government will have to mobilise to meet this target. But the Fund still thought it necessary to put this number out there for us, and such numbers are not put into such statements casually. Something crucial has been communicated here; we might know what it is once the detailed programme is released after board approval.
And that’s not the only thing. The statement says that “the government has already initiated a difficult, but necessary, adjustment to stabilise the economy”. Translation: this is just the beginning, the real deal is yet to come.
The statement also says the programme is “subject to the timely implementation of prior actions and confirmation of international partners’ financial commitments”, without indicating what these prior actions are, and which international partners are being referred to.
Most likely, the prior actions are the budgetary measures to be announced soon (the statement refers to the budget as ‘a first critical step’), with specific focus on the revenue target, as well as observing expenditure constraints in key areas.
The international partners most likely refer to the World Bank and Asian Development Bank, waiting in the wings for the IMF deal. But some claim that the words imply the Fund has asked for written commitments from China and Saudi Arabia that their reserve extension loans, extended in the form of one-year deposits with the State Bank of Pakistan, will be renewed when they mature later in 2019 and early in 2020.
Clearly, whether or not those deposits are rolled over will have an impact on the reserve asset accumulation projections, and the Fund wants to know in advance what’s going to happen on that front before committing any money.
Beyond this, it talks of “cost recovery” in the energy sector, which basically means if you can’t improve recoveries and reduce losses in power-sector billing, then just take the full losses and bundle them into the bills of those who are already paying. At the very least, get those losses off the state’s books.
It also says that “provinces are committed” to help with reduction of the fiscal deficit “by better aligning their fiscal objectives with those of the federal government”. Further down, the statement returns to this topic, and says that the federal authorities “will engage provincial governments on exploring options to rebalance current arrangements in the context of the forthcoming National Finance Commission”.
The language is evasive. Clearly, it’s calling for some action to roll back the provincial transfers, but what exactly does it mean that the “provinces are committed” or that the federal government “will engage provincial governments”?
The provincial governments are not signatories to the agreement, so have no commitments under it. Interestingly, days after the agreement was signed, the Punjab chief minister got a new adviser in the shape of Dr Salman Shah, the Musharraf- era relic who has clawed back some relevance for himself by becoming a voice for rolling back the provincial transfers in the ongoing NFC discussions.
FATF conditions are being written into the programme and the state will be withdrawing from its role in promoting exports and punishing imports through regulatory duties and the like. The game about to begin will be a tight one for sure.
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