Time has come for all to avoid over­dose of do­mes­tic debt

The Pak Banker - - FRONT PAGE - Rahim Sheikh

THERE is not a sin­gle coun­try on Mother Earth which is not re­source starved. Even oil-rich Saudi Ara­bia has started to run a deficit, let alone all the rich western economies, some of whom are in dire eco­nomic straits. Ja­pan is crip­pled by pub­lic debt. Pak­istan's pub­lic fi­nances are set in a di­rec­tion where we need to cor­rect course be­fore we hit the rocks. There is a need for a se­ri­ous 'Fis­cal and Mon­e­tary Re­spon­si­bil­ity' Bill in our laws. Politi­cians should not be al­lowed to go crazy and a few years af­ter they have left power (ev­ery­one imag­ines their days will never end) it are the peo­ple, you and me, who has to pay the price. That is why 'fis­cal and mon­e­tary re­spon­si­bil­ity' is crit­i­cal.

Pub­lic fi­nances are col­lected in the form of taxes, both di­rect and in­di­rect like the 25 per cent all of us pay ev­ery time we use our mo­bile tele­phones. Then we have the money that is bor­rowed, of­ten on crip­pling rates, from abroad. But even greater is the do­mes­tic debt in­curred by bor­row­ing within the coun­try. This comes in two forms, they be­ing the 'Sav­ings Cer­tifi­cates' un­der var­i­ous guises, and the ' bonds' raised by sell­ing to banks, fi­nan­cial in­sti­tu­tions and even the pri­vate sec­tor. For ex­am­ple in the next quar­ter the govern­ment will raise an­other Rs. 1.75 tril­lion in 'in­vest­ment' bonds at over 6.5 per cent in­ter­est.

Sadly, our banks have started buy­ing th­ese ' bonds', one of which yields an un­be­liev­able 8.5 per cent re­turn. Amaz­ing rates. The sit­u­a­tion is so dire that even pri­vate busi­ness houses have started buy­ing th­ese ' bonds', which in my col­umn I term as ' junk bonds', for that is what they re­ally are. The next quar­ter is unique in the over Rs. 1.25 tril­lion of the money for the new ' in­vest­ment bonds' will go to­wards re­pay­ing the in­ter­est on past 'in­vest­ment bonds'.

So we have en­tered, or let us be le­nient and say we are near­ing, the Ja­panese syn­drome stage where pub­lic debt re­pay­ment has brought this once dy­namic econ­omy to a vir­tual stand­still. So with this re­al­i­sa­tion our govern­ment has no way out but to cut pay­ments where ever pos­si­ble, and to raise taxes, mostly through 'mini-Bud­gets' ev­ery three months, in any way pos­si­ble. One such at­tempt, and let me say I am a sup­porter of this move, is the 'Restau­rant In­voice Mon­i­tor­ing Sys­tem' in­tro­duced by the Pun­jab Rev­enue Au­thor­ity. This is, for the time be­ing, con­fined to the ex­pen­sive eater­ies and ev­ery time you eat there and you get a for­mal printed bill, the tax au­thor­i­ties will be able to record the Sales Tax owed to them. Yes, we must all, as hon­est cit­i­zens, pay our taxes, and this is just one way of mak­ing sure the govern­ment is not cheated. But then ev­ery scheme, no mat­ter how well in­tended, can­not work with­out the peo­ple co-op­er­at­ing. Imag­ine if ev­ery fam­ily that eats out pays their Sales Tax, the govern­ment would be able to dou­ble its tax col­lec­tion. What an amaz­ing statis­tic, and given the amount that all of us eat out, it is not sur­pris­ing. The catch is that ev­ery 15 days a lot­tery will be held for those who pay their bills the cor­rect way, and they will be able to win mo­tor­cars.

But then this is a scheme that should be en­forced in ev­ery shop and store in the coun­try. We all know that our trad­ing classes just do not pay their cor­rect taxes. Busi­ness houses should use this sys­tem in ev­ery in­voice they cut, and no in­voice out­side this sys­tem should be ac­cepted by any ac­coun­tant or au­di­tor. Yes, we are, like a lot of other peo­ple in the world, tax evaders.

For some time now this col­umn has ad­vo­cated that ev­ery Pak­istani with a CNIC must sub­mit his an­nual tax re­turns. It mat­ters lit­tle that he or she does not earn any­thing. It must be there for the record. Un­less there is a his­tory of ev­ery Pak­istani with re­gard to his tax record, we will never be able to over­come.

But then the govern­ment must also show some mod­icum of se­ri­ous eco­nomic man­age­ment. One such move was an­nounced last Wed­nes­day when a 'com­mit­tee' started to re­view a draft plan to with­draw SROs, that stand­ing for Statu­tory Reg­u­la­tory Or­ders. It is well known that most fi­nan­cial mis­ap­pro­pri­a­tion in Pak­istan is done through the SRO cul­ture. There have, in the past, been sit­u­a­tions when the political rulers is­sued a spe­cial SRO re­duc­ing an im­port duty, and then get­ting it can­celled once a mas­sive ship­ment had been cleared and the new low duty paid. The sav­ings they made on such 'bu­reau­cratic theft' was, nat­u­rally, the col­lec­tive profit of both the bu­reau­crats and the im­porters. Two fa­mous cases con­cern newsprint and iron scrap im­ports, which could make in­ter­est­ing re­search stud­ies by stu­dents of the 'pol­i­tics of power'. But the lat­est move to scrap 'con­ces­sion­ary' SROs in 20162017 seems a bit con­fus­ing. The Fi­nance Min­is­ter Ishaq Dar claims this move will save bil­lions. He was told by his bu­reau­crats that in the year 20152016 the con­ces­sion­ary SROs cost the govern­ment Rs. 120 bil­lion. Now if this amount is cor­rect, and there seems no rea­son to doubt it as it is merely a pro­jec­tion, then the urge to bor­row from banks to fi­nance their 'dream projects' should come to an end.

Mr Dar claims that this will as­sist the govern­ment in macro-eco­nomic sta­bil­ity, and will go a long way to strength­en­ing the econ­omy, es­pe­cially the ma­jor in­di­ca­tors. So the fi­nance min­is­ter hopes that by pro­mot­ing a vi­brant tax cul­ture and by elim­i­nat­ing ex­emp­tions, the fi­nances needed for de­vel­op­ment will be very much there.

This is where the catch is. We know that in the plan­ning process the De­vel­op­ment Ex­pen­di­tures are be­ing trimmed by a mas­sive 20 per cent. This, the govern­ment has it­self an­nounced. The ques­tion is 'Why?' Have the lim­its of mon­e­tary ir­re­spon­si­bil­ity been crossed? The an­swer prob­a­bly lies in what the State Bank of Pak­istan Gov­er­nor said in a speech last week, where he was of the opin­ion that the pri­vate sec­tor should in­vest their sav­ings in new eco­nomic ac­tiv­ity. That just shows that banks now can­not pro­vide them with money as your and my sav­ings all go to the govern­ment. The banks are laugh­ing with hy­per prof­its. Have no doubt, that Pak­istan's do­mes­tic debt is head­ing the Ja­panese way. No way out is yet known to econ­o­mists, un­less very soon a few banks col­lapse, which I am cer­tain a few will.

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