Econ­omy: Loom­ing chal­lenges

The Pak Banker - - 4EDITORIAL - Dr Ka­mal Mon­noo

IMF thumbs-up, some feel-good re­ports (a re­cent one by Daniel Runde) and gov­ern­ment's usual rhetoric aside, the fact re­mains that the econ­omy for most Pak­ista­nis is not per­form­ing. What the re­cent bud­get should have done was to set the stage in the coun­try for growth along with so­cial eq­uity. Clearly this has not hap­pened. As na­tional com­pet­i­tive­ness and sub­se­quently man­u­fac­tur­ing fal­ters, jobs are fast evap­o­rat­ing in a de­mog­ra­phy where ur­ban­i­sa­tion is tak­ing place at an ex­tremely fast pace (to reach 50% by year 2050) and where nearly 200,000 jobs are re­quired an­nu­ally to ac­com­mo­date a young pop­u­la­tion at­tain­ing em­ploy­able age each suc­ces­sive year.

Given such a sit­u­a­tion, for any think­ing and car­ing gov­ern­ment the most im­por­tant as­pects of its econ­omy ought to be a real move to­wards com­pre­hen­sive so­cial sup­port for the public at large and shoring up of its home in­dus­try to spur job cre­ation.

And no one ar­gues this bet­ter than the Cam­bridge economist, Amartya Sen, by stress­ing in his var­i­ous works on South Asia that whereas "poverty can be par­tially al­le­vi­ated through re­lief; but it can 'only' be elim­i­nated through cre­ation of jobs and eq­ui­table growth in economies such as of In­dia and Pak­istan."

The prob­lem though, of­ten seen, is that eco­nomic man­agers in­vari­ably for­get that growth is not merely a statis­tic and it ac­tu­ally needs to be flesh and blood if it is to truly mean any­thing other than a few ex­tra nu­mer­als in an eco­nomic re­port.

If there are no jobs and if there are no op­por­tu­ni­ties for tal­ent, the econ­omy is only the crackle of a pa­per tiger - Our lead­er­ship also seems to be fall­ing in this very trap. For Pak­istan's progress to be mean­ing­ful it has to pri­mar­ily ac­com­mo­date public wel­fare, both by fa­cil­i­tat­ing the do­mes­tic pri­vate in­vest­ment in in­dus­try to gen­er­ate mass em­ploy­ment and by pri­ori­tis­ing state's rev­enue to­wards health, ed­u­ca­tion, ba­sic ameni­ties and small hous­ing over fancy in­fra­struc­ture show­boat projects.

In­stead, we wit­ness a false sense of op­ti­mism be­ing pro­moted by the gov­ern­ment quar­ters on the state of the Pak­istan econ­omy, which if not checked can have larger long-term neg­a­tive im­pli­ca­tions. First, com­pla­cency can set in and the much awaited eco­nomic re­forms, neces- sary to cor­rect the un­der­ly­ing malaise of the econ­omy, will once again be put on the back burner.

Sec­ond, once the present geo-strate­gic cum mil­i­tary need of Pak­istan ta­pers off (as has in­vari­ably hap­pened in the past) and when this low com­mod­ity price cy­cle be­gins to re­verse, we will yet again find our­selves at point zero, con­fronted by our age old prob­lems of poverty, in­equity and un­em­ploy­ment.

More to the present, this il­lu­sion un­nec­es­sar­ily raises ex­pec­ta­tions on ex­ag­ger­at­edly en­hanced rev­enue gen­er­a­tion by the gov­ern­ment. As it is, to­day the whole tax col­lec­tion drive by the gov­ern­ment is rather poorly crafted and caus­ing more pain than joy for all stake­hold­ers.

The fact of the mat­ter is that while ev­ery suc­ces­sive Pak­istani gov­ern­ment keeps on moan­ing about the low tax to GDP ra­tio, the taxpayers on the other hand keep re­mind­ing their lead­ers on the need for se­ri­ous re­forms in our tax sys­tem in or­der to seek mean­ing­ful progress in tax col­lec­tion.

It is only nat­u­ral and to be ex­pected that peo­ple go to a great length to avoid pay­ing tax or rather stay­ing out of the 'tax-net'. One pop­u­lar trick in the Mid­dle Ages was to be­come a monk; these days, shell com­pa­nies in the Caribbean are a more com­mon re­treat in the West and in an en­vi­ron­ment like ours a sim­ple avoid­ance to be­come a part of the doc­u­mented sec­tor is con­sid­ered to be the best op­tion! Point be­ing that it is re­ally up to gov­ern­ments to cre­ate an en­vi­ron­ment and a cul­ture that in­duces peo­ple to pay their fair share of taxes.

For ex­am­ple, the value added-added tax al­lows firms to deduct tax paid on in­puts from their sales-tax bill, in ef­fect per­form­ing a duty on be­half of the gov­ern­ment to po­lice their re­spec­tive sup­pli­ers; in re­turn they and not the evaders face the brunt in shape of co­er­cive au­dits and penal­ties; now who would want to be a part of it? And then this whole mean­ing­less busi­ness of first col­lect­ing a tax and then re­fund­ing it to the ex­porters where in­vari­ably the gov­ern­ment col­lects less and pays more! Why not make it ze­rorated as in the past? Last but not least, in tax­a­tion, the gov­ern­ment's un­due em­pha­sis has been on in­di­rect tax­a­tion in­stead of en­deav­our­ing to broaden the tax base.

The Gen­eral Sales Tax (GST) is the main ve­hi­cle of in­di­rect tax­a­tion be­ing used at home. The share of sales tax in our over­all tax col­lec­tion was recorded at 44% in FY14, over­rid­ing the share of di­rect tax­a­tion, which stood at 39% in FY14. Cur­rently charged at 17%, the rate is too high when com­pared with both neigh­bours and com­peti­tors; only Tur­key has a higher rate at 18%.

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