On the first day of the new year, the finance minister briefed the cabinet on the state of the economy. Highlights of the briefing, as carried in the press, indicate that he acknowledged some truths and talked about what the government was planning to do, but spent quite a bit of time apportioning blame for the current problems to entities other than the current dispensation.
Mr Dar admitted that the rate of inflation was increasing, but his explanation for this centered on the increase in energy prices mandated by the IMF, and long delayed by the previous government. If the PPP administration had regularly raised fuel prices in line with international ones, he said, the current administration would not have had to affect the drastic increase witnessed in October 2013. Another explanation for inflation, according to him, was the additional taxation (particularly indirect taxation) imposed in the last budget, once again under pressure from the IMF.
The minister also blamed profiteers and hoarders for artificially causing price hikes. As mentioned in these columns earlier, there was quite a bit of rhetoric on how provinces were responsible for higher prices of primary commodities in particular, and giving magistrates powers to check hoarding would solve a good bit of the problem. He did mention revenue shortfalls as a cause of inflation, but doesn’t seem to have spent much time elaborating on the linkages between fiscal deficits and higher prices. In fact, he apparently went out of his way to refute the idea that money creation caused inflation. That may have been worth the effort if he had acknowledged money creation at all.
[quote]Government borrowing from the State Bank from July to November was Rs 1.9 billion a day[/quote]
Energy tariff increases, sales tax rate increases, a degree of profiteering – all these are contributors to inflation. But for the minister to claim that money creation has nothing to do with it, and then to deny that the government is resorting to borrowing from the banking sector, is disingenuous. According to the State Bank’s published data on borrowing, net credit to the government amounted to Rs 297.6 billion from the beginning of July to the end November alone, amounting to a borrowing of Rs 1.9 billion a day – pretty much at par with what the PPP government had become famous for in the last five years. The minister’s idea that this has nothing to do with inflation is astonishing to say the least.
[quote]The problem does not lie with data so much as with the PML-N’s reluctance to rile its traditional supporters[/quote]
In addition to refuting established theory on monetary economics, Mr Dar went on to nullify his own government’s declarations on bringing more people under the tax net. According to him, the initiative of using a range of databases to identify potential tax avoiders is fraught with difficulty because NADRA’s data is unusable. Thus in one fell swoop, he has negated a good part of the Federal Board of Revenue’s strategy to plug tax evasion. Nobody expected NADRA’s data to be perfect, but given the way Pakistanis are expected to produce computerized ID cards to carry out any major transaction (including buying property, cars, airline tickets, and insurance policies to name just a few) it is difficult to believe that a good bit of data cleaning and some hard work wouldn’t give the FBR enough information to at least initiate enquiries on some big-wigs. The problem does not lie with data so much as with the PML-N’s obvious reluctance to rile its traditional supporters. And this is where the party is confusing being business friendly with being businessman friendly. Making it easy for undocumented transactions to take place, and letting tax evasion go unchecked is not going to prove to be business friendly in the long run, as it is will stifle the growth of small and medium enterprises who form the bulk of Pakistan’s manufacturing and service capability. Those stakeholders need an enabling environment which can only be created by a government willing to provide essential infrastructure, assist in the free flow of information, and enable access to finance on non-discretionary terms. To do that, a government must demonstrate ability, but must also have resources. Making a few friends happy and ensuring that the treasury remains empty is a ridiculous policy.
The minister did mention that the fiscal deficit is the root of all evil, and kudos to him for that admission. But that’s where it ended. He didn’t elaborate what he intended to do about it. In fact, the only further mention of the issue was when he said that the government had an alternative strategy control the deficit if the FBR’s tax collection fell below target. Whether this is large scale privatization, extensive expenditure cuts (apparently the budgets of all departments are being reduced by 30 to 40 percent already) or something else is not clear. But the fact that the minister thinks that additional measures to bridge the deficit will be activated “if necessary” is puzzling. If the tax net cannot be widened, raising taxes is a bad idea, and the FBR doesn’t have the information to go after tax evaders, then what else is needed to make additional measures necessary?
Mr Dar repeated a list of targets given in the government’s agreement with the IMF, including increasing the investment ratio from 12 to 20 percent, and increasing the tax/GDP ratio to 13 percent by 2016. But his implied insistence that the previous government’s follies have bound the current administration’s hands, and that the IMF agreement has strangled the government’s policy making powers, makes his position non-credible. The government needs to stop worrying about who to blame, and needs to work on policy. Eliminating tax exemptions, pushing for documentation of the economy, proceeding with restructuring of loss making enterprises, and not using the State Bank as a cash machine are just some of the essential steps needed to start putting things on track. Unfortunately, none of these seem to be on the agenda.