Subtle moves to deflect FBR from repaying unpaid export rebates
THE announcement by the Prime Minister that a ' ZeroRated' Export Scheme was to be put into place has been seen as ' band aid' on a larger government-created problem. The FBR is holding up an unbelievable Rs. 200 billion of cash that belongs to exporters in the form of unpaid export rebates.
Now get things in perspective. The zero-rating will cost the government less than Rs. 9 billion only. The unpaid rebate is Rs. 200 billion. Get the drift? So the question really is: does ' zero-rating' matter in the total picture? The answer really is not. If Rs. 200 billion of unpaid rebate was invested in government 'bonds' at 8% (this was the interest rate of the last bond selling to commercial banks), this would mean that the exporters of Pakistan should be also paid another Rs. 16 billion annually. Given that such rebates have been held for over three years, they are owed an additional Rs. 50 billion.
So is this entire matter just another eye-wash, a move to deflect from the bad governance that plagues Pakistan's financial affairs. The problems is governmentcreated, which bears sole responsibility for the current ' cash crunch' mess. So let us take a brief look at three matters. Firstly is the 'cash crunch' faced by the government. Secondly, is the cash crunch that exporters face. Lastly is the 'cash crunch' that the people of this country will face in the years to come.
First, the government. There is no doubt that the business community of Pakistan are the main supporters of this PML Nawaz government. In return the PML Nawaz represents the business community. It is as simple as that. Now does the business community pay their taxes? A few multinationals and big business companies do, and they do so honestly. But the vast majority of traders, especially the shopkeeper community are not, legally, paying their full and correct taxes. It is very easy for journalists like me to point out examples by the dozen. But that is not the point.
The point is that the government is undertaking major infrastructural schemes, and for that it needs money. So it is borrowing from banks in the form of 'junk bonds', bonds that will never be repaid in cash, but will merely see more and more 'junk bonds' created to repay old money. Yes, for the time being the banks' lending to the government will have impressive profit figures. But they are all 'paper profit'. The end result will be one, and only one, and that is that a few banks will collapse under the weight of 'paper profits'.
Who will be responsible for such an eventuality? The answer will be the government, and the bankers, termed 'official clerks' by a World Bank report. Who will be the losers? Naturally the depositors who trust the institution of a bank. So with a cash-strapped government holding up a massive Rs. 200 billion of unpaid 'export rebates', does getting a 'Zero Rated' export regime make sense? The answer is that it is all hogwash.
If this government was interested in finding an answer to the unpaid export rebates owed to the exporters of Pakistan, then there is just one answer, and let this newspaper put forward a proposal to solve this difficult problem. But before we make the proposal let us dwell on the reason the FBR gives for not paying export rebates.
They claim that those with local sales cannot be paid rebates. Fair enough. The question is that does not local Sales Tax cover this portion of the inputs? Just where did they buy their inputs from? Even in this case it is the FBR that is to blame.
So how does the FBR pay back the Rs. 200 billion owed to exporters? Given that banks are not lending to serious business houses because of the cash crunch created by 'junk bonds', the fact is that a major portion of the cash of business houses is currently being utilised by government itself. If government can pay banks up to 8% in annual interest, it goes without saying that this interest on the cash owed to exporters must also be paid back to them.
How do we see this being done in operational terms? Simple. Let the FBR create ' Export Rebate Bonds' that have a State Bank of Pakistan guarantee, and let business house sell these bonds to banks and let the government repay the actual as well as the interest. In this way the business house will have cash to use in an environment where cash is hard to get from banks because of the ' junk bond' crisis. On the other hand the FBR will manage to further postpone repaying stuck up export rebates to the tune of Rs. 200 billion.
This is the only viable way forward, and one that can manage to get export businesses to move forward. We also know that textile and leather exporters, because of the cash crunch, are experiencing falling exports. This will, probably, manage to reverse this trend. Given this situation to announce a ' Zero Rated Export Regime' without finding an answer to stuck up export rebates is surely another bluff.
But in the long-term there is a need for the government to create a situation whereby there is a ceiling on government borrowing from commercial banks. Government must not be allowed to go wild in its borrowing. After all it is playing with the future of its citizens by, indirectly, making them poorer. Banks must also face SBP legislation whereby they are limits to providing ' junk bond' loans to government.
This is, to be honest, a sophisticated fraud. To an accountant happy to balance books without a care of where the money comes, or goes to, reeks of an irresponsible bend of mind. The banks just cannot be allowed to play havoc with the savings of depositors. The government cannot be allowed to borrow without some modicum of responsible governance. It is time to legislate appropriate financial laws. But then who will bell this set of wild cats?