Editorial: DAWN - 21 June 2013

Tough days ahead: Back to the IMF

THE inevitable has to happen. When? It may happen next month, or take another couple of months. The Nawaz Sharif government has to knock at the IMF`s doors to obtain another loan to pay back in the next 12 months what is already owed to the lender.

Finance Minister Ishaq Dar hinted at this eventuality several times in recent weeks. There`s no harm in taking new loans to pay off old ones, he was quoted as having said during his first briefing on the state of the economy his party has inherited from the previous government.

The new loan will not raise the country`s stock of foreign exchange, which is sufficient only to pay the import bill for another three months. Nonetheless, it will stop further depletion of reserves, halt temporarily the erosion in the rupee`s buying power and in the confidence of the business community, as well as pave the way for more dollars from other global lenders for large infrastructure projects.

The government has already taken some steps in its first budget to meet conditions that the IMF is likely to attach to the new loan. These actions include a significant increase in tax revenues although without expanding the base a substantial reduction in electricity subsidies and liquidation of the power-sector debt.Some other measures like a hike in electricity prices and the reform of stateowned businesses including power generation and distribution entities to prepare them for sale will be taken in the next couple of years. All these actions will make the life of the common people more difficult because they are being asked to shoulder the chunk of the adjustments being made to make state finances more liquid. The wealthy have again been spared.

The previous government had also instituted similar initiatives when it signed the standby arrangement loan with the Fund in November 2008 to stop the run-on on the banks and the rupee.

However, it had dithered from taking tougher decisions to reform and restructure the tax system, state corporations, power businesses, etc under political pressure from its allies and the opposition led by the PML-N. Five years hence, the country may again be standing at the crossroads unless a comprehensive plan for the economy is devised that moves beyond the regular recourse to the IMF. For starters, the new government must take difficult decisions to restructure the economy for sustainable and early recovery without considering the political fallout from its opponents or from the powerful and wealthy.

Null and void: Legalizing smuggled vehicles

BY nullifying an amnesty scheme initiated by the last government granting duty and tax concessions for smuggled vehicles, the Islamabad High Court has sent the right message. As Justice Shoukat Aziz Siddiqui noted, the FBR`s amnesty discriminated against citizens who lawfully purchase vehicles and pay their requisite state dues. By declaring such amnesties and schemes, the state seems to imply that it is okay to dodge taxes and the formal economy as long as one pays a lower cost at a later date. Similar schemes have been announced in the past, for example the amnesty declared last year under which no questions would be asked regarding the source of funds invested in the Karachi Stock Exchange.

These schemes appear to encourage illegality in the financial sphere, by promising to turn `black` money into `white`. Those who honestly pay their taxes are given the impression that it doesn`t pay to follow the rules and that there are ways to break the law and still work the system.

Considering the fact thatPakistan`s tax-to-GDP ratio is abysmal, such amnesties only encourage the rampant culture of tax evasion. And while efforts are being made to document the informal economy, which is almost as big as the formal one, official moves that encourage smuggling and illegal imports make no sense.

Simply put, such moves are not sustainable as they work only to strengthen the status quo, where tax dodging is tolerated, and offer very short-term advantages to the state.

Apart from questions of financial ethics and loss to the exchequer, the local automobile industry is also affected and jobs are lost when vehicles are smuggled and later legalised. As for the FBR`s claims that billions of rupees were collected when over 50,000 vehicles were regularised under the amnesty, it would be fair to ask how much revenue the state could have collected had the vehicles been imported legally.

The court`s decision should prompt the tax authorities to avoid coming up with such dubious schemes in the future.