Dancing to the Tune

Viqar A. Khan
FCA

Viqar A. Khan is a Chartered Accountant and  a tax specialist. He has been writing in newspapers for a few years now.

His clear, crisp line of thought and precise expression make reading a pleasure. His previous articles are:-

Kargil

Creating willing tax payers

State of the Economy

The seizure of foreign currency accounts and imposition of emergency should have taken place on 11th of May 1998. A period of great uncertainty followed the nuclear blasts by India. The balance of power in the sub continent had been drastically altered. There was public euphoria in the masses in India of which the weak government in the center wanted to make political capital. The Indian leadership was becoming ever so vocal by the day. Their tone was going from bad to worse. Opposition in Pakistan was having a field day. Their rhetoric was gaining strength by the hour. The poor public had always been under the impression that we had "the bomb" and for the first ten days they expected it to go off any time. As the days passed the Indian Politicians started behaving like street thugs with their school bully statements splashed daily all over the front pages. They crossed all barriers of decency in threatening Pakistan with annexation of Azad Kashmir. War clouds were looming over the horizon. The general public in Pakistan became mute as realization dawned on them that there was a possibility that we did not have "the bomb". Even prior to 11th of May 1998 we were a substantially smaller military power compared to India. Their conventional military strength, which is formidable, coupled with their newly acquired nuclear status made them uncontrollable.

Then came twenty eighth of May 1998. We exploded five nuclear devices to match the 11th and 13th of May explosions by India. On 30th of May when we exploded another nuclear device to match India explosion for explosion. The delivery system was also in place. The balance of power in the sub continent had been restored, to say the least. For the first time military parity between India and Pakistan had been established. Military dominance of India vanished into thin air. Pakistan became the most dangerous country for anyone to risk a war with because it lacked depth in conventional warfare. The deterrence had been established. The foul rhetoric of the Indian leadership ended. Euphoria in the Indian masses subsided. Dignity of a nation had been restored.

From a position of strength came one of the greatest defeats. For this unique feat the feather in the cap goes to none other than our economic managers and political office bearers. The day when our civil liberties should have touched new heights and our economy completely opened and made transparent to induce Pakistani and foreign investors to bring in badly needed foreign exchange and all curbs "supposedly imposed" on 11th of May lifted, the government defaulted on the foreign currency accounts and curtailed civil rights by imposition of emergency. As always our policy makers resorted to administrative measures because it requires less thinking and ostensibly it gives immediate results. Confidence of the public shattered, perforce they converted their foreign currency at official exchange rate, bought it back in black and transferred it by hundi to safe havens losing a neat sum in the bargain. The run on the US$ weakened the rupee and it fell by more than 30% in the open market in a matter of days. Bears reigned the capital market and it fell 20% below the benchmark in just six weeks. The difference between official and open market rate reached almost 30% thereby forcing overseas Pakistanis to use other than normal banking channels for maintenance remittances. The cosmetic relief offered through innumerable confusing and self contradicting foreign exchange circulars did little to help. The ingenious methodology of our policy makers sent the economy in a tail spin. To correct the situation they did what they are best at. Appeals were made from the highest of levels beckoning the conscience of the poor public not to make a run on the banks and emissaries were sent to the corners of the globe with a bowl in hand.

We face a imminent default situation unless we are bailed out by the multilateral agencies. We need more than appeals and as a self respecting nation we should desist from begging. By less than wise use of loans obtained indiscriminately to bridge the perpetual budget deficits, our independence has been mortgaged to the forces of imperialism. Our economy has been made hostage to international financial institutions. Now we have two options. The easier option is to unilaterally sign the CTBT on their terms, simultaneously negotiate withdrawal of sanctions, obtain the next tranche of IMF loan under ESAF and start treading the same path to economic recovery that we have taken during the last fifty years.

Fulfilling international financial commitments by obtaining further loans would be a mockery of the much trumpeted trust reposed by the nation in the chief executive of the country when he appealed for donations to the national debt retirement fund. Whatever course we opt for, any default of our international financial commitments may lead to the seizure of goods and assets in international territories, refusal by international commercial banks to deal with us resulting in the inability of the country to trade internationally large scale closure of trading and manufacturing concerns leading to massive unemployment, hyperinflation and financial anarchy. Such a situation would make Pakistan vulnerable to disintegration and the possibility that the reins of power fall into the hands of extremist adventurists. If this would happen, an ever present possibility exists that nuclear technology or much more is exported to feed a starving nation.

The second option is to convince the saner elements in the international financial arena to appreciate our predicament and volunteer a moratorium on debt repayment and servicing followed by rescheduling. The breathing space that we get should be utilized to revitalize the economy on a just and equitable basis. Only when the economy becomes vibrant would we be able to increase meaningful tax collection that is sustainable over a long period. Labour intensive export growth on the pattern of Sialkot together with the development of value added down stream textile industry would provide a strong base for exports. A revolutionary tax system should be enforced which adheres to the parameters of broadening the base of taxation, documentation of economy, maintenance of economic growth, fair and judicious taxation, simplified and business friendly tax laws, lesser government, reduction in discretionary powers of officers, reasonable protection to local industry, zero loopholes, reduction in smuggling and parallel economy and establishing a reliable tax data base and maintaining the honour and dignity of the tax payer.

Going after defaulters of tax and loans should be the done thing and not the exception. Advertising measures to apprehend such defaulters creates harassment and does not lead to meaningful collection. Such an activity should be discrete and sustained. Appealing to the conscience of the public to act in a particular manner exhibits complete dearth of workable policies to revive the economy and should be avoided. If the Prime Minister’s secretariat can be put up for sale then why not the Badshahi Mosque, Quaid-e-Azam’s Mausoleum or the national assembly building. There are certain things which are national assets and they are not for sale. We should refrain from adhoc remedies for the creation of liquidity . Our sense of right and wrong seems to have become numb for in the last tenure of the muslim league government we advertised complete immunity from probe into source of investment of bonds floated in U.S.A. Resultantly we were chased out. Policies should be just, equitable transparent and adopted with broad consensus. If our local entrepreneur is satisfied, then private capital will flow.

If somehow we are able to pull off the second option with any degree of success, ours would be the greatest victory of all. We have to act now before we run out of options.