Creating environment for economic revival

The Federation of Pakistan Chambers of Commerce and Industries (FPCCI) seminar titled Economic Revival of Pakistan urged the government to take appropriate measures to create an environment conducive to putting the economy on the right track. The FPCCI chairman emphasised that the achievement of a 7 percent growth rate is critical to ensuring the economy’s revival as well as to ensure that the trickle-down theory, or dissemination of wealth to the grassroots, can become effective.

Of particular concern to the speakers at the forum was the rising dependence on general sales tax (GST) as a revenue source that accounts for its steady rise in contributions to annual resource generation. In the budget for the current year the government envisages around 1.1 trillion rupees from GST – an amount that compares with income tax collections of 1.1 trillion rupees. However, taxes on income also include withholding taxes, which are collected by withholding agents rather than the Federal Board of Revenue. In this context, it is relevant to note that several withholding agents have expressed their inability to distinguish between filers and non-filers, including travel agents/airlines; or in other words, the incentives extended to filers through a lower GST rate compared to non-filers, a good distinction, cannot be implemented in all cases. In contrast the FBR has the required wherewithal to distinguish between filers and non-filers and one would have hoped that such a distinction in tax rates had been made on taxes collected by the Authority.

GST is as high as 27 percent on fuel imports (a necessity given that the government has lost considerable budgeted revenue with a steady decline in the international price of oil) and around 17 percent for all other taxed products. In addition, while sales tax is passed on to consumers in its entirety, yet the fact remains that as it is to be levied at each input/output stage it not only requires payment of the tax in advance of the sale of the product leading to liquidity issues but also at least one qualified accountant to assess it – a salary expenditure that micro units, many small and even some medium-sized firms cannot afford. And finally, serious concerns of our exporters, routinely voiced, are over inordinate delays in the tax refunds that also create liquidity issues, which are further exacerbated because government borrowing from the commercial banking sector is crowding out private sector. There is therefore a need for the government to revisit the country’s tax structure and focus on broadening the tax base by not only including those who constitutionally remain outside the tax net (the rich landlords) but also bringing wholesalers and retailers into the net. It is unfortunate that influential people have sustained their clout in the country’s assemblies resulting in a tax system that continues to be unfair, inequitable and anomalous.

The government has also been able to achieve less than 4.5 percent growth since it came to power and its focus has been on reducing the budget deficit (a component of the International Monetary Fund condition) as opposed to fuelling growth. Thus resources have not been channelled into public-sector programmes with heavy reliance on foreign direct investment (which has been on the decline given the law and order problems, the continuing energy crisis as well as the failure of the government to convince foreign investors that the government has a pro-business policy). In this context it is relevant to note that Ishaq Dar in the first letter of intent submitted to the IMF did have a section on business climate where he committed to (i) enforcing contracts through finalising a new draft bankruptcy law, however, major disputes remain including with Karkey, the Turkish rental power company, as well as Reko Diq; (ii) one-stop shop with respect to start-ups including simplification of procedures, which as noted above are still awaited especially with respect to GST; and (iii) access to credit, which remains a challenge given the recent rise in government borrowing from the commercial banking sector.

The government, however, is engaged with the Chinese government and companies to fund projects in Pakistan though there are concerns that violations of Public Procurement Rules have become the norm. In addition, the Chinese companies have recently expressed unwillingness to partner with our private sector and in cases where it is agreed to do so require sovereign guarantees.

Other measures proposed during the seminar include allocation of 2 percent on science and technology, uninterrupted supply of electricity, petrol and gas, amending rules for implementing a Greenfield investment plan, higher education and adhering to the Fiscal Responsibility and Debt Limitation Act as well as constitutional and administrative reforms. In all fairness, one would assume that the Finance Ministry is fully cognisant of these proposals, however, its strategy is essentially aimed at containing the fiscal deficit (rather than to fuel growth to 7 percent), disinclination to take politically challenging tax reforms and last but not least its heavy reliance on external borrowing (including issuance of 3 billion dollar worth of Eurobonds and sukuk) to retire domestic debt procured at higher rates without taking account of the rupee depreciation each year, which would make this policy more expensive in years to come.

FPCCI – being the apex body of trade and industry needs to invite all the major political parties to a round table in order to sign a charter of economy, which would provide a roadmap of continuity in governmental policies; irrespective of the political party in power. This would provide certainty to the investors/manufacturers and ensure growth and employment. Change of policies with a change in political party in power has hurt the economy. This needs to change since continuity of policies is the best insurance we could provide to investors. Without new investment there is hardly a chance to achieve sustainable high growth. Pakistan now needs to catch up as it has already fallen far behind.