What can be done by the Government
By: Tarique Khan Javed
President, Overseas Pakistani Investors Forum.
Dated: 16 Nov 2008
Dec 27, 2007 uprising, the third challenge to status quo:
Between July 1977 and Dec 2007 common man of Pakistan kept his eyes focused on Banazir Bhutto for some relief. She came to power twice but on pre conditions and tied hands, she could not do much for the poor except providing some jobs.
By Dec 2007, when chances of her victory in up coming election looked bright, expectation of people rose very high. Thus when on 27th Dec she was assassinated people could not take it any more. They came out in frenzy and destroyed as many symbols of rich as they could. They burnt expensive cars and Banks and brought the whole country to a halt for several days.
Rich realized it was a close call, before full blown revolution leading to lot of bloodshed and reorganization of society. Army for the first time appreciated the power of the people and decided not to confront and take a sideline.
As a result for the first time in its history genuine democratic set up has come into being after Feb 2008 election.
However the democratic government found its hands tied up not by Army or Establishment this time, but by international and domestic unfavorable economic conditions. Oil and food shortage pushed the prices to record heights, further straining already huge budget deficit, caused by excessive civil and military expenses, in the wake of low collection of taxes. Inflation has touched 25% level in recent months and a great number of people are staving.
Challenges to new Government:
Cumulative inflation since 2004 estimated at 50-70% without corresponding devaluation of currency has led to:
- Erosion of purchasing power of common man.
- Increased imports and decreased exports.
- Increasing trade deficit.
- Increasing interest rate,
- Decline in currency value.
- 40% decline in Equity market and its suspension.
- Flight of capital.
- Reduction in FX reserve from USD 17 billion to 6.5 billion.
Leading the country on verge of default without the IMF bailout plan. IMF insist on:
- Radical reduction in civil and military expenses.
- End of all subsidy.
- Devaluation of currency.
- Increase in interest rate.
- Improve tax collection by bringing structural reforms.
All this has paralyzed the new Government. They do not known what to do. People wait for some relief however the Government is not in a position give any relief other than Banazir Fund and leasing of Katchi Abadis in cities like Karachi.
Possible responses by new Government:
Desperate situation demand desperate measures and I suggest the following:
1) Increase Tax collection from Rs 1 trillion to 5 trillion:
Based on tax collection record during British Rule when huge surpluses were earned and sent to UK it is easy to see that our tax collection has dropped substantially since independence. This was mainly due weak moral base of our Tax Officers and checks and balances as it existed in pre independence time. If there is no hope of find honest officers locally and foreigners would not like to come under the given circumstances. The only option left to increase the tax collection substantially is by tendering out the Tax Collection system to private Cos. That is giving out Tax collection to a private Group on a fixed amount of say Rs 3 to 5 trillion compared to current collection of Rs 1 trillion.
2) Cut Civil and Military salaries and perks by 50%.
A revolutionary cut in Government expenses is imperative. Sighting the low collection and incoming restriction on further borrowing from SBP, Government must either reduce the number of Ministers and Government employees including that of Armed forces, by say half or reduce their salaries and perks by half. This should also apply to MNA and MPAs. If they do not like their new salaries; they may resign. The Country can not pay them well by starving the common people.
3) Redistribute land to give relief to poor in rural area.
PPP Government owes to the people of Pakistan and souls of their Leader an obligation to implement the 1977 Land Reform Act. In this they will find active support of MQM and ANP.
There can not be any better time for its implementation and there is no excuse what so ever for delay. Except as the critic say, the Party is run by Land Lords, Jagirdars and Sardars and why they would agree to reduce their holdings and influence. To prove critics wrong; rank and file of PPP should demand that the unfinished agenda of their Leader be implemented.
PPP has no excuse this time as Army is on the sideline and all important Offices are held by them. If they fail to do so this will be great betrayal of trust posed by the poor. Since the last Benezir Bhutto’s Government people have been waiting for the PPP government to come again and relief their suffering. If PPP fails this time the consequence for it as a party will be disastrous.
4) Reduce indirect tax on items used by common man
1) Remove all Sales Tax on Electricity and Gas.
2) Remove Oil and Gas development surcharges on Petrol, Gas, Diesel and Furnace oil.
3) Remove all custom duty on:
a) Edible oils (between 9,000 to 16,800 per metric ton)
b) Sugar 10%,
c) Salt-20%,
d) Pencilline-25%,
e) Bandages 20%,
f) Cigarates-35%,
g) Wine and Beer-90%
and all other items used by the common man. All sales Tax and Excises duties on these items can also be removed. This will immediately bring down prices of these items and provide relief to the poor.
5. Tax the rich heavily
The lost revenue could be recovered by imposing equitable tax on large houses according to size, shops according to size, cars and motorcycles depending on CC, heavy taxes on all luxury goods etc. Such taxes will help reduce the apparent gap between rich and poor and calm the society.
6. Sell all Armed Forces Land in cities
All Military installations in the cites must be moved to remote areas and all Military Land in the cities be auctioned. If done so such a large amount of cash can be generated that all our Internal and External Debt may be paid of and a major expense of Rs 250 billion be saved to be invested on social sector or giving tax breaks to people like mentioned above.
7.Adopt a zero inflation policy to protect the poor.
Government has promised not to borrow from SBP from 1st Nov 2008. To protect the poor the democratic government should make this a cardinal principle not be compromised at any cost. With increase in money supply linked to actual growth of economy the inflationary pressure will ease overtime and lead to zero inflation.
8) Let Pak Rupees find its equilibrium market level
The cumulative inflation since 2004 conservatively estimated at 50% implies that our FX rate against US Dollar should be 93 (62x 150%) to bring equilibrium in our economy. Without it the exports will suffer while imports would look cheap leading to widening trade deficit.
9) Open stock market and let it fall to its equilibrium level:
As a consequence of the inflation the deposit rates have moved upto 14%. Therefore the return on our equity market has become unattractive at current levels. A return of 14 on deposit implies PE ratio of 100/14 =7.14. In order to beat this; the Equity market must have a PE ratio of 6. In order to get that ratio our market should fall more.
The fall from 15700 level to current 9,180 is justified. At current level PE is 7.22. To reach the level of 6 the market will need to drop to 7,628 level. This will mean a further drop of 16.91% from current level.
Once we reach the level of 6 Pakistani market would look attractive to foreign investors. At that level we shall perhaps beat other countries and become one of the cheapest markets. Provided they also do not fall further.
Currently countries with better PE ratio than Pakistan are:
Thailand - 6.12, Oman -6.23, Italy S&P 6.78,UAE DFM -6.84, South Africa All shares -7.03 and Malaysia Composite 7.07.
10. Ease the tension in the society by restoring pre 1977 conditions.
Go ahead and repeal all laws including Hadood ordinance, which have curtailed the personal rights of Pakistanis and created tension in the Society.
11. Make peace with India and open all old trade routes.
Make peace with India; with some adjustment in Kashmir borders, to concentrate energy on poverty alleviation and developing our part of Kashmir. Recent opening of two trade route in Kashmir is the model which is needed to be adopted in Punjab and Sindh as well. In Punjab Sailkot and Kasur trade route need to opened as soon as possible. More may be considered. Similarly in Sindh three to four trade routes may be opened to alleviate poverty in area like Tharparke where Nager Parker was an important trading post. After Pakistan trade continued on lower scale upto 1965 but after it died down and added to the poverty of the people in the area. Such opening will provide major relief to the people of Sindh as they will be able to travel to India inexpensively. Given the large Rajhistani and Gujrati communities in Sindh this will give a big boost to Thar as people will transverse it for travel to India.
Other points which may be considered are Musafir Khana, Rahim ki Bazar, Gadro and Vira Wah. These were natural trading post in the past.
12. Fast track SAFTA implementation.
SAFTA agreement under SAARC calls for free trade between members by 2013. However the challenge for the new government is to fast track this to 2010.
13. Energize and expand SAARC movement.
To gradually build a common market from Afghanistan to Burma. With such ease of movement that borders will not mean much. To be followed by a common currency.
14. Remove all barriers to the working of market forces of demand and supply.
Adopt a small government attitude and let market forces play their role. Only ensure that no Group is able to control and market to make extra ordinary profit and all market participants are provided equal playing field.
15. Introduce death penalty for taking bribe as is practiced in China.
Introduce very harsh property confiscation law for people found guilty of taking bribe or involved in making money by illegal means. The law should cover property in the name of all dependents like wife and children.
16. Remove all existing laws governing industry and commerce
Introduce a simplified code or conduct drafted in consultation with concerned parties to root out corruption and harassment by different government agencies.
17) Create two Free Economic Zones in each Province.
Such zones should have their own simplified laws and provide one window service to investors. Like China these zones would become powerful economic engines of the Country and absorb surplus labour and alleviate poverty.
18) Create one additional Province in each existing Province
Also relocate the Federal capital to a more central location. The new Provincial capitals should also be in central locations.
19) Restore 5% right for Locals in the natural resource taken out from their Area
This right was granted by the Act of 1935. Such right is still available in India and Bangladesh. The denial of this right after discovery of Sui Gas is the root cause of Baluchistan problem.
20. Absorb all FATA and PATA into Pakistan by adopting Baluchistan model..
After 9/11 Pakistan is left with no choice but to absorb FATA and PATA into Pakistan and apply the same security arrangement as in existence in Baluchistan.
21. Create a Federal Mortgages Agency, with special eviction powers
Agency to refinance property development. Such an Agency transformed USA after its creation in 1954. The present standard of living in USA would be unthinkable without such Agencies. Such Agencies can raise unlimited funds from the International market.
22. Start a mandatory Saving Scheme for Overseas Pakistanis.
Linked with Passport renewal. Such as scheme can generate some USD 4 billion annually and provide support to Pakistan. It can also secure the future of Overseas Pakistanis, who otherwise end up spending all their savings on consumption items.
23.Let Iranian oil come
Look other way and let the cheap Iranian oil flow into the Country unhindered, to save foreign exchange and reduce inflation.
24. Make people understand Quran
Government should insist on reading of Quran in Urdu before Arabic. Also compel rendering of translation of Ayats in Urdu after prayers. Based on my observation in Holland, I predict that terrorism and extremism based on religion, will vanish for ever within the next 30-40 years, with this master stroke. This will also substantially improve the moral character of the people and reduce corruption in private and public life.
25. Introduce working hours in line with Islamic teachings
Which will entail start of days work within an hour of Fajar prayer? This will save lot of energy and promote healthy life style.
