Budget 2024 Out of box solutions or IMF agenda?

The banker-turned Finance Minister, Senator Muhammad Aurangzeb, after three months of taking oath of his office, is faced with the daunting challenge of preparing budget for fiscal year 2024-25, amidst very difficult times. The country is faced with chronic stagflation, rising cost of doing business and increasing cost of living for the economically marganalised.

In such circumstances, mitigating the extreme financial hardships, faced by weaker segments of society, needs to be given the top most priority in the coming budget. The traditional approach adopted for decades in Pakistan of balancing the books, levying more taxes, containing fiscal deficit and other number games, must now be reconsidered.

Bold initiatives and innovative measures are required to rethink our growth strategy in totality under the prevalent exceptional circumstances, while seeking yet another, in fact, the 25th extended fund facility programme of International Monetary Fund (IMF). The gloomy predictions of rate of growth by the State Bank (SBP), IMF, World Bank, Asian Development Bank (ADP) and others can be proved wrong through fundamental structural reforms and by taking concrete steps for higher and sustainable growth.

The Prime Minister, Shehbaz Sharif and Finance Minister may be aware of the fact that “out of the box solutions” and the way forward is provided by the Pakistan Institute of Development studies (PIDE) in PIDE Reform Agenda for Accelerated and Sustained Growth, (April 2021), launched on April 22, 2021 but remains unnoticed. The challenges faced by the Finance Minister are grim and daunting, but he looks determined to follow the agenda of growth as desired by the Prime Minister.

The issue of stabilisation versus growth will continue vis-à-vis IMF and World Bank presenting their prescriptions. It is pertinent to mention that previous bank-turned Finance Minister, Shaukat Tarin, before taking the oath, openly criticised the economic policies of the then coalition government of Pakistan Tehreek-e-Insaf (PTI) and his main target was high interest rate by Governor of State Bank of Pakistan and his two predecessors, who according to him, entered and revived  the IMF programme “unprepared” and “without any plan”. The country is still in the grip of high interest rate and stagflation that will continue for the third consecutive year, as brilliantly explained by Shahbaz Rana in his write up of June 1, 2024 of as under:

“Pakistan will witness the third consecutive year of stagflation and the lives of the people will not see any major improvement, as the government on Friday approved the next fiscal year’s economic growth target at 3.6% and an overambitious inflation target of 12%.

 Even the achievements of a relatively low economic growth and an overambitious inflation target will depend on political stability, currency market steadiness, and the timely signing of a new bailout package, according to the discussions that took place in the meeting of the Annual Plan Coordination Committee (APCC).

 The APCC approved the annual plan for fiscal year 2024-25 and underlined that the rupee and the foreign exchange reserves would come under pressure in the new fiscal year due to “scheduled external debt repayments”.

While the country is caught in a low-growth trap, nobody is mentioning the role of Federal Board of Revenue (FBR) that is not only the main growth slayer but has also perpetually failed to achieve the assigned tax targets and improve the dismal tax-to-GDP ratio—it was just 8.5% for FBR in the fiscal year 2022-23. This ratio will not improve satisfactorily even if FBR meets this year’s original target of Rs. 9145 billion, though indicators are that it will be missed by at least Rs. 150 billion, if not more, even after surpassing the monthly target of May 2024 by takind advances and blocking bona fide refunds of billions!

Successive finance ministers since 2008 have been saying that If the “FBR does not increase its revenue to 15%, then the country will run out of money to spend. The FBR will have to bring revenue to 20% in 5-7 years; otherwise the country will not be able to achieve an economic growth rate of 7-8%”. None of them till 2023 made any headway in this direction! Things at FBR have rather deteriorated further with alleged sad incident of gun pulling over distribution of speed money, though real culprits are still holding the key positions!

Unfortunately, nobody is suggesting any out-of-box measures to come out the existing fiscal mess. Needless to say that the Prime Minister and Finance Minister need to realize that the iniquitous prescription of erratic and oppressive taxes in the forthcoming federal budget will not solve our problems especially in the prevalent circumstances.

 The federal and provincial governments need to generate and spend more money for infrastructure improvement to create more employments and ensure higher growth, engaging private sector to take part in public projects. This would kick-start the economy.

Simultaneously, the governments need to reduce wasteful expenditure, right-size the monstrous size of their machinery, monetize all the perquisites of civil servants and make taxes simple and low-rate. State lands, lying unproductive owned by the federation and provinces, should be leased out for industrial, business and commercial ventures. It will generate substantial funds, revenue (through public auction 10% as full and final tax can be collected amounting to billions) and facilitate rapid economic growth.

While the rich remain outside the tax net, the poor are paying exorbitant GST on items of daily use. We need to overhaul the incompetent, inefficient, fragmented and corrupt tax machinery. The untapped income/wealth in Pakistan is monstrous at federal and provincial levels. If we manage to collect tax of Rs. 20 trillion in the coming two years at federal and Rs. 4 trillion at provincial level, the federation and the federating units with total revenues of Rs. 24 trillion in the kitty will not require fresh domestic and foreign loans.

Devising a rational policy and revenue mobilisation strategy is the biggest challenge before Muhammad Aurangzeb. All agree that we need to adopt economic policies aimed at rapid growth and investment. On taking charge, Finance Minister, Muhammad Aurangzeb, rightly highlighted that his top most priority would be sustainable growth and prosperity for all the citizens. Taxes will increase with growth and not by high taxes and withholding provisions. The contrary prescription by IMF of higher taxes and costly energy will lead to unemployment and dismal growth.

Apart from fixing the fragmented tax laws and tax agencies’ merger into a single national tax revenue board, the federal and provincial governments must decide under Article 156(2) of the Constitution to earmark revenues for specific purposes placing the same in funds created for debt retirement, training of youth in various vocational disciplines, especially in Information and Communications Technology (ICT) and Artificial intelligence (AI), innovations, creation of employment zones and provision of social services, such as free education and health, affordable housing, transport, all civic amenities, like clean drinking water, sewerage, solid waste management, roads and designate areas for small/street vendors.

Simultaneously, the federal and provincial governments must drastically reduce their wasteful expenses, right-sizing the governmental machinery to bring efficiency and monetize all the perquisites of government servants. The economic policy should focus on reforms and growth and not taxes as highlighted in various studies conducted by PIDE.

The above may be considered while meeting the preconditions of the IMF for a new programme and after undertaking fundamental structural reforms, we can even exceed the targets required by the lender of last resort with higher and accelerated growth.

The Federal Finance Minister must immediately take fundamental structural reforms to achieve sustainable growth rate of at least 7% in the next three years which is not possible without simplification of tax system as highlighted in FBR, tax potential & enforcement—I, Business Recorder, March 5, 2021,  FBR, tax potential & enforcement—II, Business Recorder, March 7, 2021, ‘Tax Reforms in Pakistan: Historic & Critical View’, published by Pakistan Institute of Development (PIDE) (available  free at: https://file.pide.org.pk/pdf/Books/Tax-Reforms-in-Pakistan-Historic-and-Critical-View.pdf and in Towards flat, low-rate broad and predictable taxes-revised and expanded edition (2020) [available free at: https://primeinstitute.org/wp-content/uploads/2022/04/TOWARDS-FLAT-LOW-RATE-BROAD-AND-PREDICTABLE-TAXES-Second-Ed..pdf ]

The growth path as suggested in PIDE Reform Agenda for Accelerated and Sustained Growth, (April 2021) can induce investment and revenue mobilisation to achieve fiscal consolidation, inclusive development and prosperity for all the citizens. The prerequisites are all-out reform in administrative, judicial and other colonial-style institutions, drastic reduction, rather elimination of wasteful expenses on monstrous state machinery that is costly as well as inefficient and corrupt.

Debt retirement and reduction in debt servicing need out of box solution for which special task should be given to PIDE and establishing a commission, headed by its VC, with all chief economists of federal and provincial governments as members, representatives from national and provincial assemblies and Senate and renowned experts in the field to suggest short, medium and long term actionable steps to overcome the twin menace of debt burden and high fiscal deficit.

On the issues of broadening of tax base, improving voluntary tax compliance, lowering tax rates, withdrawing all withholding provisions (except on salary, dividend, interest and payment to non-residents), a comprehensive study is available with Federation of Pakistan Chamber and Industry (FPCCI), which was provided to the then Finance Minister in a meeting held on April 30, 2021. The implementation of plan of FPCCI and others can lead Pakistan towards higher growth resulting in enhancement of tax collection, reduction in fiscal deficit and ensuring how we can ‘return to prosperity’—the title of book by Dr. Arthur B. Laffer & Stephen Moore that must be read by all legislators, policymakers, tax administrators and researchers at PIDE.

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Dr. Ikramul Haq, Advocate Supreme Court, specialises in constitutional, corporate, media, ML/CFT related laws, IT, intellectual property, arbitration and international tax laws. He was full-time journalist from 1979 to 1984 with Viewpoint and Dawn. He served Civil Services of Pakistan from 1984 to 1996. He established Huzaima & Ikram in 1996 and is presently its chief partner. He studied journalism, English literature and law. He is Chief Editor of Taxation.  He is country editor and correspondent of International Bureau of Fiscal Documentation (IBFD) and member of International Fiscal Association (IFA). He is Visiting Faculty at Lahore University of Management Sciences (LUMS) and member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE).

He has coauthored with Huzaima Bukhari many books that include Tax Reforms in Pakistan: Historic & Critical Review, Towards Flat, Low-rate, Broad and Predictable Taxes (revised & Expanded Edition,  Pakistan: Enigma of Taxation, Towards Flat, Low-rate, Broad and Predictable Taxes (revised/enlarged edition of December 2020), Law & Practice of Income Tax, Law , Practice of Sales Tax, Law and Practice of Corporate Law, Law & Practice of Federal Excise, Law & Practice of Sales Tax on Services, Federal Tax Laws of Pakistan, Provincial Tax Laws, Practical Handbook of Income Tax, Tax Laws of Pakistan, Principles of Income Tax with Glossary and Master Tax Guide, Income Tax Digest 1886-2011 (with judicial analysis).

He is author of Commentary on Avoidance of Double Taxation Agreements, Pakistan: From Hash to Heroin, its sequel Pakistan: Drug-trap to Debt-trap and Practical Handbook of Income Tax. Two books of poetry are Phull Kikkaran De (Punjabi 2023) and Nai Ufaq (Urdu 1979 with Siraj Munir and Shahid Jamal).

He regularly writes columns/article/papers for many Pakistani newspapers and international journals and has contributed over 2500 articles on a variety of issues of public interest, printed in various journals, magazines and newspapers at home and abroad.

X (formerly Twitter): DrIkramulHaq

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Abdul Rauf Shakoori, Advocate High Court, is a subject-matter expert on AML-CFT, Compliance, Cyber Crime and Risk Management. He has been providing AML-CFT advisory and training services to financial institutions (banks, DNFBPs, Investment companies, Money Service Businesses, insurance companies and securities), government institutions including law enforcement agencies located in North America (USA & CANADA), Middle East and Pakistan. His areas of expertise include legal, strategic planning, cross border transactions including but not limited to joint ventures (JVs), mergers & acquisitions (M&A), takeovers, privatizations, overseas expansions, USA Patriot Act, Banking Secrecy Act, Office of Foreign Assets Control (OFAC).

Over his career he has demonstrated excellent leadership, communication, analytical, and problem-solving skills and have also developed and delivered training courses in the areas of AML/CFT, Compliance, Fraud & Financial Crime Risk Management, Bank Secrecy, Cyber Crimes & Internet Threats against Banks, E–Channels Fraud Prevention, Security and Investigation of Financial Crimes. The courses have been delivered as practical workshops with case study driven scenarios and exams to insure knowledge transfer.

His notable publications are: Rauf’s Compilation of Corporate Laws of Pakistan, Rauf’s Company Law and Practice of Pakistan and Rauf’s Research on Labour Laws and Income Tax and others.

His articles include: Revenue collection: Contemporary targets vs. orthodox approach, It is time to say goodbye to our past, US double standards, Was Due Process Flouted While Convicting Nawaz Sharif?, FATF and unjustly grey listed Pakistan, Corruption is no excuse for Incompetence, Next step for Pakistan, Pakistan’s compliance with FATF mandates, a work in progress, Pakistan’s strategy to address FATF Mandates was Inadequate, Pakistan’s Evolving FATF Compliance, Transparency Curtails Corruption, Pakistan’s Long Road towards FATF Compliance, Pakistan’s Archaic Approach to Addressing FATF Mandates, FATF: Challenges for June deadline, Pakistan: Combating the illicit flow of money, Regulating Crypto: An uphill task for Pakistan. Pakistan’s economy – Chicanery of numbers. Pakistan: Reclaiming its space on FATF whitelist. Sacred Games: Kulbhushan Jadhav Case. National FATF secretariat and Financial Monitoring Unit. The FATF challenge. Pakistan: Crucial FATF hearing. Pakistan: Dissecting FATF Failure, Environmental crimes: An emerging challenge, Countering corrupt practices .

 X (formerly Twitter): Adbul Rauf Shakoori

The recent publication, coauthored by these writes with Huzaima Bukhari, is  Pakistan Tackling FATF: Challenges & Solutions, available at:

https://www.amazon.com/dp/B08RXH8W46  and

https://aacp.com.pk/product/pakistan-tackling-fatf-challenges-solutions/