The narrative of the stakeholders today is that there has been a noticeable uptick in various macroeconomic indicators – those that relate to the productive sectors (agriculture, industry), those that relate to the general public (inflation, employment opportunities) and last but not least those that relate to the government’s performance (higher than ever tax collections, contracting current account deficit, and law enforcement agencies proactively targeting smugglers, utility thieves and currency speculators).
The three oft-cited tangibles to claim the economy is improving at present are the bullish stock market, stabilization of the rupee-dollar parity at higher than 281 and less than 284, the latter parity projected by the International Monetary Fund (IMF) under the ongoing Stand By Arrangement (SBA) to ensure no tranche release is stalled and a significant rise in tax collections.
There are a few big players on the stock market, under a 100, who have exhibited a capacity to collectively manipulate the market especially when faced with the prospect of a possible levy of higher taxes which, in turn, raises the distinct possibility of complicity with the policy makers. Pakistani finance ministers constantly refer to the index as a yardstick for measuring the trust reposed by the market in his/her policies and it is conveniently propitious that the stock market becomes bullish during periods when the performance of a policy maker is the subject of considerable and rising criticism. The nexus between the stock market players and the policy makers, so argue independent economists, explains the reason for the Pakistani stock market generating no more than 4 to 5 billion rupees in annual taxes while in contrast the Indian bourse generates close to a 100 billion rupees in revenue.
A complicity based on mutual self-interest between a political government and a potential tax paying group is not a new phenomenon in Pakistan. There are a proliferation of associations in this country - more than a 100 are listed with the Securities and Exchange Commission of Pakistan (SECP), including the more visible All Pakistan Textile Mills Association, All Pakistan Cement Manufacturers Association, All Pakistan Sugar Mills Association - tasked to safeguard and promote the interests of their members be it in the form of setting a market price higher than the market rate (even for products that operate under perfect market conditions where the seller by definition should have no influence over price) or be it to seek an export subsidy at the taxpayers’ expense with the most obvious recent example relating to the sugar industry.
Empirical studies’ show that there is no documented alignment between the stock market and the Pakistan economy. In an article, researchers Husain and Tariq Mehmood conclude that “a disturbing feature of Pakistan’s stock market is that it cannot be characterised as a leading indicator of economic activity and in the absence of other strong indicators shooting up stock prices may indicate a speculative bubble.”
Pakistan’s foreign exchange market is subjected to even greater manipulation than the stock market by several players: (i) the government may decide to artificially control the interbank rate, a disastrous policy associated with Ishaq Dar, which led to plummeting foreign exchange reserves with a looming prospect of default as the IMF refused to engage with Pakistan till the reversal of this policy on 26 June 2023; (ii) eight commercial banks were identified as illegally speculating on the market mid-2022 but more than a year and half later they have not yet been penalized. The government imposed a tax on banks’ profits in the budget for the current year but this tax is across the board and not limited to the eight banks; and (iii) after the establishment of the Taliban government Afghanis were reportedly remitting about 2 million dollars a day to their country however this adds up to 720 million dollars a year, which is perhaps not such big a factor in the Pakistani rupee erosion as claimed by the administration.
Federal Board of Revenue (FBR) made three claims recently, which can be easily disputed: (i) collections were higher by 43 billion rupees than the target assigned by the IMF under the ongoing SBA – 4468 billion rupees against 4425 billion rupees. This claim does not take account of the fact that inflation was budgeted at 21 percent (budget speech) while the SBA report projected it at 25.9 percent for the current year. Pakistan Bureau of Statistics (PBS) calculated the July-December average Consumer Price Index at 28.79 percent though there is clearly an upward trajectory, given that it registered 29.7 percent in December 2023 - higher than the November figure of 29.2 percent. The rise in tax collections therefore could well be mainly due to inflation; (ii) ratio of direct to indirect taxes was 49:51 percent – a ratio that sadly does not take account of the FBR resisting calls by independent economists as well as the Auditor General of Pakistan to credit collections correctly, i.e., withholding taxes in the sales tax mode, currently comprising of 70 percent of all direct taxes collected, should be credited under indirect taxes; and (iii) non-filers will face disconnection of utilities as well as freezing of bank accounts. While in the past increasing the number of filers has contributed little to increasing collections as many filed their returns who were not eligible to pay income tax (widows, students etc.) because that enabled them to take advantage of paying a lower withholding tax on goods purchased.
Some intangibles are also cited to show an improvement in the state of the economy: (i) an improvement in consumer and business confidence, a claim substantiated by rather propitious perception surveys; (ii) resorting to jargon not backed by evidence for example claiming signs of potential recovery in the industrial sector by the Finance Division by claiming “positive trends in high frequency indicators”, a claim at odds with negative 0.44 percent large scale manufacturing growth July-October 2023; and (iii) routine data manipulation.
While one can at some level understand why economic team leaders need to show a performance that is infinitely better than that of their predecessors’, yet what should be a source of concern is that this approach takes away their capacity to take timely remedial measures required to safeguard the interests of the general public.
To conclude, all recent finance ministers this country has been subjected to – from Hafeez Sheikh to Ishaq Dar – were inducted in the cabinet/parliament on a technocrat seat. And it is extremely disturbing that their sustained failure to arrest the worsening economic impasse, can be sourced to their inability to stand up to their political masters (best reflected by Miftah Ismail’s ji to Maryam Nawaz instructing him to end the tax on traders).
Dar could perhaps have been the exception given his relationship with the PML-N party supremo Nawaz Sharif; however, his lack of knowledge of economics as a subject has done even more damage to Pakistan’s economy than the others collectively. One can only hope that the next finance minister not only has the requisite academic credentials but also a backbone that would not allow him/her to resign instead of backing down just to keep his/her job.
Copyright Business Recorder, 2024
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