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Pakistan Business Council Calls for National Consensus on the Economy

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Pakistan has achieved relative macroeconomic stability. GDP growth in fiscal 2015/16 was the highest in eight years, borrowing costs the lowest in 42 years and inflation, the lowest in ten. Foreign exchange reserves have risen and Standard & Poor’s has rerated Pakistan from “B minus“ to “B”. Given these positives, there is a risk of complacency setting into economic management. Also with general elections a little over a year away, there would be temptation for populist measures. The current economic stability can easily dissipate. Now is the time to roll out an inclusive and sustainable growth strategy. Economic growth of 3%‐5% for nearly a decade exposes Pakistan to a serious challenge of its “demographic dividend” converting into a “demographic time‐bomb.” Governance and policy reforms in all sectors of the economy are imperative if the country is looking to prevent a “systemic collapse”.

Pakistan does not fare well in any of the major global rankings; in some it is worse than its neighbors who are mostly at the bottom of charts:

 

Total Countries

Bangladesh

Bhutan

India

Nepal

Pakistan

Sri Lanka

Indices Ranking

 

Ease of Doing Business

190

176

71

130

100

144

110

Human Capital Index

130

104

91

105

108

118

50

Global Competitiveness Index

138

106

97

39

80

122

71

Global Innovation Index

128

117

96

66

115

119

91

Economic Freedom Index

166

137

97

123

151

126

93

Global Youth Development Index

183

146

69

133

77

154

31

Whilst Pakistan’s GDP growth at 4.7% is better than the recent past, it does not compare well to India’s 7.57% and Bangladesh’s 6.55%. There are also some ominous clouds on the economic horizon. The trade gap is growing despite the low oil import bill, exports now represent less than 50% of imports, remittances are vulnerable and external borrowing has mushroomed. It is imperative that for any reform agenda to succeed, it needs to have cross party and other stakeholder consensus and support both within and outside parliament.

This short paper prepared by the Pakistan Business Council (PBC) identifies the four broad themes that impact the economy and businesses in Pakistan, and which, if not corrected, will have serious, negative, long‐term consequences. The irony is that the four impact the formal, compliant tax‐paying sector much more significantly than the informal sector. The four themes – and there maybe others, which the PBC seeks to address through a national consensus on the economy are:

  • Fragmentation of authority;
  • A negative perception of “Profit” and a general mistrust of business;
  • Neglect of domestic industry
  • FBR’s capacity and discretionary powers

Fragmentation of Authority

Fragmentation of authority creates complexity for business. Not only are federal ministries working in silos, there is often conflict between the federation and the provinces. A simpler, technology‐driven, one‐window operation would considerably ease doing business and bring down the cost. A unified taxation return and collection system would save time, effort and money. Mr. Bashir Ali Mohammed, PBC’s immediate past Chairman is leading a task force on Ease of Doing Business, however here again as most authority for implementation now lies in the provinces, the desired levels of improvement are still to be achieved. Specifically on exports, PBC had earlier this year issued a Policy Brief critiquing the Strategic Trade Policy Framework. PBC advocates an integrated trade strategy, with inter‐ministerial buy‐in, to be driven by a high level body, overseen by the PM. This could balance the needs for raising revenue, creating employment in the domestic industry and boosting more value‐added exports. Bangladesh and Vietnam are good models to be replicated.

A Negative Perception of “Profit” and a General Mistrust of Business

There is an unfortunate and widely held view by bureaucrats, politicians and parts of the media that “profit” is not good, “large profit” is bad and “capital accumulation” is worse. This has led to further concentration of the tax burden on a few shoulders, continuation of super tax, tax on undistributed profit and bonus shares, restriction of group relief and tax on inter‐corporate dividends. Some of the good work that a PBC inspired Task Force had done in 2007, which gave Pakistan the lead amongst emerging markets on group taxation was undone in the FA 2016, all for a mere Rs. 2 Bn of additional revenue. Inter‐corporate dividends have become taxable and group relief has been restricted. This will discourage consolidation and hence scale – crucial if Pakistani businesses are going to become regional and global players, the current bias against business is making domestic industry uncompetitive within Pakistan itself. The Companies Ordinance is another manifestation of the growing mistrust of the formal corporate sector of business. Instead of strengthening existing institutions, rules and processes on control and disclosure of foreign shareholdings, Pakistani and Foreign directors and local and foreign substantial shareholders have been swept with a wide broom by requiring them all to file returns of foreign holdings. MNCs will have to file interests in hundreds of entities across the world, which they will need to keep updating due to the dynamic nature of such investments. This does not augur well for ease of doing business. SECP and the Companies Ordinance should not be used to further encumber the corporate, formal sector. Efforts should instead be focused on those outside it. If the formal sector does not protest at the growing mistrust, intrusion and burden on it, it is not inconceivable that one day the traffic police may be empowered to verify car owner’s wealth!

Neglect of Domestic Industry

Domestic industry is being undermined by an open door policy on imports under Free Trade Agreements (FTA). PBC research shows that no FTA to date has helped Pakistan manage its trade deficit and nowhere is the impact of FTAs on employment and revenue generation captured. The largest FTA with China has seen the trade deficit rise from $3 Bn in 2006 to $14 Bn in 2015. More FTAs are mooted with Turkey and Thailand. PBC has clearly advised against both. At a time when the largest global economies are becoming protective of domestic employment, it is time that Pakistan wakes up and looks after its people.

FBR’s Capacity and Discretionary Powers

FBR is under‐resourced in both talent and technology and its discretionary powers are often misused to harass tax payers through multiple audits and demands for advance tax payment. This is one reason why many prefer to stay out of the tax base which they, for good reason, call the “tax net.” Through withholding taxes, the task of collecting taxes has been transferred to the private sector, without compensation. Going forward, a key component of FBR’s KPI must include tax collected from new tax payers rather than existing payers. Its discretionary powers need to be pruned and the responsibility of tax audits be transferred to independent firms.

A Call for a National Consensus on the Economy

Now is the time to build a national consensus on the economy so that fundamental reforms can be undertaken and a policy framework developed which can be deployed consistently, no matter who is in power. PBC will engage with political parties and other stakeholders to develop it, like it had done prior to the previous general elections. If you would like to contribute to this consensus building effort, kindly send in your suggestions to nce@pbc.org.pk

ABOUT PAKISTAN BUSINESS COUNCIL (PBC)

PBC is a business policy advocacy platform, established in 2005 by Pakistan’s leading private‐sector businesses, including multinationals. Its objectives are to provide for the formation and exchange of views on the conduct of business in and from Pakistan, to promote and facilitate the integration of businesses in Pakistan into the world economy, to interact with governments in the economic development of Pakistan and to facilitate, foster and further the economic, social and human resource development of Pakistan. Its members, all from the private sector, are engaged in thirteen important sectors of manufacturing and services. They include 22 MNCs from 12 countries. Together, PBC members account of 10% of Pakistan’s GDP and nearly every fifth Rupee of annual tax and export revenues. Collectively, they directly employ 315,000 people, with millions more in the extended value chain. More information is available on www.pbc.org.pk

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