BR Research: Now that you are running for elections, what's your own vote bank: traders or industrialists? Miftah Ismail: You can win business chambers elections focusing only on trader community, but you can't win general elections just by wooing traders. I plan to reach to everybody and based on PML-N's work and also my successful efforts in the last few months, I think we have a great story to tell to everybody.
BRR: Let's hear that story?
MI: Well, to begin with we have added significant amount of electricity to the grid.
BRR: Sure! But it's expensive and there is still plenty of load shedding.
MI: I concede load shedding hasn't ended, although we had expected that it would have, given the quantum of power we added in the system. But even the caretaker government has made a statement that today Pakistan can produce 21-22 thousand megawatts of electricity; whereas even until last year the country could only produce 12 thousand megawatts of power. Obviously, we have increased power supply. But the latent demand has turned out to be more than previously expected; we were expecting the demand to grow by 6-7 percent, but it has grown much more.
Add to that the additional pressures on electricity demand during Ramadan. And you also have to consider that due to weak river flows the production of hydel power has been reduced by 1500 megawatts, and as such no government at home or abroad can fix climate change overnight. This year is going to be hard on Pakistan because of high levels of water stress amid lack of rains, and the impact of drought. Lastly, the transmission line has been tripping due to excess heat.
BRR: But hot temperature is not new to Karachi, or to Pakistan. Shouldn't that be accounted for? Plus, that transmission system needs up-gradation has been long recognised.
MI: By next year, these troubles will be over. Plus, by next year the Balloki plant, which is current shutdown, will be up and running. If there wasn't any water shortage, there wouldn't have been load shedding, at least surely not as much.
BRR: Will PML-N revert to protecting exchange rate if elected back to power?
MI: If we form the government, which we will, we will not try to reinvent economics.
You keep a strong currency when you can run an inflation which is lower than your competing currencies; when your cost of doing business is actually going down and not up; and when you reform to improve the business climate. But because reforms were not taking place, and because cost of doing business was not going down and cost of utilities was going up, and because inflation in Pakistan was higher than our competing countries, our currency was overvalued. And the same was recognised by international agencies.
In fact, let's forget that theory for a while. When exports fall or remain weak for three years, you don't really need to do regression analysis over currency. If for three years, the sales of your general store remains weak, and shops in the neighbourhood, India general store and Bangladesh general store - are witnessing increases in sales, and you are selling only one or few items then there is only one thing to do: reduce prices, which in this you do that by depreciating the exchange rate.
BRR: Prior to recent depreciation the real effective exchange rate was at about 113-114. After depreciation, it may come down to 109-110, leaving room for another round of 3-5 percent depreciation in the weeks or months to come. Do you think the currency will depreciate further?
MI: I think the rupee should find stability around 120 to the dollar. Pakistan's non-essential imports are of a few billion, whereas the essential imports form the big-ticket items - machinery, petroleum, edible oil. These things had to be made expensive which now we have done by devaluing the currency. All of these things are elastic in the long term; you will see that imports will now taper off in the coming months.
BRR: What is your reading of the increase in the cost of production that follows from devaluation considering that the energy we have added is also expensive energy?
MI: Let's assume that 70-80 percent of the cost, including energy, is of imported factor. If I am exporting a dollar worth goods, I wouldn't have imported more than 80 cents on the dollar, and there is still 20 cents to play on. Besides when the cost of imports rises, then exporters start looking for domestic suppliers rather than importing the raw material that helps in reducing costs.
BRR: Tax reforms remained on back burner in the last five years. Why is that so?
MI: We were able to achieve a few things and few we couldn't. The Alternate Dispute Resolution Committee is a great step forward, and that would help resolve a lot of pending cases. Another significant step to assist the business community is to limit the number of audits to one composite audit once in three years.
Under the economic reform package announced before the budget, we have reduced tax rates for individuals, and we have raised the slab to benefit the middle-class people in a move unprecedented in Pakistan's history. At the same time, we have changed the law for tax filers asking those who have become exempt in the new slabs to fill a return and pay a nominal tax of Rs 1000 so that they at least remain in the tax net.
Moreover, we placed a ban on the purchase of new cars and real estate (above a certain threshold) without being a tax filer. The constitution allows us to place reasonable restrictions and this is a reasonable restriction. At the same time, we have tightened the noose by announcing the amnesty scheme.
BRR: How many declarations are you expecting under the scheme, and its revenue impact?
MI: We are expecting a lot of declarations, especially now that the Supreme Court has given the green signal. Although that signal has come rather late, but even in this short window a lot of declarations should come through. There will be a queue in front of FBR right after Eid. The amnesty can be claimed only till June end and it cannot be extended without a presidential ordinance.
I cannot comment on foreign declarations but there we will be a lot of declarations at 5 percent on domestic assets. I cannot comment on the revenue impact at the moment; and those have not been incorporated in budgeted revenues as yet. But I expect domestic declarations of about Rs 350 billion, of which 5 percent should be collected as revenues.
BRR: Amnesties usually work when there is a strong stick and the revenue department has both the will and the skill to go after the non-filers, whereas the FBR does not has any stick. Then what is the basis of your expectations?
MI: The FBR cannot give any sticks. If it could, then the declarations could have been even higher in number. But there is a stick that most people don't understand: and that's the ban on real estate purchase without being a filer.
Secondly, we have amended the law under which the FBR can now give its data to Nadra. Now we can completely figure out who is a taxpayer and who is not. Now we can also know the spending pattern of the non-taxpayer and based on that we can expand the tax base significantly.
There are only 1.5 million taxpayers in the country, though that's up 0.7 million tax payers when we took office. If you put data under the microscope and find out significant variable using repression analysis, those significant variables would be the type of cars, the type of bank accounts and name of the bank you bank with, the number of bank accounts, trips abroad and so on. Using these variables, we can then track the people who exhibit such patterns but are non-filers. I expect the system to identify about 2 million non-filers, of which 1.2 million will be prime targets - people who are not dead, non-residents, not retired etc.
BRR: We have heard that record before. But the FBR doesn't have the capacity to do all this kind of analytics.
MI: The FBR doesn't have this capacity but Nadra does. Now that the law has been changed such that FBR will give data to Nadra, all this would be possible.
BRR: Let's say Nadra does a great job at analytics. The rest of the work will have to be done by the FBR - from sending notices to going after them, whereas time after time reforms have eluded FBR. What makes you so hopeful?
MI: Notices should not be sent by the FBR. It should be sent by private company or another agency and once the person becomes a tax payer, the file should be transferred to the FBR. Eventually I think, the FBR's audit should also be privatised. You can also privatise customs at some stage.
BRR: What is your election pitch?
MI: You can have one extra MQM MNA from Karachi, but what difference can he or she make. Another MNA from the PPP will also not make a great difference for the people of Karachi. Even if a PML-N MNA comes from Karachi, he or she won't be able to achieve a lot. But if Miftah Ismail is elected from Karachi, he will be the finance minister of Pakistan, and he will sit in the room where the country's top decisions are made by a handful of people. The people of Karachi can decide whether they want to send a random person to the parliament or a person who will sit in the corridors of power.
BRR: All this on the assumption that PML-N comes to power.
MI: At this point, it looks like the PML-N is coming to power since nothing stops the PML-N in Punjab.
BRR: PSE reforms. Nothing has happened on that front in the last five years. What's your agenda?
MI: Nothing will happen. There is only one reform left: privatisation. We did FATA, we did National Action Plan after the Army Public School incident; PSE reforms require the same kind of emergency and broad base political consensus. It requires all the parties to sit down and strike out a solution. If anyone thinks that the PML-N will sell it to its friends, then we can make a committee and have opposition members sit on the committee.
BRR: With petroleum levy proposed at up to Rs 30 per litre, it seems if you come in power you will simultaneously reduce the sales tax, so you don't have to share it with the provinces. Is that the game plan?
MI: Yes.
BRR: That means you are keen on reducing the share of provinces in the next NFC, if and when it happens.
MI: The NFC has to be re-looked at. It's completely messed up. The federation cannot run under the current revenue shares. You are forcing the centre to go into a deficit and live on loans.
BRR: But why blame the federating units when the centre has failed to raise its revenues and rationalize its expenditure especially when it maintains so many wings despite devolving those subjects.
MI: Total tax collection today would be around Rs 4000 billion. As a percentage of GDP, it's about 12.4 percent. Even if the tax-to-GDP was 15 percent, the total tax revenue would have been Rs 5100 billion. Roughly 58 percent goes to the provinces, that's about Rs 3000 billion, leaving only Rs 2100 billion for the centre, of which Rs 1700 billon are spent on debt servicing. Now you have to spend Rs 1100 billion on defence budget, and we are already into a deficit of Rs 700 billion. Now even if we shut all ministries and departments assuming all of them are not needed, you will have to spend on PSDP and pensions of about Rs 300 billion.
The point is that you can raise the revenues to Rs 6000 billion, but you still can't balance the budget. This NFC award was fundamentally flawed.
BRR: The NFC is a political subject; and unless all provinces agree with your position, which they don't, there can't be a change in the formula. What can you offer to provinces to reduce their share in vertical distribution?
MI: It's everybody's country; Pakistan does not belong to Islamabad. All the provinces and regions make up Pakistan. If they want a weak federation and are ready to live to its socio-economic and geo-political implications, then so be it.
BRR: There are talks of a National Tax Agency whereas Sindh is asking to collect GST on goods on the centre's behalf. What are your thoughts on it?
MI: I think the existing system is alright; I don't think there should be a change in revenue assignments or even the mandate to collect it.
BRR: With all the grand Chinese investments under CPEC that's flowing in, the FDI tally is still pittance.
MI: There is an accounting issue. Some of the CPEC inflows come as loans in capital accounts; and there needs to be accounting reconciliation, which in fact is currently underway.
BRR: Ahsan Iqbal leaves no opportunity to say that CPEC is here to stay for at least a decade if not three. How about tasking the central bank to include a chapter on CPEC in its quarterly and annual State of Economy report that it is mandated to publish by law.
MI: Good idea. We could work on it.