Blame provinces, get waivers
ALTHOUGH we were unable to meet two key performance benchmarks of the programme, the IMF took a lenient view of these failings and granted waivers - accumulating to 12, the largest number of waivers under any IMF programme, which is yet to complete two years. These key criteria relate to a) the budget deficit despite, as argued in earlier columns, the unashamed manipulation of data to show a lower deficit; and b) Islamabad's borrowings from the State Bank of Pakistan (SBP), in spite of the trillion-rupee injections by the SBP to enable commercial banks to invest in government securities/T-bills, given the latter's insatiable appetite for grandiose projects and subsidy schemes.
These columns had predicted that the IMF would not pull the plug on the life support system that it has arranged for us since its rosy assessments of the country's economic performance provides the basis for the laudatory evaluations of our accomplishments by other lenders and rating agencies. This writer had argued that the IMF would continue to lend its name to Pakistan's desire for more donor and international banker generosity to continue providing financing, despite failures to satisfy performance criteria. It was further argued that since it is tough for the US government to elicit Congress support for funding, it has the leverage needed to cajole the IMF and the World Bank into rewarding our efforts to coax the Afghan Taliban onto the negotiating table. This decision of the Fund staff has, for the first time in recent memory, reinforced the widening perception that the IMF, World Bank and Asian Development Bank are abettors of the government's window-dressing scheme by unreservedly believing government data, thereby damaging their own credibility while breeding complacency in Islamabad.
It is amusing that Islamabad holds the provinces primarily responsible for the budget deficit condition being breached because they did not generate the budgeted surplus of Rs289 billion which, extending the same perverted logic, presumably resulted in Islamabad being unable to reduce its borrowings from the SBP. No one is bothering to ask why on earth would the provinces tax their own citizens or reduce allocations for service delivery improvements to raise surpluses for Islamabad to spend? For Khyber Pakhtunkhwa it would be even more politically outlandish with large sums still owed to it for hydel profits.
The IMF, World Bank and Asian Development Bank are abettors of the government's window-dressing scheme. More importantly, if 90pc of provincial un-encumbered resources come from the divisible pool of taxes collected by federal agencies, how could they be expected to supply such surpluses if the size of this pool was smaller owing to the inability of these institutions (mandated to collect taxes) to muster budgeted revenues?
Regrettably, the provinces are the favourite punching bags of Islamabad, donors and commentators alike. They are recurrently chastised for failing to mobilise adequate resources to fund their constitutional responsibilities for services like law and order, education, health, water and sanitation, etc, whose neglect is universally censured.What is conveniently forgotten is that the revenue raising capacity of the provinces is limited, owing to the taxation powers enshrined in the Constitution and the structure (GST in VAT mode) put in place under earlier IMF programmes. Admittedly, the provinces also haven't done enough to augment revenues. They haven't been aggressive enough in marshalling and collecting taxes on incomes derived from agriculture (making it worse by treating land rented out also as agricultural income) or by making urban property tax more progressive and robust. However, they have had decent success in recent years in mobilising additional revenues by widening the GST base for services.
The federal government has preempted the revenue base of the provinces that everyone wants them to exploit: motor vehicles, real estate and services. It has levied a variety of silly withholding and other taxes on motor vehicles and property transfers. By imposing excise duties on some services and by adopting conceptually flawed legislation that empowers it to levy GST on economic and commercial activities that would logically be treated as services, Islamabad has further narrowed provincial options to develop the potential of GST on services. But then, Islamabad operates in a world of its own, in which actions and decisions are not driven by, or argued on the basis of, rationality.
Moreover, the federal government has contributed to the taxation regime becoming increasingly complicated. For instance, the provinces do not allow the deduction of GST paid on inputs, although the country is supposedly administering a system of GST in VAT mode, thus raising the cost of doing business (affecting competitiveness) and unnecessarily raising consumer prices. There is also the issue of multiple revenue collecting authorities adversely affecting administrative and economic efficiency, leading to higher transaction and operational costs, unnecessary duplication of functions and data bases and inconsistent legal and other treatments of even similar types of taxes. Such a complex arrangement has raised the cost of compliance for taxpayers by creating difficulties for them, causing increased annoyance.
What is, however, worrying is that instead of correcting these anomalies in the tax structures and making the processes and institutional mechanisms less harassing for existing taxpayers, etc, Islamabad, commentators and the IMF are intent on consolidating and strengthening defective systems. They want the provinces to produce, by hook or by crook, more revenues to reach some magical number of the budget deficit. So much for the refrain that the tax reforms are being studiously implemented.