During the first four months of the ongoing fiscal year (July-October 2021), tax revenue of Pakistan grew 37% on a year-on-year basis to Rs1.84 trillion, which is no mean feat.
However, the mammoth tax collection is a byproduct of an unusual increase in import duties and it was recorded alongside expansion in import volumes.
According to the Pakistan Bureau of Statistics (PBS), merchandise imports during July-September 2021 surged 66% to $18.75 billion against $11.3 billion in the same period of last year.
The increase in collection of indirect taxes contributed heavily to the growth in the overall tax revenue collection. Out of Rs1.84 trillion collected during the four months under review, Rs1.21 trillion, or 66%, was received under the head of indirect taxes, statistics of the Federal Board of Revenue (FBR) revealed.
The reason why tax revenue grew almost invariably on the back of these two elements is that the country has yet to expand its tax base and achieve a manageable level of trade deficit.
The tax base remains narrow because the government finds it difficult to tax the untaxed, rich and powerful.
On the other hand, the trade deficit remains inflated because exporters are spoon-fed and most of them keep on demanding incentives to become competitive in the world market.
Ineffective business models and export strategies of the incentivised exporters – who are huge in number – have kept the export growth sluggish.
Imports, on the other hand, shoot up every time the government tries to boost economic growth. This happens because Pakistani policymakers usually prefer consumer-led growth over export-led expansion for the simple reason that opening up the floodgates of imports is easier than boosting exports in an increasingly competitive world market.
Pakistan’s external sector has some structural flaws and unless they are removed, export earnings cannot increase at the pace required for catching up with the widening import bill.
Unless export earnings improve, foreign investment inflows thicken and remittances show steady growth over the years, the country cannot control trade and current account deficits effectively. This means that the national debt as a percentage of GDP may keep scaling new heights and put economic sovereignty at risk.
The primary structural flaws of Pakistan’s external sector lie in its political system and the secondary ones in the economic model.
Pakistan’s political class is weak and less organised. This affects the quality of democracy. Democracy, as many of you must have heard, always remains “threatened”.
Can we expect a “threatened” democratic setup to devise long-term, inclusive and sustainable policies and ensure that every government, current or future, would pursue them? We cannot.
When we hear about long-term economic policies being rolled out by a particular government, those policies are generally not implemented. It will not be surprising then that these policies are not vigorously pursued by all the federating units of the country.
The sorry state of affairs turns the so-called “long-term, sustainable” policies into different schemes – yellow cab scheme, green tractor scheme, various types of Rogzar (employment) schemes and others.
Sometimes, such long-term policies fail to see the light of the day. They remain buried into voluminous documents titled sustainable export-growth strategic framework, water conservation strategy or agricultural revolution.
The point of the argument is that unless Pakistan builds a strong political and governance structure, no so-called long-term and sustainable strategy for the overall economy or for any sector would yield the desired results. Even if it starts reaping the fruits, its hidden opportunity cost will reverse everything soon.
The ailments of political economy cannot be cured with a few good doses of fiscal and monetary medicines, like higher tax revenue collection and interest rate easing or tightening.
Now, if we dig deeper, we find that Pakistan’s political structure remains fractured for two reasons. First, the state needs to redefine the roles of all its pillars and reset the boundaries between them.
Secondly, it is time for Pakistan to clearly define its role in the global and regional affairs. We are constantly told that geo-economics play an elementary role in defining geopolitics but the reverse is equally true as well.
Geopolitics, too, play an elementary role in defining economic models, particularly of foreign debt-dependent nations.
State Bank of Pakistan Governor Dr Reza Baqir recently predicted that Pakistan’s economy would grow close to 5% during the ongoing fiscal year, up from last year’s 4%.
“It is also a fact that we have confidence in the direction of our policies,” he boasted while speaking at the Pakistan Banking Awards 2021.
If the direction of policies he referred to means that the country’s economy is being documented at a fast pace, that the share of direct taxes in the total tax revenue collection is set to increase, that our export growth is going to outpace import growth – kudos!
But if these and similar other things are not going to happen anytime soon, then his words carry little weight.
The writer is an electronic engineer and pursuing Master’s degree
Published in The Express Tribune, November 15th, 2021.