Friday, August 30, 2013

Riyasati Ashrafiya (State Aristocracy) grabs loans and distorts the economy

'Qarz burhao, mulk bigarho'
By Huzaima Bukhari and Dr Ikramul Haq  

[This article first appeared in the Business Recorder of August 30, 2013.]

In 1997 the slogan of Pakistan Muslim League (Nawaz) was 'Qarz Utaro, Mulk Sanwaro' [retire debt, adorn country], which is reversed in 2013 as all efforts are underway to increase public debt - both domestic and external. The new slogan appears to be 'Qarz Burhao, Mulk Bigarho' [increase debt, damage country].

People of Pakistan have yet not forgotten the fate of 'Qarz Utaro, Mulk Sanwaro' Scheme announced by Nawaz Sharif on February 23, 1997 along with declaring Friday as weekly holiday instead of Sunday within one week of assuming his second term as Prime Minister [February 17, 1997 to October 12, 1999]. The Government of Pakistan Muslim League (Nawaz) [PML-N] in its third term is using the same old tactics-misleading the people on economic issues.

Finance Minister Ishaq Dar on August 26, 2013, in a Press conference, revealed that the "government will seek $12 billion in loans from international financial institutions to retire its previous debts and to try its luck with international and domestic bond markets to finance its mega projects." The worthy minister must be aware of the fundamental principle that in the absence of creditworthiness "no country can try its luck with international and domestic bonds" and that too just to finance some "mega projects", the viability of which is highly questionable. Who will buy bonds of a near-bankrupt State and even if investors do take risks will it not tantamount to further indebtedness - costly and burdensome? Nawaz Sharif as usual is unwilling to tax the rich and mighty that can bridge the enormous tax gap. If we plug all loopholes it is not difficult at all to raise taxes of Rs 8 trillion - the actual tax potential of Pakistan ['No will to tax the rich', Business Recorder, June 14, 2013].

Before proceeding further to analyse the strategy announced by Dar about debt retirement through issuance of bonds, the following facts about 'National Debt Retirement Programme' [NDRP] initiated on February 27, 1997 under the slogan 'Qarz Utaro, Mulk Sanwaro' are worth considering:

1. NDRP solicited funds from non-resident Pakistanis (NRPs) towards retiring the country's external debt. Resident Pakistanis were also allowed to participate in the scheme using their foreign currency accounts, FEBCs, FCBCs, traveler cheques, remittance from abroad or by surrendering hard currency. Deposits in three currencies (US Dollar, Pound Sterling, and the German Deutsche Mark) could be placed in the following:

-- An outright donation with no payback (referred to as NDRP I).

-- Qarz-e-Hasna deposits for a minimum period of two years; no interest payments but principal repayments could be taken in Rupees or hard currency (NDRP II).

-- A profit bearing deposit for a minimum period of two years (NDRP III).

2. The total receipts from NDRP I, II, & III were Rs 2274 million. The major portion of these comprising donations (Rs 1845 million), Qarz-e-Hasna, (Rs 120 million), and profit bearing deposits (Rs 309 million) - major amounts received in the first year of the scheme. Subsequent years saw minor inflows.

3. Regarding the usage of NDRP funds, the equivalent Rupees generated under NDRP I & II were credited to the government account with State Bank of Pakistan (SBP). The foreign exchange component, against which these Rupees were generated, form part of the SBP's foreign exchange reserves. The federal government used these rupees to retire domestic debt of about Rs 1.7 billion, which carried a 17.3 percent rate of interest per annum. Inflows from NDRP III formed part of SBP's foreign reserves, while the generated rupees were credited to the mobilising institution. For collections in Rupees, the amount collected by commercial banks was surrendered to the relevant SBP local office.

4. In a nutshell, the NDRP could not do much about Pakistan's external debt that was in excess of $30 billion as political slogan of Qarz Utaro Mulk Sanwaro raised around $178 million in foreign currency which was equivalent to less than 0.6 percent of Pakistan's external liabilities.

In the face of above facts, which can be verified from the record of SBP and even available on website of PML-N (http://www.pmln.org/qarz-utaro-mulk-sanwaro), there is hardly any need to comment further. The lesson is clear: economic issues cannot be solved through political slogan mongering. These require seriousness and consultation with best minds who are not only well-versed with the issues but who can also offer practical solutions. Where is the input from experts on reducing fiscal deficit, managing debt stock, resource mobilisation and controlling wasteful expenses? Where are the economic wizards of PML-N like Sartaj Aziz and Hafeez Pasha? Do they endorse what Dar is proposing? It appears Nawaz Sharif likes "home experts" than professionals. Thus the fate of prescriptions given by a person having half-cooked knowledge of economics is boldly written on the wall. There is no doubt in anybody's mind that we would face a complete disaster if such policies are adopted. Needless to point out that an accountant who considers himself all-knowing and does not bother to consult a team of able economists cannot tackle enormous economic national challenges.

Neither the Prime Minister in his long-awaited speech, nor Mr Dar in his Press conference, unveiled any pragmatic short and long term measures to come out of the existing economic mess and energy crisis. It is clear by now that PML-N has no workable plan and viable strategy to tackle issues like debt management, energy crisis, economic revival or resource mobilisation, let alone willingness to go for much-needed structural reforms.

The accumulated public debt - Rs 15 trillion internal and $60 billion external - constitutes nearly 67 percent of GDP, breaching the limit of 60% imposed under the Fiscal Responsibility and Debt Limitation Act 2010. This level of indebtedness has devastating effect on resources - the budget allocation of Rs 1.52 trillion for retiring public debt and payment of interest during fiscal year 2013-14 would prove short as there was a surge of Rs 180 billion in external debts alone during July 2013 due to depreciation of rupee.

It is true that public debt witnessed unprecedented rise from 2008-2013 - average rate of growth was 21.5 percent as compared to 6.6 percent from 2000 to 2007. It is shocking that public debts (in real terms) went to Rs 14.24 trillion in June 2013 from Rs 6 trillion in June 2008 registering an increase of Rs 8 trillion in just five years. The PML-N government, however, is not ready to learn any lessons from failure of PPP on this front. It has, like Zardari et al, no will to tax the rich and retire debts as has been done by the Hungarian government most recently - 'Learn from Hungarians', Business Recorder, August 16, 2013.

Undoubtedly, huge debt servicing is taking a heavy toll on economy - fiscal deficit for financial year 2012-13 jumped to 8.8 percent of GDP (Rs 1.835 trillion) as shortfall on the part of Federal Board of Revenue (FBR) alone was Rs 442 billion. The fast depletion of foreign exchange reserves - from $14.776 billion in July 2011 to $5.153 billion by July 2013 - aggravated the situation. Heavy repayments to the IMF and others and financing of current account deficit amounting to $2.3 billion in 2012-13 has left no choice but to approach IMF for a bailout package. However, it is not going to serve any purpose as Dar admitted that "in the first year, the IMF will give $2.2 billion to Pakistan while Islamabad is scheduled to pay back over $3 billion".

The situation on internal debt is equally disturbing. The Government of Pakistan, for the first time in history, borrowed from local banks over Rs one trillion during the fiscal year 2012-13, the trend continuing in the current fiscal year. The net government borrowing from domestic banks increased to Rs 1.012 trillion between July 1, 2012 and June 28, 2013 against Rs 629.9 billion over the same period last fiscal year. The federal government borrowed Rs 1.005 trillion for budgetary support as compared to Rs 696.5 billion during the corresponding period in the last fiscal year.

This reckless and unabated borrowing from commercial banks is not only retarding growth but also depriving private sector of the much-needed funds for investments. It is also forcing SBP to inject heavy amounts of liquidity in the banking system through frequent open market operations as high borrowings wipe out liquidity from the money market.

The only way to come out of prevalent mess is to accelerate growth, generate employment, enhance tax revenues, stop financing luxuries of elites and incurring losses in public sector enterprises (PSEs). But the present government like PPP-coalition government is not at all serious about it. During its election campaign, PML-N made tall claims that on assuming power it would get rid of the "cancer of debts." However, since assumption of power, Nawaz government is knocking the doors of international lenders even more vigorously than PPP. Besides IMF's lending of $6.6 billion to pay off previous loan, Finance Minister Ishaq Dar is approaching Asian Development Bank and World Bank for further borrowing. The main priority of the government is to rely more on external borrowing than mobilising own resources by taxing the rich and bridging the monstrous tax gap.

Internal debt is now 67 percent of GDP breaching the limit of 60 percent imposed under the Fiscal Responsibility and Debt Limitation Act 2010. The law requires the government to prepare and revise its debt management policy every year in January but nothing has been done as there is no debt reduction plan. Making things worse, the government is not inclined to impose fiscal discipline while indulging in reckless borrowing to pay off liabilities of the corruption-ridden inefficient PSEs. According to SBP, the funding of PSEs has inflicted a heavy toll on the economy, increasing the stock of total debt & liabilities (TDL) by Rs 500-600 billion.

All governments - civil and military alike - have failed to raise revenue to end debt enslavement. We can easily collect revenues to the extent of Rs 6 trillion, though actual potential is not less than Rs 8 trillion - 'FBR: new chairman, old challenges', Business Recorder, August 2, 2013. Unless it is done, Pakistan can never come out of the 'debt prison.' The Senate was informed on January 23, 2013 that over 3.39 million individuals had National Tax Numbers (NTNs), but only 885,999 filed their returns. The former Finance Minister, Abdul Hafeez Sheikh admitted that the number of income tax filers had drastically reduced to 1.6 million by 31 December 2012. The Senate was told that "a large number of businesses and individuals, who were regularly filing their income tax returns, are now avoiding their legal obligations by either under-declaring or incorrectly declaring their assets and incomes". PML-N supports these tax evaders as majority of them are part of the party and financiers.

FBR admits widespread tax non-compliance, but no government has ever taken any action against any official. FBR and tax delinquent sitting in the assemblies work hands in hands. They protect each other. There is no will to eliminate wasteful spending on monstrous government machinery and inefficient PSEs. The way the government is moving foreign debts would reach $75 billion in 2015 and domestic debt would be Rs 22 trillion. The policies of appeasement towards tax evaders, money launderers and plunderers of national wealth and monopolisation of resources by Riasti Ashrafiya (State Aristocracy) have pushed the country towards disaster - 'An elitist Pakistan', Business Recorder, July 26, 2013. The word 'austerity' is not in the dictionary of State Aristocracy - indomitable militro-judicial-civil complex and men in power. The habit of living beyond means - our national addiction - has turned the nuclear-powered Pakistanis into a nation holding the beggar's bowl. When foreign lenders see the lifestyle of our ruling elite, they immediately show indignation - it is hard for them to believe that the rulers of a penniless nation surviving on borrowed funds can display such flamboyance.

The reluctance to collect taxes from the rich and mighty, rather giving them free benefits and perquisites at State's expense, is worsening the miseries of the poor. There is no scarcity of resources as propagated by the rulers to shift blame on others, but the real cause is outlandish living of the elites off taxpayers' money-'Politics of plots and perks', Business Recorder, July 12, 2013 . Look at residences of judges, generals and high-ranking civil officials with army of servants and fleet of cars. Wasteful spending on State Aristocracy and unwillingness to tax the rich is playing havoc with the economy. Behind the present chaotic socio-economic and political situation in Pakistan, amongst other factors, is an ever widening gulf between the rich and the poor. With every passing day more and more people are being pushed below the poverty line - their total number is now not less than 60 million in a country where rulers unashamedly waste billions on their comforts and personal security - 'Finance Bill 2013: Apathy of Parliament', Business Recorder, July 5, 2013.

The present crisis testifies to the failure of power-hungry, money-greedy politicians and incompetent, inefficient and corrupt bureaucrats. Even the so-called technocrats always take the first flight to Washington after creating a mess - where are Shaukat Aziz and Abdul Hafeez now? In this bleak scenario, Riasti Ashrafiya is not ready to surrender extraordinary perks and privileges enjoyed by them at the cost of taxpayers' money. How can rulers and bureaucrats living in fortified containments, completely oblivious of the ordinary people's plight, feel the pinch of life's hardships?

We cannot come out of debt-enslavement unless we restructure our State on the principle enshrined in Article 3 of the Constitution - from each according to his ability, to each according to his work. For this, everyone should be given work and fair reward for that. There should be a complete change in the style of governance - the President, Governors, Prime Minister, Chief Ministers, ministers, parliamentarians, and high-ranking government officials should get 'consolidated pay package' liable to tax just like the income of an ordinary citizen. Palatial residences occupied by them should be sold or converted into income-yielding assets, and all perquisites of civil servants and public office-holders should be monetized to remove the burden off our country's broken financial back.

(The writers, tax lawyers and partners in HUZAIMA & IKRAM (Taxand Pakistan), are Adjunct Faculty at Lahore University of Management Sciences)

Here is the link: http://www.brecorder.com/pages/article/1226398/2013-08-30/qarz-burhao-mulk-bigarho.html

Note: Reproducing this article in my Blog does not amount to my agreeing with the authors' point of view.

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