When dealing with a dysfunctional economy, try daredevil policies

LAHORE: Unfortunately all negative factors that one can imagine about an economy are present in Pakistan. As a matter of fact, our economy is utterly dysfunctional. Pakistan is heading towards high inflation, higher power rates, higher policy rates, and dependence on indirect taxation.

Next two to three years pose a stiff challenge for the government and general public as the former would have to muster political will to take transparent and difficult decisions and the latter will have to bear the brunt of those measures.

Besides fiscal deficit of over Rs2.6 trillion, the state owned enterprises are bleeding the exchequer to the tune of Rs1200 billion. The economic growth will be much slower than what is required.

The inability of the state to fully document the economy is one factor that is promoting black money. Agriculture tax is not a big issue. A study conducted few years back by a former president of Institute of Chartered Accountants of Pakistan revealed that the maximum potential of agricultural tax is only Rs60-80 billion which is a nominal amount when compared with our revenue shortfall.

The actual evasion occurs after the agricultural commodities land in the hands of middlemen that deal in hundreds of billions of rupees but pay no taxes. Widespread under-filing of production and taxes on top of smuggling and under-invoicing highlight the incompetence and failure of Federal Board of Revenue (FBR).

The tax authority has miserably failed as it lacks teeth and claws to confront over three million tax evaders, despite having documentary proof of their evasion. In developed world there is no concept of tax avoidance. Benjamin Franklin, one of the founding fathers of United States of America wrote, “…but in this world nothing can be said to be certain, except death and taxes”. It is a criminal offence in developed economies to evade tax.

One expects that the new chairman would ensure that FBR performs its functions according to its mandate. Tax evasion is simply because of the rampant corruption in the institution. Having not been able to create the scare of audit among taxpayers is the biggest failure of the revenue collector.

Fair and transparent audit is the best deterrent against tax evaders. However tax audit in fact should function independently without oversight of the FBR. It should be run by dedicated professionals capable of unearthing tax frauds and making evaders believe that there will be no escape if they came under tax audit.

We desperately need resources to ensure better quality of life for majority of our citizens. There are almost 130 million citizens in our country that are below 25 years. We are adding three million new aspirants to our workforce every year. To absorb these workers we need to grow at 10 percent a year.

At current projected dismal growth, we would be adding two million unemployed young people to the idle workforce every year. It is obvious that if at the working age youth is not gainfully employed they move towards negative activities as devil makes works for idle hands.

We should nurture our private sector, which is the engine of growth.

Even the infrastructure projects should be built by private sector on built, own, and transfer basis. Currently our public sector development programs are not more than three percent of our GDP, while in order to upgrade the infrastructure to top level we need annual investment of 10 percent of our GDP. Government lacks resources to take up all infrastructure projects.

The private sector can fill this gap if policies are transparent and fair.

Pakistan’s demographics could be a source of strength for the country if proper planning is done. We have two mega cities (Lahore and Karachi), while there are 12 cities with population of over a million.

We should create employment opportunities around these urban centers. Each city should be given autonomy. Mega cities should be distributed into zones for separate and better management.

The construction rules should be liberalised and deregulated. Construction business in Pakistan has still not been institutionalised. There is a lot of construction activity in the country but very few big names survive for more than a decade.

Big names in 70’s and 80’s like Nazir sons, Gammon, Hassan Associates, Interhom, etc are history. The institutions taken to peak by the founder were found too challenging by the new generation that succeeded them.

Baring Descon there is no institutionalised construction company operating in the country. These flaws have to be corrected. Making money after paying due taxes should be respected and the moneyed class will only earn this respect after FBR is purged of corruption.