Time has come for all to avoid overdose of domestic debt
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.