Bigger Begging Bowl

Majyd Aziz

Come election time, the election speeches of politicians usually hype up and sincerely promise three pledges: elimination of corruption, provision of infrastructure, and breaking the proverbial begging bowl (Khaskol in local parlance). The rent-a-crowd and the hangers-on go into frenzy, and then the full-throated campaign slogans are raised. The large gathering seems convinced that deliverance time has finally arrived.

Good governance pledges and promises are merely for reassurances because every incoming government sets in motions strategies to mint for itself huge financial benefits at every available opportunity. Grandiose infrastructure projects are announced without ascertaining the actual costs or feasibilities. However, when the government in power fails to withstand the imperatives of fiscal mis-management and burgeoning deficits, its immediate reliance is on external financing channels, notwithstanding the solemn pledge to desist from taking this step.

The penchant for propagating the feel-good factor becomes a hollow boast when representatives of international lenders land in Islamabad or when the economic managers have flown out to Dubai or Washington. After drawn out negotiations and acceptance of tough terms and conditions, a deal is reached and these managers heave a sigh of relief, despite the fact that most of the conditionalities would be difficult to achieve. The primary reason for the requirement of additional external finance is that the fragile economic situation, dwindling levels of foreign exchange reserves to meet the foreign obligations, and financing the rising import bill become alarming signals of a possible default. There are a number of other factors responsible for the vulnerability of the economy like heavy debt servicing, low investment inflows, a devastating law and order situation, poor governance, and the after effects of the recession of 2008 that negatively impacted on scarce employment opportunities and overall demand for goods and services.

The Federal Board of Revenue convinces Finance Ministers that it has the potential and capability to rope in non-tax filers and is confident of achieving the revenue targets. Even then, knocking at the portals of the international development financing institutions should be a priority to obtain resources for mega projects, for budgetary support and for boosting foreign exchange reserves. This is how the governments are pushed into the abyss. Akin to a beggar who prefers to live a life of begging by braving the elements of nature, the derogatory comments of the citizens, and the hardships of soliciting meager Rupees and Paisas, the government of the day is saddled with tough conditionalities, censures and criticisms of the multilateral agencies. Sovereignty is shaken, vulnerable, and mortgaged.

The present government faced an acute dilemma after assuming power when its economic team became aware of the dire economic situation. The Finance Minister was ill prepared and possibly uninformed of the situation at hand when he had just a few weeks to present the budget, another vivid example of a bureaucratic budget. At the same time, the government was not keen to lay total blame on the previous government and hence assumed the responsibility of moving forward, carrying the excess baggage inherited from the outgoing government.

Take IMF, for instance. The favorite of Finance Ministers and economic managers. Pakistan has a long history of borrowing from the Fund. Pakistan has signed five Stand-by Arrangements (SBA), three Extended Credit Facilities (ECF), and three Extended Fund Facilities (EFF) agreements till now for stabilizing the fiscal situation. However, none of the loans in the past accounted for that enormous amount as taken in 2008 and 2013 under SBA and EFF respectively. Loans are given under Special Drawing Rights (SDR) and Pakistan has so far been granted 16.734 billion SDRs.

In summer of 2013, a strong IMF team set up base in one of Islamabad's five-star hotel. The economic functionaries were rushing in and out of the meeting halls requisitioned for the IMF team. I had gone to there to meet a senior official. He informed me that the environment was like a missionary high school classroom and the manner in which they were grilled and the way they were being lectured was astonishing. It reminded me of the popular Big Nate comics and its two characters, Nate Wright and his social studies teacher Mrs Godfrey. Just as Nate had a difficult time convincing his nemesis who always saw through his antics, lack of preparedness and outlandish behavior, in the same way the visitors from Washington saw through the presentations and pledges of the Pakistani officials. Nevertheless, IMF too could not afford a default by Pakistan, and thus taking cognizance of the ground realities as well as the smooth transition under a democratic process, the team's recommendations were positive, albeit with tougher conditionalities.

The major requirements of the present EEF need highlighting:

·         Fiscal Adjustments: This core requirement relates to enhanced levy on natural gas, strict tax measures, fundamental structural and administrative measures, extensive purchase of US Dollars from the open market, and maximum reduction of subsidies in energy sector.

·         Gas Levy: The perceived shortages of natural gas, the program to finance the expected Iran-Pakistan Gas Pipeline, and the planned TAPI Gas Pipeline gave the government a valid reason to increase gas prices as well as impose the Gas Infrastructure Development Cess. The stakeholders have challenged the GIDC in courts.

·         Broadening the Tax Base: Pakistan's Tax-to-GDP ratio is still in single figures. IMF proposed a fast track broadening of the tax base. Resultantly, FBR issued notices to a huge number of non-filers but the response has been pathetic. In the 2015-16 Budget, the Finance Minister introduced a Withholding Tax of 0.3% on tax filers and 0.6% on tax non-filers on every bank withdrawal above PKR 50,000. The government expected revenues of PKR 35 billion. However, the business community, especially small traders, vehemently protested and there is a deadlock since both sides are adamant in their stands.

·         Structural and Administrative Policy: IMF decreed that State-Owned Enterprises on the privatization chopping block should be developed and a reform strategy prepared for most of the SOEs. IMF wanted privatization of 26% shares of PIA to a strategic investor. It ordained that legal framework of various codes, laws, and procedures dealing with electricity theft need to be strengthened.

·         Purchase of US Dollars from Open Market: This was the preliminary demand of IMF that State Bank of Pakistan must increase purchase of the greenback to shore up the Forex Reserves.

·         Tariff-Rate Elevation and Phasing out Subsidies: Another pre-requisite for the EFF was that the government should develop and approve a three-year plan for phasing out Tariff  Differential Subsidies and increasing the weighted average tariffs by 50% on industrial, commercial, and bulk users and reduction of subsidy on second group of consumers through enhancing the weighted average tariffs by 30%. This measure has been implemented and has led to increase in cost of production and consequently in erosion of the purchasing power.

·         Relief measures: The Benazir Income Support Program, the largest targeted social assistance mechanism, has been extended to mitigate the impact of removal of subsidies and to provide economic assistance to the less-privileged citizens.

·         Other Economy, Business and Trade Measures:  IMF wanted a commitment to simplify the Tariff Structure, normalizing trade relations with India and eliminating the negative list, taking full advantage of GSP Plus status granted by European Union, improving Balance of Payments regime, and approaching World Bank, Asian Development Bank, and countries such as USA, UK, Japan, and China etc for mega projects such as energy, roads, and housing etc.

The adoption of various measures and adherence to the conditionalities normally puts a heavy toll on the country. Pakistan is no exception. The loan is never disbursed in one tranche and thus every further tranche is approved after intense meetings (nowadays in Dubai) where IMF officials and the Pakistani economic managers led by the Finance Minister deliberate, debate and analyze the progress and the future course. So far, Pakistan has managed to get a green signal for the next tranche. The drastic reduction in global oil prices and some prudent fiscal management has enabled Pakistan to withstand the effects of economic pressures. These have resulted in a very low inflation rate, reduction in Discount Rate, decrease in oil bill, and increased inflows of external financing for major development projects.

On the other hand, exports have stagnated, foreign direct investment is despondently low, energy shortages are perennial, government expenditures are wasteful, the tax base is still a matter of grave concern, while political instability, war on terror, belligerent actions and outbursts of neighborly countries, distrust of trade and industry for government policies, and escalating corruption are a detrimental impact on the economic prosperity of Pakistan. IMF loans are granted for sustainable progress of a country and not as financial crutches for the government of the day.

Smuggling impact of APTTA

Majyd Aziz

Afghan Pakistan Transit Trade Agreement, a facilitation accorded by Pakistan to Afghanistan, is also a contentious issue. Pakistani industrialists are more concerned about APTTA than other stakeholders are. The misuse of the original APTA was widely reported and accepted by even the respective governments. Despite the inclusion of safeguards and presumed tightening of the monitoring process, the fact is that APTTA is still a matter of consternation for Pakistani manufacturers as well as importers. Moreover, since many safeguards have not been properly implemented, the unscrupulous traders dealing under the APTTA regime as well as the clearing agents, truckers, government officials and politicians have continued to take illegal, favorable and lucrative advantages of the facility.

The bare truth is that no independent or reliable study has been carried out to determine whether the quantity of the different products imported under APTTA are in conformity with the actual demand of the products or commodities. This is the highlighted fact. The excessive imports are made to misuse the facility and transfer the products and commodities for domestic Pakistani utilization and consumption.

The government usually gives lip service when there is hue and cry over the misuse of APTTA. These lead to high-level meetings and important decisions are given. However, most of these decisions fail to see the light of the day. The primary reason being the large monetary stakes involved in facilitating the supply chain. The issue is further compounded when this laxity is allowed because the political, diplomatic and security compulsions outweigh the ramifications of the APTTA.

Tea is a major item of concern. About 50% of Pakistan's requirement is met through the APTTA and this has been documented by Pakistan Tea Association on a regular basis. A visit to Peshawar or Chaman would immediately lend credibility to this tea business. Tyre and tubes for vehicles are another prime source of blatant smuggling. Again, no efforts are made to control the movement of these products. Electronic items are regularly imported under APTTA and most of these are destined for the Pakistani markets. Moreover, although they do not fall under the ambit of APTTA, cement, livestock, and wheat are openly smuggled into Afghanistan from Pakistan.

Afghanistan generally has an import duty of 5% on most of the imports. Furthermore, truckers and Pakistan Railways give preference to goods destined for Afghanistan. This has a negative impact on goods transport within Pakistan. Domestic customers of trucking industry and Pakistan Railways are compelled to pay a premium to book wagons or trucks for their needs. There is a perennial shortage of wagons and, at the same time, Pakistan needs nearly 100,000 more trucks to cater to local requirements and to ply on the Pakistan-Afghanistan route. This is a double whammy for Pakistani users since the transport cost becomes exorbitant and unfeasible. They are always dependent on the whims of the Railways officials or the truckers and thus corruption becomes the justifying factor whenever wagons are requisitioned. The goods and commodities under APTTA are charged duties at destination and when these goods are diverted either before crossing the border or even after entering the Afghanistan territory, the overall expenses are much lower than if officially imported into Pakistan.

The volume of smuggling is huge. The irony is that official exports to Afghanistan are reducing every year while informal trade has exhibited a marked increase. Individual truckers are buying cement from local market and transporting it into the depots inside Afghanistan, bypassing the manufacturers and intermediaries. This has led to a decrease in official exports of cement from Pakistan although locally, the sales have maintained a steady increase. At times, there is a wheat shortage in Pakistan but flour as well as wheat make their way across the border. The Pakistani consumer pays a higher price due to this artificially created shortage and loose controls at the border. If there were no increases in local production of vehicles, then most of the tyre manufacturers would have closed down or faced colossal losses due to the smuggling of tyres under the APTTA. Imported fabric is available in nearly every cloth market because it is cheaply brought in under APTTA. This has severely affected local production and, today, even most of the producers of lawn use imported fabrics for the Dupatta for their sets.

The dynamics of Afghanistan give impetus to reliance on smuggling and informal trade. Negative factors include corruption, the diversion of aid money into financing informal trade, weak financial controls, huge profits due to narcotics, and the subversion of money from natural resources being used to finance terrorism as well as enhancing informal trade. A case in point is the substantial smuggling of Chrome Ore that is channelized into Pakistan and exported, mostly, to China as Pakistani Chrome Ore. There are over 1000-1300 illegal mines in Afghanistan that are controlled by warlords, corrupt officials, and other non-state stakeholders. Another damaging example is narcotics. More than 35% of it is routed through Pakistan and this enables dishonest stakeholders to circulate the cash through procurement of products and commodities through the APTTA.

The Middle East, especially Dubai, is the focal point for money laundering, imports and exports under APTTA, and investment in real estate. These are used to finance products and commodities that are sent to Afghanistan or for Pakistan under APTTA and in this way, the informal traders and financiers rake in exorbitant profits as well as gaining influence and thus they can maneuver politicians and government officials and get political and official support for their activities. The parallel economy operates with impunity and all roadblocks in its way are removed or paved. Hawala and Hundi system are used openly and this paper financing come into the system because the profits are alluring. The amounts mentioned ranges from $50 to $100 billion and there is no end to it. Of course, since most of the transaction is in cash or non-banking paper, the terrorist and extremist organizations have also entered the game to finance their activities.

No illegal or informal activity can be supported without the connivance of the corrupt government officials. The manpower at the borders is actively involved in this racket and, it is said, the personnel pay a premium to obtain posting at the borders. The withdrawal of the ISAF Forces would result in heavy reduction of external assistance to Afghanistan. The country would need $15-17 billion every year for its expenses and development. However, the government is hard-pressed to source funds. Notwithstanding this factor, the government has not put into operation an Action Plan to reduce smuggling, narcotics, misuse of APTTA, or containing terrorism and extremism. This is basically due to the overarching influence of the warlords and people with access to the corridors of power.

The underlying concern is that the possibility of stagnant or gradual reduction of official imports and exports between both the countries would be prominent, and off-books availability of finance would continue to be the norm. Monitoring and control are technically in place but loopholes and lax action enable informal trade to flourish. Bringing sanity is an onerous task and, frankly speaking, governments in both countries lack the critical mass to enforce the laid down systems.