ECONOMY

Auto finance revisions

THE State Bank’s decision to revise its prudential regulations governing consumer
financing to limit car sales is a desperate move to moderate growth in domestic demand
and curb burgeoning imports to control the current account deficit, which widened to
$2.3bn in July-August from a surplus of $838m a year ago. The import of both CBUs and
CKDs during the last fiscal had grown to $2.142bn from $1.276bn the previous year.
During the first two months of this fiscal, CBU/CKD imports surged to $495m from $160m
a year ago. The revisions may not have a drastic impact on the overall import bill — and
consequently on the trade deficit — but they will certainly dent domestic car sales. With
the current account projected to beat the central bank’s optimistic projection of 2pc-3pc
of GDP for the present fiscal by a wide margin, both the bank and government have from
last week begun to temper their monetary and fiscal stimulus to shift the economy back
into lower gear in order to ease pressures on the precarious balance-of-payments
position.
The State Bank‘s revised auto financing policy tightens regulatory requirements for
procuring loans for domestically assembled cars of more than 1000cc engine capacity
through reduction in lease tenures, increased minimum down payment and a cut in
maximum debt burden ratios for borrowers. The new policy effectively prohibits financing
for imported vehicles and fixes the maximum amount of outstanding auto loans at Rs3m at
any given point. Locally assembled electric vehicles, hybrids and cars under 1000cc have
been insulated from the changes with a view to encouraging environment-friendly
technology and middle-income car buyers. Overseas Pakistanis with Roshan Digital Accounts
will also remain unaffected by the amended regulations. Until recently, ministers had been
jumping up with joy, citing the increasing car sales as a benchmark for the economy’s return
to the path of recovery. The warnings from experts that the nascent economic upturn on
the back of procyclical economic policies would bring the current account under immense
pressure were brushed off with scorn. The recent developments have, however, proved
critics of the unprecedented monetary and fiscal stimulus correct. It remains unclear as to
how far the government will go to cool the overheating economy. But it is quite certain that
it may soon run out of time if it does not move swiftly to shield its debt-based foreign
exchange reserves and reach an understanding with the IMF in the upcoming October
review of its suspended programme.
Published in Dawn, September 28th, 2021
Karachi tax collection
THE Sindh government’s decision to collect two municipal taxes through electricity bills
from consumers only in Karachi is likely to be seen as discrimination by the dwellers of the
megacity. In its attempt to make the Karachi Municipal Corporation financially strong, the
provincial government earlier this month proposed the collection of conservancy and fire
taxes through K-Electric bills from consumers in Karachi. According to the details, Rs100
and Rs200, respectively, will be charged from two categories of 2.56m electricity
consumers in the city. It is believed that this will enable KMC recoveries to increase
drastically — up to Rs9bn per year as compared to the present collection of Rs210m from
these two taxes. The Sindh government took a similar step earlier this year in February
when it mandated the Sindh Revenue Board to collect local taxes on KMC’s behalf.
Though these taxes are not new, it is too early to say whether their collection through
electricity bills will prove effective. Part of the reason is that the authorities have not yet
made available the details of the two categories of consumers mentioned.
Meanwhile, even if the financial targets are met, it is unclear how the money raised will be
used to improve civic facilities in Karachi. The 20m-plus people of Karachi, whose large,
medium and small businesses drive the country’s economy, are left to cope with natural and
manmade disasters practically on their own. Certainly the comatose KMC seems to be
providing little to no civic amenities. Secondly, the same PPP leadership that now appears so
concerned to prop up KMC was the same one that originally stripped the body of many of its
powers. Moreover, why shouldn’t the same methods be employed to boost tax collection
via municipal bodies in other cities of the province, including Hyderabad, Sukkur and
Larkana? Will financial autonomy for these municipal bodies not benefit the Sindh
government too? Taxing is essential but its application needs to be fair across all settings,
rich or poor, urban or rural.
Published in Dawn, September 28th, 2021
No funds for Fata
IT has been a little over three years now since the Federally Administered Tribal Areas
were merged in KP with the commitment to correct 70 years of historical wrong done to
its more than 5m people and to bring the latter’s lives at par with the rest of Pakistan. The
2016 Fata Reforms Committee led by senator Sartaj Aziz had pledged 3pc of the National
Finance Commission award or Rs100bn per annum to improve infrastructure and create
job opportunities for the tribespeople in a region with the lowest socioeconomic
indicators in the country. Despite having across-the-board endorsement from the civil and
military leaderships, that recommendation was never implemented. Finding lack of
support from other provinces for the recommendation, a meeting held under the
chairmanship of Prime Minister Imran Khan in December 2018 decided that the federal
government together with KP and Punjab would provide 3pc of their share of the federal
divisible pool to former Fata. Sadly, neither the federal government nor Punjab honoured
their commitments, leaving KP to pick up the tab.
A report in this newspaper lays bare this stark reality. Not only did Punjab, Sindh and
Balochistan fail to live up to their word, the federal government too fell short of its
commitment by providing only 37pc of its promised uplift funds in the last three years. To
rub salt into the wound, ex-Fata’s share in the seventh NFC award has been going to other
provinces since the merger in May 2018. If there is growing impatience and dismay in the
now merged tribal districts of KP, it is but understandable. The merger plan had raised
hopes and expectations in the area and had held out the promise of a quick and visible
turnaround in the lives of the people who had lived through decades of neglect, terrorism
and displacement. The centre and the provinces need to realise the criticality of ex-Fata in
view of the evolving situation in neighbouring Afghanistan and chip in — or else feel the
impact of the negative fallout yet again.
Published in Dawn, September 29th, 2021
Financial troubles
THE PTI administration has found itself left with no option but to go back to the IMF with
a request for the resumption of the $6bn loan programme stalled since March.
With the 2023 elections in sight, the government was reluctant to introduce the unpopular
measures suggested by the global lender. The strict programme conditions, especially the
ones related to electricity pricing and tax reforms, were also seen as major impediments to
the government’s plans to grow a shrinking economy in time for the next elections.
The IMF’s ‘open and constructive discussions’ with Pakistan’s finance managers including
Shaukat Tarin seem to be yielding the ‘desired results’. The sixth review of the programme is
expected to be over soon with the IMF releasing two outstanding tranches amounting to
$1bn once it completes the validation of the data on power and gas tariffs and tax collection
shared by Pakistan.
Read more: Technical-level talks with IMF conclude
What Islamabad has agreed to give in return will be fully known once the IMF executive
board approves the deal and releases the document. At the moment, we only know that Mr
Tarin has given in to a major IMF demand to raise electricity prices. Speaking to Pakistani
journalists in Washington after his meetings with IMF officials, he repeated his old position
that raising [power] tariffs without structural changes only increases inflation and makes
industry uncompetitive.
“We will increase these tariffs in a gradual manner so it does not increase inflation a whole
lot,” he explained, trying to justify his volte-face.
Read more: Tarin hopeful on success of IMF negotiations, says encouraging progress made
The resumption of the IMF deal is crucial for Pakistan to sustain its external sector in the
short to medium term since the growing trade gap is fuelling the current account deficit and
bringing the already meagre foreign exchange reserves under massive stress. But it is bad
news for ordinary people. Besides making electricity a lot more expensive, the IMF is likely
to force Islamabad to implement measures to boost income, consumption and import taxes
to pull up its revenue target of Rs5.8tr for the present fiscal year to Rs6.3tr, abolish or
significantly reduce all kinds of subsidies, and hike interest rates. The brunt of these
inflationary actions will primarily be borne by the low-middle-income families already
struggling to cope with eroding funds.
Does the government realise this and can Mr Tarin — whose term as unelected finance
minister expired Friday night because a Senate seat to get him elected to the Upper House
could not be found — clinch any concessions from the IMF on behalf of ordinary Pakistanis?
At the end of the day, Mr Tarin may keep his office in Q Block as a minister or as an adviser.
However, the conditions tied to the loan programme are going to unleash a strong public
backlash. How will a politically beleaguered government deal with public outrage and what
will it mean for the PTI’s electoral prospects? Only time will tell.
Published in Dawn, October 18th, 2021

Evading tax laws

MERELY 2.5m or 35pc of the 7.2m total registered taxpayers or NTN holders have filed
their returns for tax year 2021. This is very low compliance with the tax laws.
The government’s claims of taking measures to expand the narrow tax base
notwithstanding, the reluctance to file highlights why the share of income tax – the only
direct charge on personal incomes — in the FBR’s total revenue collection stands at less
than 35pc. Even the bulk of income tax is collected ‘at source’ as withholding tax in ‘indirect
mode’.
Read more: Pakistan’s stagnant tax base
The large majority of those who should be paying their due share of taxes on their incomes
and filing their returns regularly do not do so because few believe that the FBR will take
punitive action against them. Little wonder then that tax compliance is declining in spite of
the laws prescribing fines, arrests and imprisonment for non-filers. Recently, the FBR also
got the powers to cut off the electricity and telephone connections of non-filers of tax
returns. But what is the use of such powers if these aren’t or can’t be exercised to punish
tax cheaters?
Read more: Good time to broaden tax base, says OICCI
Pakistan’s tax-to-GDP ratio of around 10pc is one of the lowest in the region and in the
world. It is at the heart of the country’s chronic economic and financial woes. Successive
governments have pledged to raise this ratio to 15pc to bridge fiscal deficit, offload debt,
and push economic growth and development. In the last NFC award, both the centre and
the provinces had agreed to increase tax revenues.
More than a decade later, taxes as a per cent of the size of the economy remain stagnant.
This is because any effort to raise tax revenues anticipates wide-ranging reforms —
especially improvement in the income tax regime and collection — aimed at broadening the
tax net. Instead of focusing on reforms, successive governments have chosen the easier
path of expanding and increasing indirect levies, which spare the wealthy and directly
burden the man on the street.
Read more: An unfair taxation system
The incumbent government has proved no different from its predecessors. It has also been
struggling to boost the tax-to-GDP ratio through indirect taxation without addressing the
difficult challenge of expanding the base of taxpayers. This strategy hasn’t worked in the
past and is unlikely to deliver in future. The challenges of tax compliance and mobilisation
cannot be dealt with without effectively and directly taxing incomes irrespective of their
source, and punishing the tax evaders.
Published in Dawn, October 19th, 2021
Baqir’s blooper
THE remarks made by State Bank governor Reza Baqir at a London press conference have
hit a raw nerve in Pakistan. In response to a barrage of questions about the rupee’s rapid
depreciation and rising inflation in the country, Mr Baqir thought it best to adopt a glass
half-full approach; he said that this situation has some sort of silver lining for expats
sending money back home. Unfortunately for him, there are few among the 200m people
in the country who will take kindly to this viewpoint. The reality of living under
skyrocketing costs and shrinking disposable income is harsh and ugly and his remarks
against this backdrop were uncalled for. According to him, a weaker rupee results in
higher remittances and therefore benefits overseas Pakistanis sending foreign exchange to
their families. Moreover, his follow-up remarks, that these rising costs are somehow only
a thorn in the side of the “very rich” who “want to buy imported items” are not only far
from the truth, they are tone-deaf and insensitive.
Mr Baqir is a seasoned economist with a degree of experience when it comes to monetary
policy. But it doesn’t take a genius to know that a dramatic depreciation of currency coupled
with inflation can in no way be painted in a positive light. Even by his logic, the “higher
volumes” of remittances sent by expats are of no real benefit as inflation eats into any gains.
Someone with Mr Baqir’s experience should know better. By making these irresponsible and
illogical remarks, the State Bank governor has exposed himself to criticism. His remarks
appear to be an appeal to the sentiments of expats whom the ruling party is so eager to
woo in the next election. They have also once again raised the question of Mr Baqir, an ex-
IMF official, justifying economic policies that have brought misery to the average citizen. In
an attempt to paint a rosy picture for expats, it is important that Mr Baqir not forget that
there are many millions at home for whom this depreciation has been anything but positive.
Published in Dawn, October 23rd, 2021
Financial crisis
DESPITE having progressed to ‘very good step’ and being ‘close to concluding the
agreement’ a few days back, the talks between Pakistan and the IMF for the resumption
of the $6bn programme seem to have hit a deadlock.
Pakistan’s entire finance team that had been negotiating the revival of the loan facility in
Washington since early this month has had no option but to leave without finalising an
arrangement that is considered crucial to mitigating the emerging risks to our balance of
payments. Yet a finance ministry spokesman has dismissed reports of a breakdown in talks,
insisting that these were continuing and a statement would be issued as soon as discussions
concluded. Earlier, he had refused to give a definite time frame for the agreement.
The reasons for the ‘failure’ remain unclear but the IMF is expected to soon issue a
statement to explain how its reforms programme can be revived. However, reports suggest
that the talks had hit a snag on a number of matters including disagreement on the level of
increase in electricity prices, imposition of additional taxes of approximately 1pc of GDP,
and validation of the expenditure of the $1.4bn Covid funds provided to Islamabad to fight
the pandemic. With neither side coming clean on the reasons for the current ‘interruption’,
it can only be hoped that this hiatus in talks will be temporary.
From the very start, the Fund was expected to play hard this time around given the
government’s poor track record on implementation of the steps agreed to under the
programme to reduce expenditure, raise the tax-to-GDP ratio, liquidate the energy sector
debt, and reform or privatise loss-making SOEs. The talks were projected to be tougher
given the changed regional geopolitics after the Taliban takeover and the new frostiness in
Pakistan’s ties with Washington, which has huge influence over the Fund.
Yet finance adviser Shaukat Tarin was hopeful of convincing the lender about meeting
programme targets without taking its suggested harsh measures ahead of the 2023
elections. Apparently, the IMF has proved him wrong.
The question now is whether Islamabad has any fallback plan as the State Bank’s liquid
foreign exchange reserves have already begun depleting on the rising trade deficit, putting
pressure on the exchange rate. Indications are it doesn’t have one unless the Saudis agree
to step in to fill in for the IMF and help Islamabad avert the imminent balance-of-payments
crisis and its attendant consequences.
Published in Dawn, October 25th, 2021
Escalating prices
ONE question being asked by almost every Pakistani today is: for how long will we have to
suffer food price inflation and how far will it go? Based on the data signifying the linear
upward movement in prices, especially of food and energy, over the last three years,
these questions are valid. The government, on the other hand, seems quite oblivious to
the extreme difficulty the vast majority of citizens face in making ends meet. That the
purchasing power of most households continues to erode because of the sustained and
steep increase in prices barely begins to describe the people’s financial hardship. A report
in this newspaper yesterday has highlighted how the prices of various food staples have
spiked under the present government. The prices of such items of daily use as vegetable
ghee, cooking oil, sugar and some lentils have increased by an annualised average of 27pc,
23pc, 22pc and 21pc since October 2018. The increase in wheat flour price has been 15pc a
year during this period. In absolute terms, cooking oil, sugar and chicken have become
88pc, 83pc and 60pc more expensive than they were three years ago. Likewise, the cost of
beef, eggs, milk and rice has gone up 48pc, 47pc, 33pc and 29pc. However, no statistics
can capture the true impact of inflation on ordinary people because sustained price hikes
make daily life more expensive in a way that no index can measure.
There is little doubt that the post-Covid-19 global recovery has sent international
commodity markets spiralling across continents on demand-supply imbalance. Still, double-
digit food price inflation in Pakistan remains much higher than experienced in other regional
countries like India and Bangladesh, even though both are net importers of basic food items
— and energy — like us. In recent years, inflation in Pakistan has become a structural issue.
The government cannot absolve itself of responsibility by dismissing the hike in domestic
prices as a phenomenon of the international commodity cycle. Nor will its claims of passing
on only part of the global price increase to people make the impact of its reckless
consumption-based growth policies ahead of the 2023 elections as well as poor governance
lessen its contribution to inflation. Food inflation had already escalated to 24pc in villages
and 20pc in cities with the number of food-insecure households swelling across the country
long before commodity prices started to rise.
The massive devaluation of the home currency on the back of expanding deficits on the
current and trade accounts is not helping either. Pakistan Bureau of Statistics inflation data
highlights a worrisome price trend over the next several months. The central bank too has
already revised upwards its inflation forecast for the year. If anything, all indicators point
towards more troubles for low-middle-income families already struggling to cope with
erosion in the currency’s value, pay cuts and job losses.
Published in Dawn, October 27th, 2021
Easing the pressure?
SHORT-TERM Saudi loans always come in handy for our rulers — be they from the PML-N
or PTI — when there is financial trouble. Concessionary petrodollars and deferred oil
payment facility from the kingdom after the PTI’s ascent to power in 2018 had gone a long
way in assisting the new government avert a balance-of-payments crisis, just as a similar
gesture helped the PML-N build up its foreign exchange reserves in 2014. The sum of
$4.2bn ($3bn in safe deposits with the State Bank and $1.2bn in oil supplies on deferred
payments for a year) lent by Riyadh during the prime minister’s recent visit to Saudi
Arabia will also provide some respite to the government even as it loses its grip on the
external sector. The Saudi announcement has somewhat eased pressure on the rupee
which strengthened by 1.7pc against the dollar in the interbank market. It has also bought
Islamabad some time in case talks with the IMF for the resumption of the suspended $6bn
loan go on longer than anticipated. This much was evident from Shaukat Tarin’s relaxed
tone at his Wednesday presser. Only recently, the finance adviser had been shuttling
between Washington and New York to salvage the IMF deal.
Mr Tarin, who claimed that Pakistan had nearly reached a deal with the IMF and that there
were just a couple of matters that remained outstanding and were under discussion, did not
give out details of the talks with the Fund. Yet he indicated the ‘rationalisation’ of taxes to
cover the revenue gap of Rs450bn the government has foregone to keep down domestic
petroleum prices. Mr Tarin also blamed the harsh IMF conditions his predecessor had
accepted to secure the last tranche of $500m from the Fund in March for his troubles with
the lender. However, a cursory reading of IMF officials’ statements over the last few months
shows that the lender is sceptical of Pakistan’s growth policies and does not approve of its
fiscal spending plans and structural reforms — particularly in the energy and tax sectors —
agreed in the original agreement. Another important condition relates to a significant
reduction in imports to below FY19 levels to keep the current account deficit manageable.
The problem is that none of this suits the government’s pre-election growth strategy.
Essentially, the current impasse with the IMF amounts to differences over the government’s
expansive fiscal policies. Revival of the deal appears uncertain unless these policies are
reversed.
Published in Dawn, October 29th, 2021