Melania Trump Club

Sunday, February 21, 2010

World Bank, govt in $300m dispute over PRSC prog

In a dramatic development, the World Bank has distanced itself from the planned creation of Inland Revenue Service (IRS) in Pakistan under the $83 million tax administration reforms project to avoid possible penalties from the Inspection Panel, leaving the government in a quandary over how to go ahead with the merger of various tax collection groups.

Background discussions with relevant authorities and official record suggest that the creation of IRS to administer domestic taxes (income tax, sales tax and federal excise) was not part of the original tax reforms programme approved by the World Bank.

The situation has taken such a serious turn that the government has been asked to withdraw its request for extension in the programme till December 2011. The programme should have been closed by December 2009, but was extended for three months till March 31 this year.

As far as the World Bank is concerned, it has already stopped further payments for the project and threatened to ‘adjust’ the amounts already paid. The “project is fraught with problems of disbursements which is hampering its implementation”, said Federal Board of Revenue chairman Sohail Ahmed. He is also worried about the Inspection Panel’s plan to visit Pakistan by the end of February because it would invite ‘unwelcome media attention’.

The government faced another setback on Friday when the Federal Public Service Commission, currently in the process of fresh recruitments under the central superior service (CSS), declined to acknowledge the IRS as a legitimate service group of federal government employees.

“At present, there is no service group in the name of Inland Revenue Service”, FPSC chairman Justice (retd) Rana Bhagwandas told Dawn.

Asked if the commission had been consulted by the government before the creation of IRS, he said the matter was sub judice and hence he should not comment on it. He, however, advised this correspondent to ‘go through section 7 of the FPSC Ordinance and draw your own conclusion’.

The crux of section 7 is that creation of any service group should be made only on the advice of the FPSC and recruitment or promotion of government servants in pay scale 16 and above in any group should be made in consultation with the FPSC.

The government has not yet consulted the FPSC about the conversion of customs and excise group and income tax into IRS, officials said.

The World Bank mission led by Satu Kahkonen has also informed the government that the Inspection Panel would be visiting Pakistan in the fourth week of February to investigate the matter and hence it would not be possible for the bank management to defend the creation of IRS on legal grounds.

The World Bank has also informed the government about its decision to delete actions relating to ‘new integrated tax administration’ from the policy matrix because the Inspection Panel had taken ‘cognizance and registered for investigation’ the merger of customs and excise group and income tax group into IRS on complaints that the move violated the World Bank policies and the Constitution of Pakistan.

“This development has put the FBR/GoP in a needlessly embarrassing position especially since the FBR has kept World Bank completely informed of the process,” the FBR chairman said. He has now written to Finance Minister Shaukat Tarin to provide Rs1.4 billion during the current fiscal year and another Rs1.5 billion next year to complete related activities.

Interestingly, the project cost was originally estimated at Rs6.5 billion when the bank was part of the project with Rs5.5 billion loan.

According to FBR chairman, ‘integration of tax administration and creation of a new occupational group’ was one of the structural benchmarks adopted in the $11.3 billion standby arrangement with the International Monetary Fund.

On the advice of the IMF and World Bank, the establishment division took approval of Prime Minister Yousaf Raza Gilani and issued orders for creation of the group in September 2009.

“For the World Bank to initially press for the FBR to undergo these reforms and make them as benchmarks in GOP’s negotiations with IMF, and to now take adverse notice of successful implementation by FBR/Gop, is totally inappropriate and undesirable,” the FBR chairman said.

In a related move, chief commissioner of large taxpayers unit in Karachi Ms Yasmin Saud has declined to accept postings of 13 officers of customs and excise group under her command saying they had not opted to become part of the IRS and hence could not be expected to work willingly.

“Practically speaking, making such officers work in an integrated division against their options is not likely to give the required results as their transfer is perceived by them as a parking place”.

On January 19, the Inspection Panel of the World Bank had registered for investigation a complaint by Pakistan’s customs and excise group officers’ association and had put World Bank President Robert B. Zoellick and Pakistan’s representative on its executive board on notice till Feb 18 before formally starting the investigation.

As a result of one of the panel’s investigations, Paul Wolfowitz, the former deputy secretary of defence in the Bush administration, had to resign as the World Bank president in 2007. This is the second time a World Bank-funded programme in Pakistan has been taken up for the panel’s investigation since its inception two decades ago.

In the previous investigation into the $785 million National Drainage Programme, the bank was found to have violated its own policies and procedures, resulting in loss of lives and property. The management was forced to pay compensation for 318 deaths and tens of thousands of damaged houses in Thar, Thatta, Badin and Hyderabad because of drought, cyclones and floods.

India, Pakistan peace necessary for growth, stability: World Bank

Peace between India and Pakistan is not only necessary for sustaining economic growth but also vital for building pluralistic democracies and sustaining the integrity of both states, says a new World Bank report.

"South Asia today stands suspended between the hope of a better life and fear of cataclysmic destruction," says the report noting "it is not only the poorest region in the world but also one whose citizens live in constant danger of a nuclear holocaust".

"The arms race between India and Pakistan (two countries that account for 93 per cent of the total military expenditure in South Asia) is responsible for this cruel irony," says the report "Promoting Economic Cooperation in South Asia".

India, which is ranked at 142 in terms of per capita income, ranks first in the world in terms of arms imports. Pakistan is not far behind, being ranked 119 in terms of per capita income and 10th in the world in terms of arms imports, it notes.

"The deadly nuclear dimension that since 1998 has been added to the India-Pakistan arms race is seen by the respective governments to reinforce national security through a presumed 'deterrence'."

Apart from the danger of an accidental nuclear war, the current structure of the India-Pakistan tension is such that a terrorist attack can induce military mobilisation and repeatedly bring both countries to a point at which the nuclear button could be deliberately pressed by one, then the other side, the Bank report said.

"Peace and economic cooperation with Pakistan are necessary for India not only to secure its strategic economic interests but also to maintain its secular democratic polity," argues the report.

"A high-growth, open economy framework for India today is inseparable from a liberal democratic political structure," it says, noting "the existing social forces of Hindu nationalism, intolerant of minorities, will undermine India's secular democratic structure as much as its economic endeavour".

Continued tension between India and Pakistan will only fuel extremist religious forces in both countries, to the detriment of their economy and polity, the report said.

"Pakistan, by contrast, is faced with an economic crisis whereby it is unable to sustain high GDP growth due to an aid-dependent economic structure, inadequate export capability, and recurrent balance-of payments pressures."

The persistent high levels of poverty in Pakistan and continued tension with India fuel the forces of religious extremism, it said, noting: "Armed militant groups have now emerged as rival powers to that of the state within its territorial domain, thereby threatening the structure of the state as well as the fabric of society."

"Peace with India will mean a substantially improved environment for the much-needed foreign and domestic investment," the Bank said. "This could play an important role in accelerating and sustaining GDP growth and poverty reduction in Pakistan."

"It is clear that through peace, both India and Pakistan can reap economic benefits for their people and secure their respective democratic structures against the forces of religious extremism," the report said.

"The national security of both countries is threatened not by the neighbour across the border but by internal social forces of intolerance, violence, and poverty," it said.

"A new structure of peace would reduce the danger of cataclysmic destruction from nuclear war and also provide the two nations with economic and political stability."

"Thus, by providing increased security of life and livelihood to both countries, national security in their respective nations will be enhanced," the report concluded.

Govt agrees to take 20% stake in MRC: SBP governor

KARACHI: The federal government has agreed to take 20 percent stake in the proposed Mortgage Refinance Company (MRC), which is a joint initiative of the State Bank of Pakistan and the International Finance Corporation (IFC) of the World Bank Group.

SBP Governor Salim Raza said this while delivering a keynote address at a seminar on housing sector organised by the Association of Builders and Developers of Pakistan (ABAD) on Saturday.

Raza said that discussions are underway with the World Bank Group for seeking financial support in the form of equity as well as credit line for MRC. “We are also in the process of seeking equity commitments from commercial banks, being the primary mortgage lenders,” he said and added that MRC, apart from acting as a liquidity company for primary mortgage lenders, will also facilitate development of private debt market and open-up investment opportunities for long-term institutional investors, such as pension and provident funds, and insurance companies, which are looking for diversification of their investment portfolios.

The SBP governor said that the refinance facility will assist in improving liquidity of the financial system and enable banks and housing finance companies to prudently match maturity profile of their assets and liabilities. “It will also pave the way for primary mortgage lenders to diversify their product base by exploring fixed rate or hybrid models of mortgages,” he added.

He said the central bank has embarked upon a number of key initiatives to strengthen the market-based housing finance mechanism for the development of housing sector in the country. The SBP is fully cognizant of all issues and constraints surrounding the housing sector and it is taking a vanguard position for providing institutional arrangements and reforms for promotion of housing finance, he added.

Raza said that to address issues of non-availability of complete and reliable information on housing and housing finance to consumers, housing industry and other stakeholders for investments or financing decisions, the SBP and the WB have planned to collectively work towards the establishment of a housing observatory.

Similar institutions are acting as the hub of housing information in developed countries, he said and added that the Ministry of Finance has already issued a formal expression of interest to the WB in this regard.

“Considering the significance of market intelligence, we have stressed upon the commercial banks to enrich the housing finance sections of their websites to ensure that potential customers are well informed about their products and policies,” he said and added that the setting up of housing and housing finance information portal at industry level is also under consideration with features like relevant laws and regulations, market/business trends, housing demand and supply position and mortgage locator. “This will enhance the general awareness level to assist in making well informed decisions and can serve as an efficient and effective tool,” he added.

He said the SBP has provided ABAD and the financial institutions with a common platform to iron out issues that lead to lack of appropriate financing for the developers from the formal financial system. “This is aimed at developing a sustainable and acceptable financing model for large-scale developers,” he added.

Raza also talked about the capacity-building initiative of SBP, which was initiated under the cooperation agreement signed between the SBP and IFC with a view to develop human capital that will play a critical role in ensuring sustainability of housing finance.

He reiterated that the SBP would continue to give the housing and construction sector the desired impetus for it to attain its full potential. “We will continue to facilitate this sector and see the mortgage to gross domestic product ratio grow towards the desired and acceptable level, the SBP governor added.

Pakistan, like other developing countries, faces a critical shortage of housing units. According to conservative estimates, there is already a backlog of around 8 million housing units, which is growing approximately by about 300,000 units every year. This backlog, together with inadequate housing facilities, has been seriously affecting the quality of life of the general public, especially the urban working class in Pakistan, Raza added.

He observed that after the emergence of commercial banks in mortgage business, the housing finance portfolio grew considerably from Rs 37 billion in 2004 to Rs 84 billion at the end of 2008. The just concluded year of 2009 was not very promising, as housing finance portfolio experienced a dip of 11 percent and now stands at Rs 74 billion, the SBP governor said.

He pointed out that the housing and construction sector of Pakistan has huge potential to make significant contribution to the overall economic development. “Through its higher multiplier effect, with a host of beneficial forward and backward linkages with more than 40 allied industries, Pakistan’s housing and construction sector provides substantial employment opportunities, and can act as one of the key drivers of the economy, as has been the case in many developed and developing countries,” he added.