An open letter to the finance minister - Dr Ashfaque H Khan - Tuesday, March 08, 2011

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Mr Finance Minister! You presented your maiden federal budget for 2010-11 in parliament in June 2010. Unfortunately, the same budget could not see the light of the new fiscal year because your revenues were grossly overstated and expenditures were highly understated. Fiscal indiscipline of the provincial governments also played a key role in sabotaging your maiden budget. You failed to present a revised budget and as such, the nation is living through a budget-less year for the first time in the country’s history. What a great beginning, Mr Finance Minister!

Your statement in Karachi on March 5, 2011 avers that “we have a commitment with IMF to maintain a balance between revenues and expenditures, as this imbalance results in borrowing”. You also stressed “the need for immediate tax reforms in the country and highlighted that all political allies of the government have to be taken on board in making policy decisions”. You further argued that “we must not allow politics to defeat economics or partisanship to defeat national interest”.

These are nice words, Mr Finance Minister. The question I would like to raise is, what have you done so far to balance revenue and expenditure? Did you make enough effort to broaden the tax bases? Have you made any advancement on RGST and adjustment of domestic fuel prices in line with international oil prices? Did you convince the PML-N team in your 45 days parley to support the government on RGST and oil prices?

Did you take any initiative, Mr Finance Minister, to bring agricultural income under the direct net? You must learn from honourable members of parliament like Jehangir Tarin and Shah Mahmood Qureshi who have vociferously advocated agricultural income tax. Did you initiate any work on improving withholding tax regime? Did you ask the Chairman, Federal Board of Revenue (FBR), to minimise the gap between the tax collected and tax deposited in the government’s treasury?

Mr Finance Minister! Have you taken the provincial governments on board in relation to the need for placing binding constraints on them to generate surplus directed at keeping budget deficit at a sustainable level? Did you look at the power sector reform which is currently handled in the Ministry of Finance by an Under-19 team? What have you done so far in terms of addressing the issues of rotten public sector enterprises?

Mr Finance Minister, your statements in the press clearly reflect your frustration and inability to address Pakistan’s fiscal challenges. You stress “the need for immediate tax reforms” but who would undertake these reforms? It is none other than you, Mr Minister. You stated that “we must not allow politics to defeat economics”. The economics has been defeated time and again over the last year in particular. The recent retreat on the issue of passing the higher cost of oil prices to domestic consumers is a classic example of defeat. The fact is that you are a Finance Minister of a lame-duck government which is bent upon clinging to power at any cost. It has been observed throughout the world that a weak and lame-duck government cannot implement economic reform and will hesitate to take difficult economic decisions. Simply postponing the reforms will put the economy in dire straits and will increase the adjustment cost.

Two pieces of advice, Mr Finance Minister, from my side. Firstly, you should not behave like a politician. You are an educated person and a technocrat and must avoid giving political statements. Your statement that appeared in an English daily, dated March 5 that “the government inherited a shattered economy” sounded political in tone. You were a part of the previous regime for a long time, therefore, your contribution to the “shattered economy” cannot be ignored. Secondly, whether the government inherited a ‘sound’ or a ‘shattered’ economy, you must read the first two paragraphs of the Memorandum of Economic and Financial Policies, dated November 20, 2008, submitted to the IMF by your own ministry.

Let me give you another piece of advice. At the time of presenting the budget 2010-11 in parliament, the revenue number was grossly overstated. The drawback of such overstatement is that, in anticipation of higher revenues the provincial governments planned their expenditures accordingly. The performance of revenue, thus far, has been dismal. The FBR has collected Rs 865 billion in the first eight months (July-February) of the fiscal year, thus depicting an increase of only 9.2 percent. What is happening in the FBR? Did you get the time to find out the reasons for such a pathetic performance?

The IMF Mission is in town and will be finalising the country’s macroeconomic framework for which the revised revenue target of the FBR will be required. The FBR Chairman has categorically stated that the FBR would collect Rs 1630 billion in the current year. To achieve this target, the FBR would have to collect Rs 765 billion in the remaining four months of the year. This translates into a growth of over 42 percent in the remaining four months. Don’t make your future projection of revenue on the basis of an inflated base. You will collect in the range of Rs 1500-1530 billion, at best, with considerable effort. Even this would require a growth of 18-23 percent in the remaining four months. Plan your expenditure accordingly to keep budget deficit at 5 percent of GDP in the current fiscal year.

Mr Finance Minister! You need to lead the ministry from the front, shed the lethargic and laid-back attitude, communicate with the people of Pakistan, talk to the private sector regularly, appoint a spokesperson of the ministry and strengthen your team which is by far the weakest that I have ever seen. God help you Mr Minister.

The Writer is Principal & Dean at NUST Business School (NBS), Islamabad.


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