Economic Freedom Promotes Upward Income Mobility

01/09/2021by PRIME Institute PRIME Institute No Comments

Economic Freedom Promotes Upward Income Mobility

New study shows increased economic freedom leads to greater income mobility for workers and entrepreneurs

Islamabad, Pakistan—Economic freedom enhances income mobility while the poor in unfree nations have fewer opportunities to escape poverty and build prosperity, finds a new study released today by Policy Research Institute of Market Economy (PRIME) in conjunction with Canada’s Fraser Institute, an independent, non-partisan public policy think-tank.

“The main purpose of economic development should be to provide opportunities for upward social mobility of a vast majority of citizens. This can be achieved through inclusive economic policies and re-allocation of resources from rent seeking to efficiency seeking activities” said Ali Salman, Executive Director PRIME.

Many factors contribute to economic freedom but the most important for income mobility are rule of law and restrictive regulations. In uneconomically free nations, domineering government and crony elites use the rule of law, not to protect the freedom of all but entrench the privilege of their cliques while undermining the rights of everyone else.

Similarly, regulations are too often used to exclude people from work and opportunity, even in nations with a relatively robust rule of law. Government regulation may require workers to purchase occupational licenses or train to acquire credentials before they can work.

Pakistan ranked 139 in rule of law, ranked 140 in economic freedom and 123 in regulations; the country stood at 137 in terms of labor market regulations and 109 in business regulations.

“Government regulations impede the ability of workers to make themselves better off by slowing the upward mobility of workers,” said Vincent Geloso, an assistant professor of economics at George Mason University, senior fellow at the Fraser Institute and co-author of Economic Freedom Promotes Upward Income Mobility

The study shows that labor regulations across industries slow wage growth for low-income workers. And, particularly, inappropriate minimum wages and occupational licencing tends to hurt income growth among the poor more than among higher-income workers.

The same effect is also observed for would-be entrepreneurs who face barriers to entering certain industries because of regulatory costs and fees.

“If governments are genuine in their desire to help low-income workers climb the income ladder during the COVID recovery and beyond, they should take a second look at regulations and look for ways to increase economic freedom in their respective jurisdictions,” Geloso said.

The Fraser Institute produces the annual Economic Freedom of the World report in cooperation with the Economic Freedom Network, a group of independent research and educational institutes in nearly 100 countries and territories, including PRIME Institute in Pakistan. It’s the world’s premier measurement of economic freedom.

Click below to read full report:

Economic-Freedom-Promotes-Upward-Income-Mobility.pdf

MEDIA CONTACT:
Afzal Khan: afzal@primeinstitute.org or call at 03330588885

CCP ruling on sugar industry: the second opinion

30/08/2021by PRIME Institute PRIME Institute No Comments

CCP ruling on sugar industry: the second opinion

Ali Salman

ECC’s role in granting permissions for import, export of sugar should be discontinued

**The ECC allowed K-P government to borrow Rs43 billion after the province busted its budget limit. PHOTO: PID**

ISLAMABAD: Adam Smith noted centuries ago, “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”

He was probably right here and may have rightly predicted the tendency of business associations towards collusive practices.

This is the main message of the ruling of the Competition Commission of Pakistan (CCP) in the case of Pakistan Sugar Mills Association (PSMA) and its members, finding them guilty of collusive practices and imposing the biggest-ever fine of Rs44 billion.

The CCP has found that the PSMA has deliberately facilitated the formation of a cartel on behalf of its members, which has resulted in welfare loss.

The CCP has also found that real-time stock tallying by the firms was carried out to manipulate the availability of sugar in the market, influence export decision and thus influence pricing.

The CCP has classified the stock sharing as “commercially sensitive information” and has almost entirely relied on this assertion for reaching the conclusion.

A rare event in this case is that the commission, comprising four members, was split into half and the chairperson cast her second vote to endorse the decision. While this legal point will be challenged, we need to understand the economics of it.

The authors of the “second opinion” have differed with the judgement on Issue I (sharing of sensitive commercial stock information), Issue II (collective decision to export), Issue III (effect of collective decision of export on price), Issue IV (zonal divisions in Punjab to coordinate sales) and Issue V (collective bargaining practice in USC tenders).

It will be instructive to read the “second opinion” – as published on pages 135-173 of the 186-page decision that the CCP has issued. These pages contain a deep analysis of the sugar market dynamics in Pakistan as well as some legal arguments leading to dissent.

The dissenting members of the commission found that the allegation of market manipulation against PSMA needed further analysis.

Concurring with this, the sugar industry being a heavily regulated sector is a peculiar case where rent-seeking on the one hand by the firms and excessive intervention by the government on the other hand have resulted in the “worst of both worlds”.

Consumers get expensive sugar whereas farmers and industrial units remain inefficient. The net winner may be the government which reaps more revenue in the form of taxes than the profit earned by the firms.

Here is my theory. The CCP is unanimous that no single firm is in a dominant position to influence the market, however, collectively they do.

What is the one factor which brings these competing firms to become one voice? It is the collective formed by the Sugar Advisory Board, cane commissioners and the Economic Coordination Committee (ECC).

By actively deciding the input price, time of harvest, time of crushing and controlling import and export, these collectivist institutions create a uniform condition for market players, kill competition and encourage them to form a cartel.

In the instant case, by constantly asking the PSMA and sugar mills to provide their stock data, the government has effectively made price levels insensitive to the stock position. As noted in the second opinion, the supply and demand forces are no more at work.

Which laws can be used to indict the government for encouraging the collusive behaviour?

Unfortunately, the Competition Act 2010 bars the CCP from indicting the government itself if it is found guilty. That is why we see that the CCP seems to be overly concerned with price control, which is not its mandate.

It has recommended the government to make efforts to collect information about stocks independently. Instead, it should have recommended the government to exit this sector.

The moment the government exits, the sugar firms will lose the platform where they can directly negotiate commercial decisions with the government. They will continue, perhaps, their own “merriment and diversion”. Let them be.

The government should allow free market forces to play their role. If domestic players collectively decide to raise the price, a competitive trader, while pursuing self-interest, will import sugar, thus keeping prices in check.

If prices go up in the international market, local producers will be free to sell in the external market. The increased price of sugar will finally dictate the consumer behaviour. But we have killed this cycle of free competition in the name of welfare.

This goes beyond the CCP but the role of ECC in granting permissions for import or export of sugar should be discontinued.

All archaic laws (the Sugarcane Act 1934, Sugar Product Control Order 1948, Sugar Factories Control Act 1950 and Control on Industries Establishment & Enlargement Ordinance 1963) along with concomitant institutions need to be phased out and abolished.

The CCP decision may be received positively by the public and the government, as it confirms the “mafia” image of sugar industry.

But it falls short of understanding a centrally controlled market, where supply and demand are irrelevant. Without understanding the market, the law itself cannot prevail.

The writer is the founder and executive director of PRIME, an independent think tank based in Islamabad

Published in The Express Tribune, August 30^th, 2021.

Moving to new industrial policy

30/08/2021by PRIME Institute PRIME Institute No Comments

Moving to new industrial policy

Ali Salman

Policy should be based on open trade, export orientation, value addition and innovation

ISLAMABAD: The debate on premature de-industrialisation in developing economies hinges on the premise that open trade, elimination of protective tariffs and withdrawal of subsidies are harmful for local industries.

In the case of auto policy, the proponents of this debate devised import substitution policies, which led to the deletion programme. Thus, while it helped local auto parts industry to develop, it gave rise to a protected auto industry, which has continued to flourish on the back of tariffs and other incentives. The government and automobile industries are the main beneficiaries as this has led to a stable flow of income for both at the cost of consumers, who have been forced to pay more for less.

Furthermore, the rising demand for cars on the back of income and improved infrastructure has created opportunities for the market to arbitrage the lag in production, resulting in the unique phenomenon of “on money”. This policy has not only caused harm to the consumers, but it has also proven to be a bad industrial policy. Pakistan has not been able to produce a single car which is competitive regionally or internationally.

As Pakistan has not achieved economies of scale, there is hardly any incentive in innovation and product development. The benchmark of economies of scale for the auto sector is 500,000 units (cars, vans and jeeps) in a year, whereas the government target was to achieve production of 350,000 units. The country’s production has barely crossed 100,000 units. Thus, the high tariffs have led to expensive assembled vehicles, suppressing demand and hence production.

This has resulted in an oligopolistic structure where some players have benefitted hand in hand with the government, which has benefitted from the high level of excise duties, which in turn has made cars more expensive. This is the double jeopardy that the country’s old industrial policy has visited upon us. As the government is revisiting the industrial policy, and in particular the automobile policy, there is an opportunity to evolve a new industrial policy.

“The past and contemporary policies have been focused on merely establishing assembly units, instead of developing manufacturing capacity, which is the real driver of growth in an economy; consequently, the inflow of FDI has been limited compared to profits earned and repatriated out of the country,” observed recently the independent Economic Advisory Group.

The timing is critical. Pakistan is stuck at a low level of exports and there is no way to jump on this ladder while relying on the existing product mix, which has been maintained for the last 20 odd years. Pakistan’s commodity basket including textile, rice, leather, etc is highly unlikely to help achieve the ambitious export targets. While the country may see a gradual rise in total exports, thanks to IT services, the manufactured exports will not be contributing to this rise. Thus, we may be seeing de-industrialisation even more rapidly.

Government measures are only contributing to the de-industrialisation. In the context of the upcoming auto policy, the decrease in tariffs on completely knocked down (CKD) kits, as envisaged in the Finance Bill 2021, which will be imported into the country and then assembled, in reality, discourages the domestic auto parts makers because imported items are being subsidised against domestic production. This implies that relative profits will be higher in the assembly business as compared to the auto parts manufacturing business, which will gradually reduce the linkage between the auto assemblers and the domestic auto parts makers.

In the context of expected foreign direct investment (FDI) in the telecom sector, if mobile phones are assembled without value addition arising from some intrinsic latent advantage but only as a result of some fiscal incentive, then the industry will remain dependent on protection from the government and manufacturing will not become a profitable avenue for companies. Such investment will be market-seeking instead of efficiency-seeking.

The new mobile phone manufacturing policy is also regressive as tariffs are more than 70% on lower-end mobiles and hover around 40% on higher-end phones. The policy also fails to incentivise the inflow of new technology and latest devices to the country as consumers will be paying higher prices for old-generation phones just to enable companies to set up assembly units in the country.

What needs to be done?

As envisioned in the Vision for Economic Transformation, Pakistan needs to alter the existing incentive structure dramatically.

As a corollary, we propose a new industrial policy. The main parameters of the new industrial policy should be open trade, universal reduction of tariffs instead of selective reduction, integration with the global value chains, export orientation, value addition, product development and innovation. The government should play an active role through the new industrial policy.

It should use its democratic power to counter the influence of powerful lobbies and ill-informed bureaucrats. An incremental approach will not work and will only provide more time for protective lobbies as well as arbitragedriven investors to maximise profits at the cost of the country’s manufacturing capability and consumer choice, which is the ultimate arbiter of market.

THE WRITER IS THE FOUNDER AND EXECUTIVE DIRECTOR OF PRIME, AN INDEPENDENT ECONOMIC POLICY THINK TANK IN ISLAMABAD

Published in The Express Tribune, August 09^th, 2021.

Financing private sector growth

30/08/2021by PRIME Institute PRIME Institute No Comments

Financing private sector growth

Ali Salman / Beenish Javed

Increasing private sector credit is imperative to improve business confidence

ISLAMABAD: Over the last two decades, Pakistani banks have experienced structural reforms and a phenomenal growth.

Their profitability has multiplied several times and they have played an important role in job creation as well. But it remains debatable whether the privatisation of banks has contributed meaningfully to financing the private-sector growth.

In this backdrop and in light of a new study by PRIME, this article assesses the trend of banking credit for the government and private sector in the post-reform period.

In the 1990s, banking reforms were introduced to reduce government’s footprint in the industry, increase private sector credit, minimise the ratio of non-performing loans, and improve banks’ efficiency and profitability.

Despite improvements in technical efficiency and profitability, the banking sector post-privatisation has not delivered necessary dividends for the private sector, as also noted by former chief economist Pervez Tahir.

It has been inefficient in performing its core function of channeling depositors’ savings into loans for private businesses. Instead, these funds are being increasingly geared towards government debt instruments to earn easy and secure profits.

Consequently, a large proportion of private businesses, particularly the small and medium enterprises (SMEs), remains financially excluded and faces difficulty in accessing finance.

Pakistan continues to lag behind regional economies with respect to penetration of bank credit and private investment.

According to the study, the ratio of private sector credit-to-gross domestic product (GDP) declined from 27.7% in 1985 to 18% in 2019, indicating a low bank credit penetration into the economy post-reform. This ratio remains significantly higher in Bangladesh (45%) and India (50%).

Furthermore, private sector’s participation in fixed investment remains lacklustre at 11% while the same stands at 23% in Bangladesh and 21% in India.

Several demand- and supply-side factors have contributed to the post-reform decline in private sector credit.

Starting with the supply-side factors, the first and foremost has been the rising government footprint in credit market in the form of increased borrowing from commercial banks, supported by the rise in interest rates.

In 2011, the suspension of Standby Agreement with the International Monetary Fund (IMF) forced the government to increasingly rely on local banks to meet its budgetary requirements, resulting in crowding out of the private sector.

Between 2015 and 2018, the focus of government borrowing shifted from scheduled banks to the State Bank of Pakistan (SBP), resulting in a decelerated pace of scheduled banks’ investment in government securities.

Over the last two years, banks’ investment in government securities has surged again on account of IMF condition restricting government borrowing from the SBP.

The large federal footprint in the credit market has thus suppressed private credit offtake by reducing the funds available for private credit. Moreover, the lucrative mark-up on government securities has provided an impetus to the banks to increasingly invest in them.

As of December 2020, credit to the government stood at Rs15.2 trillion as against private sector credit of Rs6.5 trillion.

Second, the decline in private sector credit can partially be attributed to the shrinking footprint of development finance institutions (DFIs).

Post-reform, these institutions gradually faded due to the broad restructuring of the financial sector, leaving a void in terms of institutions that could provide long-term financing for the development of key industries.

Third, loans and advances given to the private sector generally entail the risk of default. This risk, however, is more pronounced in case of Pakistan due to non-existence of bankruptcy laws and imperfect information.

Given that there is an alternative of risk-free investment available and credit demand from the government continues to increase on the back of rising budgetary requirements, the post-reform banking sector has little incentive to extend credit to the risky private sector, especially the SMEs that are often subject to credit rationing.

Fourth, the red tape or cumbersome procedures to access finance through formal channels have repercussions for the private sector credit.

Post-reform banks have devised procedures and systems keeping in mind the blue-chip corporations. The higher collateral requirements and legal costs in case of default increase the compliance cost and put SMEs at a significant disadvantage.

Fifth, the restructuring of financial sector has been detrimental from the inclusion standpoint as banks’ disbursements are heavily skewed towards blue-chip corporations, while SMEs remain financially deprived.

The share of large-sized borrowers in total loans of the banking sector stands at 87% in Pakistan relative to 72.5% in Bangladesh while such borrowers account for only 1.6% of the total borrowers in Pakistan.

There are demand-side constraints to private sector credit as well including poor financial awareness and attitude towards formal finance as well as sluggish demand for long-term investment.

Moreover, the high mark-up on long-term loans has undermined the financial incentives and failed to stimulate demand for long-term investment. Therefore, most borrowing by the private sector centres around working capital, which is cheaper to avail.

During these unprecedented times, increasing private sector credit and ensuring financial inclusion is imperative to improve the business confidence and propel private sector activity.

This needs all parties – banks, private sector and the government – to alter their course and take a different direction. The government must roll back and the banks must make an advance.

The writers are affiliated with the PRIME Institute, an independent economic policy think tank based in Islamabad

Published in The Express Tribune, July 19^th, 2021.

A Case Study of Auto Industry in Pakistan (Draft Note for Discussion)

30/08/2021by PRIME Institute PRIME Institute No Comments

A Case Study of Auto Industry in Pakistan (Draft Note for Discussion)

Vision for Economic Transformation

This is a Draft Note for Discussion authored by PRIME’s Research Economist Mr. Tuaha Adil. The policy note comprises valuable inputs from the members of the Economic Advisory Group.

The transformation of an economy is contingent upon the utilization of resources in the most productive manner. Sectors of the economy will operate at maximum potential when business conducive ambiance is created through favorable and ease promoting government policies. The economic transformation policy based on the identification and resolution of contemporary structural and sectoral inefficiencies and futile economic policies is inevitable for the prosperity of the country. The performance of the auto sector is analyzed as a case study to evaluate the efficiency of government industrial policies. The government’s policies and initiatives to expand the auto industry are based on the assumption of latent comparative advantage. Therefore, domestic auto companies are protected from international competition through tariffs and tax cuts. However, the outcome of policies and performance of the sector have been unsatisfactory due to confinement to assembly of vehicles and nonexistent localization of products. The policies adopted by countries having developed automobile industries have also been discussed to evaluate shortcomings of the policies adopted in Pakistan.

Click below to read the full report;

Auto-Policy-Note-10.8.21.pdf

PRIME Institute hosts an event on the report “State Owned Electricity Distribution Companies: A performance Review”

20/08/2021by PRIME Institute PRIME Institute No Comments

PRIME Institute hosts an event on the report
“State Owned Electricity Distribution Companies: A performance Review”

PRIME Institute has arranged an event in Islamabad Hotel on the release of its report ‘State Owned Electricity Distribution Companies: A performance Review’ which was lead by its Executive Director, Ali Salman and the research team: Tuaha Adil and Sarah Javaid

The incompetency of state owned electricity DISCOs have accumulated to a whacking loss of Rs 1.35 trillion further contributing to circular debt over 5 years. (2016-2020)
Research Economist Tuaha Adil, at PRIME; Policy Research Institute at Market Economy, finds out how the incompetence of state driven distribution companies have lead to 680 fatalities in DISCOs territory over 5 years, under-utilization of generation capacity following power outages, growing trade deficits, 1.2 million pending connection applications due to inefficient regulation by NEPRA, Rs 195 billion of accrued losses bred by poor T&D performance, and continuous Government’s bail outs.

Click below to Read Full report:

STATE OWNED ELECTRICITY DISTRIBUTION COMPANIES: A PERFORMANCE REVIEW

PRIME Budget Review FY 2022

12/08/2021by PRIME Institute PRIME Institute No Comments

PRIME Institute, Islamabad based independent think tank has released its commentary on the federal budget 2021-22. According to the report authored by PRIME research economist Beenish Javed, the budget is both pro-growth and inflation prone. The key messages of the report are:

• The federal budget strategy for FY22 is pro-growth and spending-led.

• Customs and Federal Excise Duties have been reduced to facilitate the industry and
exports.

• The new budget entails reduction in existing indirect taxes with no new direct tax on salaried class and businesses.

• Gains from higher growth rate can be wasted in the case of increased food inflation.

• If international oil price does not come down, a possible hike in petroleum levy is likely to result in cost-push domestic inflation.

• The budget FY22 entails increase in power subsidies but not food subsidies.

• Fiscal prudence in the case of Public Sector Enterprises (PSEs) and commitment to privatization is appreciable.

PRIME since 2013, has been advocating for reduction of tax rate, lowering import tariffs and reducing wasteful expenditures. The lowering of customs duties and tariffs on a wide range of raw material imports as well as announcing of zero duty regime on IT products is certainly a great news.

Commenting on the budget, PRIME Executive Director Ali Salman said that “the government has presented a pro-growth budget by tax cuts and demonstrating fiscal prudence, though some of the additional indirect taxes on key commodities will backfire.” He also said that the budget sanctity has to be ensured and hoped that no mini-budgets are introduced in the next fiscal year. Ali said that on the whole this budget will be appreciated in the board rooms but may not be welcomed in the kitchens.

PRIME report mentions that Federal government’s commitment to improved recoveries from state-owned enterprises as well as higher targets from privatization proceeds is appreciable. This is high time that the government delivers on its promises of turning around loss-making public sector enterprises.

The report says that contrary to the claims of being a pro-poor budget, ambiguity remains as to how this budget will reduce food inflation in the upcoming fiscal year. Under the federal budget FY22, government has proposed to increase the turnover tax on wheat from 0.25 percent to 1.25 percent, while the sales tax on flour bran is set to enhance from 7 percent to 17 percent. Moreover, Rs. 7 billion would also be collected from sales tax on sugar. Since both are essential commodities, increase in their prices is likely to worsen food inflation. Direct and indirect cash transfers to low-income group is a short-term solution for mitigating the effects of food inflation and other socio-economic issues, which this budget entails. However, a long-term and a more sustainable approach calls for increasing real incomes, employment opportunities, human capital development and sustaining economic growth in order to achieve a definite improvement in socio-economic indicators.

Please click on the pdf below to read the full report.

PRIME-Budget-Review-FY-2022 Download

Lending from Privatized Banks: More for government, less for private sector

12/08/2021by PRIME Institute PRIME Institute No Comments

Lending from Privatized Banks: More for government, less for private sector

A new report released by PRIME finds that the commercial lending to the private sector has declined from 24.1 percent of GDP in 1995 to 17.9 percent in 2019 undermining private sector economic growth, while increasing bank’s profitability manifolds.
The report finds dramatic increase of share of government securities in banks’ investment portfolio from 10 percent in 2010 to 46.4 percent in 2020, which indicates that banks have turned to risk-free lending to the government rather than playing a role in allocation of capital to the private sector. On the other hand, the profitability of banking sector increased from Rs 7 billion in 2000 to Rs 244 billion in 2020. These are the main messages from a recently released report by PRIME, an independent think tank, authored by economist Beenish Javed.
The report finds that the private sector lending stands at 17.9 percent of GDP in Pakistan, while regional economies like Bangladesh stood at 45 percent and India at 50 percent.
The report mentions gradual extinction of Development Finance Institutions as a factor, which were used to complement the banking sector by bridging the gaps in the supply and demand of financial services.
The report notes that after privatization, the infection ratio that stood at 25 percent in December 2000 fell to 8 percent in 2017and then increased to 9.2 percent as of December 2020.
The report also finds that in Pakistan, the banks’ credit disbursements to private sector are heavily skewed towards large enterprises. The share of large sized borrowers in total loans of the banking sector stands at 87 percent in Pakistan, such borrowers account for only 1.6 percent of the total borrowers, in contrast to 72.5 percent in Bangladesh.
PRIME Executive Director Ali Salman, commenting on the report, said that “the government needs to minimize its reliance on commercial borrowing as it not only displaces the private sector firms but also reduces risk appetite in banks”. Ali also urged that the commercial banks should streamline their financial procedures to reach out traditionally unbankable but profitable enterprises thus helping the policy goal of financial inclusion.

Please click on the pdf below to read the full report.

Lending-from-Privatized-Banks-More-for-government-less-for-private-sectorDownload

Debt without Growth

12/08/2021by PRIME Institute PRIME Institute No Comments

Policy Research Institute of Market Economy (PRIME) released a report titled ‘Debt without Growth’ that assesses government’s two-year performance in the domain of Public Debt.

As per the report, Pakistan’s foreign debt and liabilities increased by $17.6 bn or 18.5 percent between FY19 and FY20. This increase has been coupled with a deterioration in both the debt bearing and debt servicing capacity. During FY20 government borrowed an additional $3.7 bn worth of grants and loans to support country’s corona relief efforts thus adding to the debt burden. Like its predecessors, the government has not been able to fully capitalize on non-debt creating inflows like exports, remittances and foreign direct investment. Consequently, debt servicing remains the largest expense in the federal budget. The government has paid $11.9 bn in external debt servicing during FY20 which is 23 percent higher than the amount paid in FY19.

Please click on the pdf below to read the full report.

Prime-Report_Debt-without-Growth-1 Download

Dissecting Pakistan’s lead in Service Exports

12/08/2021by PRIME Institute PRIME Institute No Comments

As per World Trade Organization’s latest statistics, global trade in services witnessed an average decline of 24 percent in the third quarter of 2020. Out of the 39 countries reviewed, approximately 90 percent experienced contraction in service exports whilst 10 percent observed a positive growth.

Interestingly, Pakistan took the lead in the latter category. Notwithstanding the unprecedented times, the country registered year-on-year (y-o-y) growth of 17 percent in November 2020 and 23.2 percent in December 2020. The month-on-month growth of service exports remained at 23.8 percent in December 2020.

To read more, click on the PDF given below:

Dissecting-Pakistans-lead-in-Service-Exports-Download

Federal Government’s 2-Years Performance Report

06/08/2021by PRIME Institute PRIME Institute No Comments

Federal Government’s 2-Years Performance Report

Introduction

Upon completion of PTI’s two years in the federal government, PRIME is issuing a short report on its assessment of the government’s performance in the domains of Trade Performance, Tax Policy & Administration, and Business Regulations.

Trade

In its first two years in power at the federal level, PTI-led government has laid the ground for its tariff policy. The policy entails simplifying tariff slabs on the principle of cascading; reducing additional customs and regulatory duties; providing time bound protection to nascent industries; gradually reducing tariffs on raw materials, intermediate and capital goods; and eliminating difference in rates for commercial importers and industrial users to end misuse. The now finalized, National Tariff Policy is to be implemented over a five year period starting from Federal Budget 2020-21, so its performance remains yet to be seen.

To facilitate international trade, SBP maintained its Export Financing Scheme rate at 3%, and Long-Term Financing Facility at 6%. Phase-II of China-Pakistan Free Trade Agreement saw its implementation during the same period. On the legislative side, treasury bench tabled the Geographical Indicators (Registration and Protection) Bill, 2019, which has now been signed into an Act. Ministry of Commerce’ ‘Look Africa Policy’ has borne fruit in the form of a 10% increase in exports to Africa during Jul 2019 – Feb 2020. These exports now stand at $1.03 B. However, there is no visible change in the overall exports destination.

The most significant measure by the government which has impacted Pakistan’s international trade has been its policy of going for a market determined exchange rate. Over the two years, Pakistani Rupee has been let to devalue by around 34.5%. While it helped the government in reducing its import bill, it did not help in increasing exports.

Budget 2020-21 has been forthcoming in reducing the incidence of duties on imports to the extent that the customs duty proceeds for FY 2021 are forecasted to be 36% less than the previous fiscal year. However looking at the trade statistics for 2018-2020, goods imports have seen a large contraction from $55.6 B in FY 18 to $42.4 B in FY 20. Similarly, albeit to a lesser extent, goods exports dropped from $24.8 B in FY 18 to $22.5 B in FY 20. All things considered, during PTI’s two years in government, both imports and exports have faced a substantial downward slide.

For the former, a principal factor was Pakistan’s decision to approach the IMF. Initially, in order to get a better deal from the IMF, the then Finance team of the PM tried its best to increase its forex reserves by:

Securing foreign currency deposits, loans, grants and deferred payment facilities from friendly countries such as Malaysia, Saudi Arabia, UAE, and China.
By cutting down on its imports bill

Later on, once Pakistan entered into an IMF program under the Extended Fund Facility, it agreed to maintain a market based exchange rate and to improve its tax collection; factors which lead to further imports reduction. To meet its revenue targets, the government increased electricity tariffs, gas prices, and taxes on petroleum, which contributed to the slide in exports.

While the customs duties, regulatory duties, and import tariffs are being lowered in each successive fiscal year, there is no mentionable work on improving value-addition in exports, diversifying the exports basket or exploring new export destinations.

Tax Policy and Administration

Ever since assuming reigns of the federal government in August 2018, PTI has replaced four chairpersons of the FBR, in a period of two years. Each chairperson only got, on average, five and half months in office — a period too short to implement any meaningful reforms at FBR. Similarly, the top slot at Revenue Division has also changed hands thrice in two years.

To pursue its agenda of reforming tax policy, administration, and enforcement mechanism, PTI sold Shabbar Zaidi as the right man for the job. All the hope that there ever was about PTI being able to reform the tax system of the country, it relied upon Shabbar Zaidi to perform as an outsider to the bureaucracy, who wouldn’t face peer pressure in taking some much needed unpopular decisions that would face resistance from within the FBR. Nine months into the role, he took an indefinite leave from the job, citing health reasons, before he was officially replaced by a career civil servant again.

PTI’s boldest move in the domain of increasing the tax base was the move to bring the vast majority of non-tax paying retailers under the ambit of tax net. These retailers contribute around 18% to the national income but their tax contributions account for less than 1% of total FBR revenue.

The government imposed the condition of production of copy of CNIC for purchases over Rs. 50,000 and floated the idea of income tax calculated as a fixed percentage of annual turnover. Various trader unions organized shutter down strikes all across Pakistan and the pressure tactic seemed to have its desired effect as the government kept on extending the deadline for implementation of these measures so as to maintain status quo. While this resulted in resumption of market activity, it laid bare the weak writ of the state with respect to its ability to collect its dues.

At the same time number of tax filers has reached an all-time high of 2.7 million, credit for which goes to active enforcement measures by the FBR, and the amnesty scheme announced in May 2019. Overall, PTI government has announced two tax amnesty schemes in its tenure – one for the public in general, and one specifically for investments
in the construction industry. Bottom line – revised estimates for FBR taxes in 2017-18 stood at Rs. 3.94 billion; in 2019-20, the revised figure was recorded at Rs. 3.91 billion. Tax to GDP ratio is still in the single digit range, which has slipped to 9.5% from 9.9% last year.

Business Regulations

Pakistan’s Doing Business ranking has significantly improved from 136th to 108th in a year. This has been the result of successful implementation of a large number of initiatives across numerous departments, all of which cannot be mentioned here, for want of space. Few notable measures include elimination of requirement of physical inspection by FBR at the time of registration; time for obtaining building permit reduced from 30 days to 15 days; and number days required for obtaining electricity connection reduced from 73 days to 49 days in Lahore, and from 134 days to 73 days in Karachi.

Government of Pakistan has established Pakistan Single Window (PSW), which will go live in 2022. The PSW is being developed at a cost of $67 million, borrowed from World Bank. The PSW programme includes phased establishment of an ICT-based platform involving simplification, harmonisation, and automation of regulatory process related to cross-border trade. It also includes implementation of a port community system to facilitate related logistics.

In the domain of promoting E-Commerce, in October 2019, Government of Pakistan introduced the country’s first ever E-Commerce policy. This is a step in the right direction however strong commitment by the government is required to make these reforms see the light of the day. Presently, Pakistan ranks 114th out of 152 countries on UNCTAD’s B2C E-Commerce Index. She lags her Asian competitors such as Malaysia, Thailand, India and Bangladesh that rank at 34th, 48th, 73rd and 103rd place, respectively. In 2020, SBP announced five-fold increase in the remittance limit for freelancers, from $5,000 to $25,000 per individual per month. Such meaningful measures for the industry can enable proliferation of E-Commerce transactions in Pakistan.

Post the onset of Covid-19 in Pakistan, PM Imran Khan has brought forth the construction incentives package as his revival plan for the economy. The PM is chairing weekly meetings to review progress and resolve any issues faced by the industry. PM’s construction incentives package has offered builders and developers with a tax amnesty scheme; given the status of industry to construction sector; it has introduced a fixed tax regime for the industry; withholding Tax has been exempted on all construction-related goods andservices except steel and cement; only 10% of fixed tax to be payable for those constructing houses under Naya Pakistan Housing Program; and State Bank of Pakistan and all other banks directed to set aside 5 percent of their portfolios for house financing.

In the domain of tourism promotion, the PM appears keen to deliver. PTI has made several contributions to both the tangibles and the intangible affecting the industry. The government has set up several camping sites for tourists in Khyber Pakhtunkhwa. E-Visa facility has been introduced along with relaxation in NOC requirements for foreign visitors. The government has transferred ownership of government rest-houses to Tourism Corporation Khyber Pakhtunkhwa. These positive steps notwithstanding, existence of multiple and overlapping task forces
for coordination and promotion of tourism indicates lack of clear policy. This is further complicated by the fact that in June 2020, Pakistan Tourism Development Corporation shut down 30 of its managed tourist facilities and terminated 450 employees due to financial losses.

Conclusion

In an effort to curtail the trade and current account deficits, the government has ended up reducing the total trade volume of the country in such a manner that total imports and total exports both have fallen down. As 18% of FBR revenue comes from customs duties, and 38% from Sales tax (of which approximately 55% is contributed by imports), naturally FBR revenues were bound to take a hit, which explains the lackluster revenue performance of the government. These issues notwithstanding, the government has achieved a noteworthy improvement of jumping up 28 spots in the World Bank Ease of Doing Business Index in a year – a feat which could not have been achieved without support from the provincial governments, most notably the Government of Sindh and the Government of Punjab. An increase in the tax registry to 2.7 million is a significant achievement however tax policy and administration still needs revamping. We once again call for considering a low-rate, flatter and broad-based income and sales tax regime with better enforcement which can encourage more people to file tax returns and can yield a predictable tax base.

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Federal Government’s 2-Years Performance Report

Street Vendor Assembly -Peshawar

28/07/2021by PRIME Institute PRIME Institute No Comments

PRIME Institute, in collaboration with Friedrich Naumann Foundation and National Youth Assembly, has held a Street Vendor Assembly in Shahi Bagh Area of Peshawar. Zafar Ullah Khan, President of Rehri Baan Association in Peshawar, organized the participation of a large number of stall holders and cart pushers in the assembly. Purpose of the assembly was to create awareness among street vendors about the lacunas in-country laws that exacerbate their economic plight. Faiz Muhammad, President of Sarhad Chamber of Commerce, was the Chief Guest at the event.

Zia Banday, Executive Director of PRIME, elaborated on the economic aspects of street vending. He mentioned that this low economic segment is much resilient in survival against all odds, which has emerged due to uneven imposition of rule of law. It is impacting the earning capacity of the street vendors, who are the victims of state apathy and at the mercy of different mafias. Street vendors are playing a very important role in serving as a distribution channel for taking the goods of cottage and small businesses to the low and middle income groups. Mostly street vendors are from low skilled and rural migrant segments. They are a vital cog in an urban economy, which needs to be taken into account for any city planning.

Ahmed Bashir, a Senior Lawyer and a Research Fellow, said that street vendors are heart of Peshawar’s economy. And yet, Street vending and provision of services escapes attention despite it being the primary means of combating poverty and of economic survival for many inhabitants of the city. Importance of street vendors as service providers is immense, however, all the laws concerning them are for controlling their economic activity and there are hardly any workable provisions for facilitating them and to improve their working conditions and general betterment.

Zafar Ullah Khan highlighted the plight of street vendors in Peshawar. He did mention the lack of protection to street vendors and their continuous fear of being uprooted from their place of business. He demanded the government to provide them amenities for operating in the newly constructed Bachat Bazar. Hanan Ali Abbasi, President of National Youth Assembly, has reiterated the engagement of youth in supporting the cause of street vendors for improved rights and enhanced livelihood.

In his concluding remarks, Faiz Muhammad, President of Sarhad Chamber, has informed the audience about the commitment of business community in helping the street vendors and taking their voice to higher echelons of the government. Business community is even ready to allocate their own money for easing the water problems of street vendors.

In a question & answer session, various street vendors did talk about the humiliation they have to undergo at the hands of police and other city agencies. They feel powerless and despite paying bribes, they remain insecure and fearful owing to uncertainty in their tenure. They demanded the issuance of health cards and education facilities for street vendors and their families. PRIME Institute did announce constituting of a working group that will comprise of elected representatives, street vendors and civil society to lobby government for improving upon the legal structure for the street vendors.