Let us compile a list of common ‘irritants’ and ‘disincentives’ in our economy. Costly raw material and stuck sales tax refund are the major irritants for exporters. Reporting fatigue is irritating withholding agents. Taxation anomalies are irritating investors, brokers in the stock exchange, and importers. FBR harassment is irritating small shopkeepers. Increase in the smuggling of daily use items after the imposition of regulatory duty is irritating the revenue authorities. Customs duty on the import of newsprint paper is irritating the newspaper industry.
In the corporate sector, there is not much tax incentive for capital formation. Investment in greenfield industries and in machinery and equipment for renewable energy is not very competitive compared to our neighbouring countries. And tax filers are upset that they have to pay advance tax on cash withdrawals and sale of banking instruments.
The list of such irritants goes on and their solution seems not only very complicated but with a big price tag in terms of revenue loss. However, it turned out that all it required to remove most of those irritants and boost positive sentiments in Pakistan’s economic market was political will to improve ease and cost of doing business along with some corrective measures amounting to a revenue loss of less than Rs7 billion.
The third finance bill for the fiscal year, presented by Finance Minister Asad Umar, needs to be adopted by the National Assembly. Many of the measures proposed in the bill would be applicable from July 1, 2019 (next fiscal year) but the hope that doing business in Pakistan would be less costly and much easier has already changed the market sentiment.
My three best picks from the mini budget are: payment of sales tax refunds through promissory notes; reduction of the frequency of withholding statements from 12 to 2; and incentives for industrial undertakings set up for manufacturing of equipment used in the generation of renewable energy (solar plants and wind turbines etc).
The first would resolve a long outstanding complaint by exporters about their refunds. The second would save withholding tax agents from being blackmailed by FBR officials and the third would promote the manufacturing of solar panels and other equipment in Pakistan, certainly good news for consumers who cannot afford to buy imported solar solutions.
To meet the fiscal deficit, the formula of 50 percent reduction in the Gas Infrastructure Development Cess (GIDC) – provided the companies settle their past liabilities – seems quite viable. Currently, the industry owes around Rs400 billion to government in GIDC. Many of them are in litigation with the government and the issue is pending for the last many years. One hopes that the federal government can rope in Rs150-80 billion through this formula. A reduced GIDC would also bring down the cost of urea fertiliser by Rs200 per bag.
If the GIDC formula succeeds, then the government should review the decision to impose taxes on mobile phones that cost less than $1000. Not only that, the telecom expansion in Pakistan depends on widespread usage of smartphones; they are also a prerequisite for the fourth industrial revolution as well as for a successful implementation of e-governance. Taxes on low- to medium-priced phones would be a disincentive for smartphone buyers.
Allowing the purchase of locally manufactured motor vehicles above 1300 cc for non-filers is a positive move. In my opinion, restrictions on non-filers to purchase property and vehicles are counter-productive, as it stops circulation of wealth in the economy – which in turn negatively impacts job creation. Rather than restricting non-filers to spend their money, we should enable our systems to detect through the CNIC system whenever they register a vehicle or transfer a property. A tax demand on such consumers may be generated at the time of registration/transfer and they may be brought into the tax net.
The jigsaw puzzle pieces of the government’s economic strategy seem to be falling in place. After formalising a $3 billion agreement with the Abu Dhabi Development Fund ($1 billion out of which has already been received) at a 3.18 percent mark-up, the government has managed the current fiscal year’s balance of payments without going to the IMF.
The major bottlenecks in ease and cost of doing business are partly addressed through this finance bill. A few more pieces of positive news on improving the cost of doing business are yet to come in the forthcoming medium-term economic development framework. The Board of Investment is aiming to climb up at least 20-25 notches on the ease of doing business through a comprehensive reform package. One is not expecting overnight results, but in the medium term these reforms will mobilise domestic investment and revive local businesses, which should have a positive impact
To curtail fiscal deficit, the government would have to take some more unpopular measures to curb unnecessary imports; to keep the exchange rate realistic; to reduce energy circular debt; to broaden the tax net, and to overhaul loss-making public-sector enterprises. Within or without an IMF programme, these measures are a must to break the vicious debt cycle that entraps every government in Pakistan.
In the long run, the success of the government’s economic strategy depends on attracting foreign direct investment. Both the Chinese government and the private sector are willing to invest in special economic zones. CPEC has started paying off dividends and, recognising the importance of the Gwadar Port, major Gulf States are willing to invest there. For the first time, the government of Pakistan is trying to engage the Gulf rulers through an institutional mechanism (Board of Investment, Ministry of Commerce, Ministry of Finance and Ministry of Petroleum) rather than merely personal contacts and this strategy seems to be paying off.
After Saudi Arabia’s interest in a $10 billion petrochemical complex in Gwadar, the CEOs of more than two dozen Saudi companies will be accompanying Prince Mohammad Bin Salman’s delegation to explore investment opportunities in Pakistan. Qatar and the UAE have also shown willingness to invest in Gwadar. If things go as planned, then one would see the economy turning around by year 2022-23.
However, the billion-dollar question is whether the common people can wait till 2022-23 to get relief in their daily life. The government’s strategy on social and human development is still not visible (or has not been communicated yet). The federal government can only give framework guidelines, as these strategies must come from (and be implemented by) the provincial governments. However, the provinces seem to be lacking both in capacities as well as in teamwork.
The economic strategy is working as the PM’s economic ministers are working as a team. This is still not the case at the provincial level. PM Khan will have to ensure that the provincial ministers responsible for social sector service delivery come up with short-term, medium-term, and long-term plans and deliver on them as a team. Otherwise, the risk of losing the gains of economic growth on the social front will keep looming.