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Moeen's sweeping changes; a challenge for new government.

It is felt that merely declaring the names of the defaulters and debarring them from contesting the elections will not be sufficient. Unless the Government comes with a heavy hand and confiscate the property and other assets of the defaulters the measure in regard to the outstanding loans would be quite ineffective.

The caretaker Prime Minister has vowed to salvage the economy. He has initiated a policy package very boldly. Apart from a 10% rise in energy prices, a modest increase in wheat prices and some increase in ghee prices, his main thrust was in scrapping the yellow-cab scheme. Incidentally, this scheme had already been scrapped by the earlier caretaker government of Mr. Balkh Sher Mazari and just as promptly reinstated by Mr. Sharif as soon as his government was restored. In addition, the new caretakers have scrapped a few super-highways. They have levied a small tax on agriculture which is more an issue of getting them within the tax net rather than any appreciable enhancement of revenues.

Devaluation is always a more contentious act. In developing countries it does not necessarily raise exports, but it probably does reduce imports. On the other hand, it is inflationary and unless accompanied by tough credit and fiscal policies, its gains, if any, are probably lost within 12 months. There are other problems also. But it is something much favoured in the World Bank and IMF.

The State Bank of Pakistan has been made independent, giving it the power to refuse the overdrafts to the Government. This is most important because it means the Government will not be able to borrow beyond its limit. The bank would be free from political pressures that over the past two years have resulted in allocation of 70 per cent of credit to the public sector and deficit financing, while the private sector battled for the remaining 30 per cent. Pakistan's budget deficit soared to 7.5 per cent in 1992-93 (July/June), exceeding targets by 1.5 per cent, as the Government borrowed heavily to make up for profligate spending and flagging tax revenues.

According to Finance Secretary, Mr. Alimullah -- Monetary Policy would now be set by the Central Bank without prior Government approval. He called for an end to Government interference in prudential regulations, more taxes and privatisation of banks. Distortions in monetary policy, such as segmentation of the credit market, multiplicity of the rate structure and outside interference were making the cost of money exorbitant.

Alimullah was cautious about convertibility, saying he would like to see $ 2.0 billion in the reserves but adding that an independent central bank would be positioned to monitor the situation. Reserves stood at $ 448 million on September 2, a slight fall from $ 496 million the week before but compared with $ 180 million in July, enough to cover just two weeks of imports.

Tax on agricultural incomes and wealth on farms above 60 acres get an initial setback as Punjab government rejected the Ordinance because of technical reasons. It was pointed out that it needed a review in the presence of Ushr Ordinance and Wealth Tax. It is felt that agriculture tax would meet the same fate as that of Ushr. The government could hardly raise Rs. 35 million from this source instead of estimated revenue of Rs. 350 million.

A list of loan defaulters has been published by the newspapers. According to the new rules defaulters cannot contest elections. Many prominent politicians including ex-Prime Minister Ghulam Mustafa Jatoi were debarred from taking part in the elections. Out of Rs. 80 billion outstanding only Rs. 600 million is reported to have been paid until September 13.

It was not known if majority of the defaulters had cleared their dues after obtaining new bank loans then what procedure was being considered for the recovery of income tax, wealth tax and loans following the inter-bank transactions. It was also learnt that the defaulter traders and industrialists, after the publication of their names in the defaulters lists, instead of giving positive response for repayment, had consulted prominent legal experts to file case against banks and the government.

A commission, headed by a retired judge, has been set up to weed out corrupt officials in the next six weeks. Thousands of bureaucrats have already been transferred to prevent them from tampering with the election process now under way. Another task force, this one under a general, is expected to be set-up to target the drug industry. In future, drug dealers will face the death penalty.

Some angry and worried politicians say that the caretaker government does not have the mandate to enforce such sweeping changes, and are threatening to challenge the measures in court. It is felt that merely declaring the names of the defaulters and debarring them from contesting the elections will not be sufficient. Unless the Government comes with a heavy hand and confiscate the property and other assets of the defaulters the measure in regard to the outstanding loans would be quite ineffective. It has also been suggested that government should regularly publish say every after six months such list. It may be helpful in eradicating this evil from our society.

Some of the measures for adjustment agreed to by the caretaker government may be useful for the economy, but many of them are quite difficult to implement in view of the socio-economic-political conditions obtaining in our country. Important points from "Summary and Time-frame for Structural Reform Policies, 1993/94-1995/96", are being given here: Extension of the direct taxation to agriculture through the wealth tax and provincial income taxes. Reduction of profit tax rates. Expansion in base of agricultural taxation, including adjustments in PIU value. Reduction in exemption and concessions. Conversion of final withholding taxes into advance payments. Further reduction in maximum income and corporate profit tax rates. Adjustment in specific rates and conversion to ad valorem basis. Phasing out of capacity schemes and excise exemption as investment incentive instrument. Price adjustment and implementation of mechanism to adjust petroleum consumer prices in response to changes in landed cost. Replacement of surcharges by ad valorem excise taxes.

Reduction in maximum duty rate to 80 per cent (excluding Iqra and import license fee). Rationalisation and reduction of other tariff rates consistent with a reduction in dispersion. Reduction in the number of existing exemptions and granting of no new exemptions. Further reduction in the maximum duty rate. Integration of the Iqra and import licence fee into the tariff structure as a minimum tariff. Revision of rebate system with a view to eliminating all rebates for excise taxes and sales tax. Elimination of duty concessions for intermediate products. Reduction of maximum duty rate 35-40 per cent (including Iqra and import license fee) and minimal dispersion around a low average rate. Reduction of exemptions from duty on investment goods. Elimination of exemptions for most locally produced goods and imported goods (except basic foods, medicines, fertilizers and pesticides.)

Further increase in rates on concessional credit schemes with a view to bringing them to market levels in 1995-96. Elimination of the restrictions on rates of returns for trade and investment-related modes of financing. Ensuring that the premia for SBP foreign exchange cover eliminate subsidy. Developing private markets in foreign exchange risk cover. Further strengthening of bank prudential regulations consistent with international standards. Strengthening of supervision of provincial banks and nonbank financial institutions. Harmonization of tax and regulatory treatment of financial institutions and instruments. Elimination of the restricted import list. Removal of restrictions on provision of foreign exchange for current transaction and acceptance of obligations.

Provision for adequate funds for construction and maintenance of roads, railways, irrigation, water supply and sanitation, and social services. Containing budgetary defence expenditure consistent with resource availability and security needs. Privatising, liquidating, or restructuring remaining industrial units on initial list. Expanding privatisation to services and infrastructure. Implementing Social Action Program, by increasing the share of resources (investment and current) allocated to social sectors; according to provincial targets agreed upon in SAP. Making suitable adjustments in power tariffs consistent with the need for rationalizing and financing needs for the sector. Applying full fuel oil parity prices for gas and adjust levels to border prices. Increasing gas prices for households to reach parity. Assuring that no net cash subsidy for urea will reappear. Reductions of economic subsidies; elimination of subsidy for phosphatic fertilizers and elimination of subsidy for potash fertilizer by October 1995.
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Author:Haidari, Iqbal
Publication:Economic Review
Date:Sep 1, 1993
Previous Article:First Al-Noor Modaraba.
Next Article:Pakistan's economy: under new stresses and strains.

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