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Big Business: The Bulls and the Ballot

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KARACHI: Pakistan faces a host of economic challenges, including an acute shortage of energy, rising inflationary pressures and debt burden, and a balance of payments problem compounded by low GDP growth rate.

Business leaders have pinned their hopes on the future political administration for better economic management to pull the country out of the impending crisis.

“The economy is in a pretty precarious state right now. Take a look at the deficits, the devaluation of the rupee, the looming energy crisis, and the lack of investment. We believe the economy is very unsettled right now, and under tremendous pressure,” said Kamran Mirza, the chief executive of the Pakistan Business Council, a think-tank representing 42 of the country’s largest business groups and multinational corporations.

“Look at the factual figures. From 2004 to 2008, there was lots of foreign investment, IMF loans were paid off. There was at least a road map. That map has been lost somewhere.”

Mirza says the big business community now expects radical structural reforms to recover from the crisis. “We think the coming government will have to take some very difficult decisions to revive the economy.”

For every Rs 1000 of output (GDP) produced, the government only raises about Rs 95 in taxes, much less than the tax-to-GDP ratios of other regional economies. Experts, including donor organisations such as the International Monetary Fund (IMF), believe better revenue generation for the government is critical to progress.

“No modern state can progress without a rise in its government’s revenues. For the first time tax is being discussed in the public domain.

“If you take a look at the party manifestos, they have all discussed tax; some probably more clearly than others. Yes, there are differences, but I believe the ‘political system’ has recognized that taxation is an issue where radical change needs to be implemented. A lot of things need to be done to bring fiscal discipline, and taxation is one aspect of it.”

Not ‘business-as-usual’

Greater access to electronic media has raised awareness amongst the public, owing to which traditional leaders are now facing an unexpected situation, says the PBC head.

“People are telling us that many parties who thought it was ‘business as usual’…that they had a strong flag, their party had been there forever, or there was a personality cult,” said Mirza. “We’ve heard that such parties have recently received a shock, and it’s high time that they got this shock.”

“We believe that the electorate should bring a change in the political system so only those politicians become legislators who focus on these issues.”

Business leaders agree that the energy crisis and the law and order situation are the most critical issues that the coming government will have to address.

Haroon Agar, the president of the Karachi Chamber of Commerce and Industries (KCCI), estimates at least Rs 100billion is lost annually due to shutter-down strikes in Karachi, the country’s commercial capital.

“Three to four billion rupees is lost every day business is shut down in the city. It is industrial activity, and subsequently the daily wage worker, who suffer due to closures. During 2012, there were around 100 days of closures due to different accounts of shutter-down strikes and the law and order situation.”
“The reserves are at an all-time low. Exports have stagnated. And every government that comes takes out Statutory Regulatory Orders (SROs) that negatively impact the industry. Then there are these amnesty schemes which support tax evaders instead of penalising them.”

The KCCI president says his community will only support whichever party focuses on the economy and promotes the industries at the national level.

Pakistan Business Council chief executive Kamran Mirza. — Photo credit: PBC
Mirza, however, argues that there is also a need for stronger provincial governments rather than just an efficient federal government.

“Since the 18th amendment and devolution, there is greater responsibility on the provincial governments. The federal government can only finance them to a certain extent. In India, around 6.5 of the 16 to 17 per cent tax-to-GDP ratio is raised by their provinces. Provinces here will also have to realize that they cannot just depend on the federal government’s dole-outs.”

Mirza says the prevailing system can only be changed from the inside out. “You see, we are all part of the system. Civil society is also to blame for allowing this system to prevail by giving votes without asking any questions.”

“There is a strong desire on the part of the business community that the political system undergo a ‘shock therapy’ from the electorate, just to remind them that it is not business as usual.”

Need for consensus

At a recent conference in Karachi, economic experts expressed the need for political consensus on key economic issues, and the need for political parties to shun populist policies.

“Deep rooted reforms such as bringing incomes from agriculture and services sectors under the tax net, implementation of Reformed General Sales Tax (RGST), adjusting energy prices in line with the world price movements are likely to prove difficult unless major political parties reach a consensus on these issues,” said recommendations by experts at the Pakistan Economic Forum.

Mirza says this lack of consensus was most evident in the former coalition government during their efforts to implement RGST.

“When the previous government was trying to bring in RGST, I was asked to present to senators and MNAs at a meeting of the committee on finance. Can you believe that the government’s political allies criticized it as much as the opposition? How can you expect policies to be implemented when the government’s own allies oppose them?”

However, he believes that this ‘political scoring’ will decrease as no party can ignore these “harsh economic realities”.

“Most probably, there will be a coalition in the federal government, and other parties in the provincial governments,” he said.

“No one party will be governing Pakistan. Therefore, the entire political system will have to recognize the need to address these economic issues.”

The business community has no particular political preferences, he adds.

Recovery ‘no big feat’

Despite all odds, Pakistan’s stock markets have been rallying in the recent past, with the benchmark Karachi Stock Exchange 100-index hovering just under an all-time high of 19,000 points. Several analysts attribute this rise to interest by foreign investors.

Aftab Munshi, top executive at Al Habib Capital Markets, thinks there is still attraction for foreign investors and overseas Pakistanis in the country’s equity markets. “If you see, our average 10-year returns are still more attractive compared to other markets.”

If the security situation can be controlled, then this can be translated into even bigger gains, he says. Munshi hopes financial austerity from the coming government will improve the situation.

The PBC chief also agrees. “There is intrinsic strength in the economy. Given the right policies, the economy will bear lots of low hanging fruit in the years to come.”

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