Pakistan Economy and Loopholes

A balance of payment crisis compelled Pakistan to seek $11.3 billion IMF loan in 2008. Strings attached with the loan invited harsh criticism from the political parties and business groups. The three-point reform agenda requires implementation of reformed sales tax, reduction in budget deficit and end to government subsidies. At present, Pakistan is in a peculiar situation today. Fiscal deficit is high, debt is increasing rapidly, growth is minimal and unemployment on the rise. The mounting debt and liabilities, approaching Rs11,000 billion, doubling in the last three years, is being used for non-productive expenditure. The budget deficit is set to hit 7.5 percent against the targeted 4.7 percent for fiscal 2010/11 (July-June). Pakistan badly needs to generate additional revenue to meet its budgetary deficit and conditions agreed to IMF. That is why the Govt. is doing all what it can to win favors for RGST but still it looks a far cry. While the IMF forecasts emerging economies, notably China and India, to drive the global growth, Pakistan’s economic sovereignty is facing serious challenges. The debt profile of the country is worsening day by day with fears of a looming debt trap. With over half a billion debt increase in the first quarter of FY11, shared equally by domestic and foreign components, the country’s total debt reached Rs10.7 trillion. With fiscal deficit threatening to reach Rs1.5 billion for FY11, according to the Finmin, a significant rise in the country’s debt is inevitable.

But on the other hand there are many loopholes that if plugged can generate all the necessary revenue without resorting to increase in power tariff and RGST. One such case is “ISAF Missing Containers”.

The International Security Assistance Force (ISAF) is a NATO-led security mission in Afghanistan established by the United Nations Security Council on 20 December 2001 by Resolution 1386 as envisaged by the Bonn Agreement. It is engaged in the War in Afghanistan (2001–present).

ISAF started importing goods through Karachi and established Forward Mounting Base (FMB) unit at Karachi in 2002 as part of co-ordination mechanism by designating one of the its officers at Karachi to regularly co-ordinate customs clearance matters with Additional Collector Customs Karachi Port. But this co-ordination system fizzled out when the FMB was shifted by ISAF to Kabul within a year of its establishment at Karachi. In June 2010, it was leaked to media that over 11,000 ISAF containers with equipment worth Rs220 billion went missing during the last two years or so.

The FBR data showed that during the period June 2005-2010, a total of 558,141 containers were transited to Afghanistan. Of these, 166,949 (30 percent) containers belonged to the US Military; 52,929 (9 percent) to ISAF/Nato and the remaining 338,263 (61 percent) were commercial ATT consignments. The biggest aspect of the ISAF Containers Scam is the non-availability of the data on the movement of ISAF containers. The FTO report on the scam shows that in response to data requisitioned from FBR for the period January 1, 2007 to October 15, 2010, Pakistan Revenue Automation Limited (PRAL) confirmed that Karachi Customs had handled a total of 306,267 transit containers during this period. For 71,202 containers, there is no information regarding either their departure from Karachi or their arrival at the border customs stations. In case of 27,871 containers, that did arrive at the destinations, their departure information from Karachi is not available. Another 55,140 containers are shown to have left Karachi but have no entries of arrival at the border stations. A total of 152,054 containers have records for departure from Karachi and arrival at the border customs station, but no record of crossing into Afghanistan. Finally, not a single container, out of 306,267, is recorded to have ever crossed over to Afghanistan during the almost four-year period under reference. According to one informed insider, the arrival or otherwise of the ‘missing containers’ could be verified from the ISAF Kabul officials. The containers that were meant to go missing after availing of ISAF duty-tax free clearance by Customs were never meant to reach ISAF warehouses in Kabul and therefore the ISAF headquarters could easily confirm whether they ever arrived in Kabul or not.

It is estimated very conservatively that the scandal involving the ISAF containers have caused a huge loss of over Rs 37 billion to the economy. Chief Justice Iftikhar Mohammad Chaudhary on Wednesday hearing the embezzlement of billions of rupees in International Security Assistance Force (ISAF) containers case observed that revelations made in the Federal Tax Ombudsman report is just the tip of the iceberg, as further investigations could divulge much more. He said because of smuggling the national exchequer faces a loss of $2 billion every year.  The Chief Justice further said that even the Islamabad markets are flooded with the smuggled goods. Justice Ramday said that the domestic barrowing have reached Rs4008 billion since 2008 to 2010. The court wondered that besides the smuggling of alcohol and arms, what else is being smuggled on the pretext of Afghan trade.

The Afghan Transit Trade Agreement (ATTA) scam is bleeding our beleaguered economy dry to the tune of up to Rs37 billion per year . The ATTA allows goods destined for Afghanistan to transit through Pakistan duty free but ATTA goods, amounting to an estimated $2 billion, either stay in Pakistan or are smuggled back in. Described as the “main source of smuggling” in Pakistan, the ATTA scam is hemorrhaging our economy on several fronts. The ATTA has become an unmitigated source of customs duty evasion. When the Federal Board of Revenue (FBR) enhances duties on any product, official imports to Pakistan decline as people shift to import the same product, fraudulently, under the ATTA. Such was the case with stainless steel imports, which doubled under ATTA within six months, immediately after duties were increased on it. So the ATTA has dented the FBR authorities’ ability to accrue revenue via customs duties which, when combined with the stranglehold of the feudal and political classes on preventing income tax collection, has stymied Pakistan’s tax-to-GDP ratio to an eye-watering nine per cent. This is a critical issue for the nation’s economic future. The extent of the problem with ATTA is borne out by the fact that Afghanistan’s per capita imports are 72 per cent higher than Pakistan, even though its GDP per capita is almost 300 per cent lower. The statistics reveal the extent of smuggling into Pakistan. The Afghan economy cannot sustain such high imports. In fact, 80 per cent of these goods are smuggled into Pakistan, damaging local industry and destroying legal businesses here. Worse still, Pakistan’s high-value edibles are smuggled into Afghanistan, bleeding our exchequer further, as both fertilizers and flour are heavily subsidized by the government. The resultant shortage in Pakistan drives up prices — another body blow for the Pakistani people, already bludgeoned by food inflation.

Revenue loss on account of smuggling of Afghan transit trade alone, as estimated by the World Bank, amounted to US$ 35 billion during nine years from 2001 to 2009. It is no secret that Pakistani tax evaders have been transferring to Swiss banks huge amounts of money generated through illegal activities by some politicians, bureaucrats, terrorist networks and businessmen to Swiss banks. White-collar crimes are also responsible for facilitating transfer of capital towards informal economy either from the black market or the formal economy with the connivance of FRB’s officials. Due to Pakistan’s low productivity resulting from massive exemptions, poor administration, low threshold, and lack of transparency and enforcement, the country faces a massive challenge of balancing low revenues and the avaricious politicians, corrupt bureaucrats, and greedy businessmen, who are mostly crook, corrupt and tax evaders, succeed to remit this black money to their hidden accounts in Switzerland and other European countries. On the one hand parallel economy in Pakistan is growing at an alarming rate of 20 percent per annum and on the other hand, according to an estimate, the money lying in Swiss banks of Pakistanis has reached to the tune of US $200 billion. The volume of black money generated in the year 2008-09 alone has been measured by the independent sources which is not less than $ 40 billion. The rent-seekers and beneficiaries of loan write-offs in Pakistan have also shifted funds worth billions of dollars to Switzerland.