Imran Khan keeps saying that bringing back the looted wealth from abroad will suffice to relieve the economy of its entire debt burden. Dr Arif Alvi, an MNA of the Pakistan Tehreek-i-Insaf, had tabled a question as to the steps the government was taking in this regard.
The government chose the timing of the so-called Tsunami march in Islamabad to give a response that has left every sane analyst perplexed. It told the house that a mammoth sum of $200billion was parked in Swiss banks accounts held by Pakistanis. To recover this ill-gotten wealth, the government would be approaching the Swiss government for renegotiating the existing tax agreement.
The move is not just to take some steam out of the latest campaign about electoral reform and to suggest that Imran Khan is deviating from the more important economic agenda; it also pressurises the PPP to stay away from the emerging political alliance against the government. Politics apart, the move sits well with the fiscal strategy pursued so far by the government.
Business friendliness in Pakistan’s resource-starved economy has come to signify a tax regime that does not hurt the big and the powerful players. The Finance Minister of the PML-N government has valiantly looked for resources everywhere but in the domain of taxes. It all began with massive domestic borrowing to clear the circular debt. The IMF was approached to repay the past IMF debt.
When it transpired that domestic debt was costlier than the external debt, understandings have been reached with multilateral and bilateral donors amounting to a total that exceeds the existing external debt of Pakistan. Latest data reveals that the borrowing from the State Bank is now negative and the debt from commercial banks has declined.
Privatization programme and the 3-G auctions fall in the same genre of non-tax revenue. After friends and relatives had brought their dollars back in the form of tax free remittances and oversubscription of the lucrative Eurobonds, the public is being hoodwinked with the promise of bringing back the stolen money abroad. The new foreign loans being announced every other day would be easily repaid out of the return flow of the hefty sum of $200 billion. If those with a taste for Islamic finance felt excluded, an Islamic bond denominated in dollar is already in the works. No one seems worried that the resulting appreciation of the rupee is hurting exports and the import related revenue.
The figure of $200 billion is not based on any research done by the Ministry of Finance, nor investigations conducted by the FBR, State Bank of Pakistan, NAB, FIA or an independent researcher. This is what an ex-foreign minister of Switzerland, Micheline Calmy-Rey, is reported to have claimed. She was also twice the President of Switzerland and her reason for fame was the scarf she wore while doing a gas deal in Iran, the US protestations notwithstanding. In Pakistan, she is better known for having closed down the visa section of the Swiss embassy in Islamabad in 2006 for charges of fake visas and human trafficking. On the strength of a statement made “on the record” by a director of Credit Suisse AG, the reply in the National Assembly claimed that this bank alone held $97 billion of the money stashed by Pakistanis.
In 2012-13, Pakistan’s GDP was $238 billion. This means that the government has to recover the equivalent of 84 per cent of GDP, another piece of evidence to demonstrate that the Nawaz government always Thinks Big — motorways, metro buses, trade corridors, bullet trains, trains through mountains. And now manna from heavens of $200 billion, which is more than three times the total external debt and liabilities.
The present agreement between the two countries is a standard arrangement for the avoidance of double taxation. Signed on 19 July, 2005, it took three years to ratify on 24 November, 2008. Before signing, the negotiations must have taken sometime, too. The purpose of re-negotiation is to benefit from the new provisions recently allowed in these agreements by Switzerland for disclosure in response to specific requests not necessarily related to a tax offence.
The Restitution of Illicit Assets Act, 2010 made effective in Switzerland from 2011 was the outcome of the pressures exerted by the United States and the European Union to curb illegal flows of funds. This law removed difficulties in returning frozen assets to failing states. Under this law, illicit assets can be frozen, forfeited and restituted when the state of origin fails to institute a criminal procedure satisfying the Swiss law on international mutual assistance in legal matters. Why would this law be relevant to Pakistan, unless there is admission that Pakistan is a failing state?
While the government will be seen doing something about the corrupt and bringing back their wealth and raising the hope that its own huge borrowing would be repaid through these inflows, the past pace of negotiation, signing and ratification shows that a new agreement is unlikely to take effect during the remaining tenure of the government. Even after the agreement is put in place, the time taken in satisfying all the rules and procedures on both sides before any money can be returned is anybody’s guess. Some facts may help give an idea.
Efforts to lay hands on Zardari’s alleged $60 million since 1997 in the second tenure of the PML-N have not brought back a dime. Of course, the taxpayers footed the bill for the huge transactions costs. On the Swiss side, only around $2 billion of the illegally accumulated state funds by what is called politically exposed persons (PEPs) have been restituted so far. These include the cases of Montesinos of Peru, Marcos of the Philippines and Abachaof Nigeria. The Marcos case took some 18 years.
While the return of $200 billion is an idea whose time may have come, there is a long gestation period before it bears fruit. By all means, the agreement with Switzerland should be renegotiated. Following that, the execution should be across the board and above board, not a repeat of the antics of “Ehtasab-ur-Rehman” during the PML-N Mark-II. The whole process should be seen as part of an anti-corruption strategy, with accountability and transparency as its essential elements.
The worst thing to do is to see it as a budgetary measure. The fiscal crisis of our state requires tax reform for its sustained correction. Everyone, including the government, knows what needs to be done. First, exemptions worth Rs500 billion allowed to favour vested interests should be withdrawn. Second, persons and sectors that have escaped the tax net so far should no more be allowed this discrimination. Third, the preponderance of the withholding and advanced tax regime reflects poorly on the working of the FBR. Not only does it cause huge pilferage of revenue, it also has the effect of converting direct taxes into indirect taxes. Instead of promoting fairness, the already narrow direct tax regime thus ends up in additional burden on the common man.
Unfortunately, the political will to implement tax reform is lacking. Were it not the case, the government would be focusing on the large and increasing informal and undocumented economy rather than chase the illusion of $200 billon of offshore money.