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Author: PRIME Institute

Experts Critique Pakistan’s Fiscal Policy and Budget Allocations in Post-Budget Roundtable

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Experts Critique Pakistan’s Fiscal Policy and Budget Allocations in Post-Budget Roundtable

Islamabad, June 14, 2024 – The Policy Research Institute of Market Economy, supported by the Friedrich Naumann Foundation (FNF) Pakistan, convened a post-budget roundtable where leading voices from research institutes, academia, and government gathered to analyze Pakistan’s fiscal policies and upcoming budget allocations. The discussion aimed to provide insights into the economic implications of these decisions.

Dr. Ali Salman, Executive Director of PRIME, highlighted the need for a coherent fiscal strategy amidst current economic challenges. “The budgetary measures require scrutiny,” remarked Dr. Salman. “There appears to be a departure from our research-driven approach advocating
streamlined tax policies and sector-neutral budget allocations.”

Key concerns included tax exemptions totaling 3.9 trillion rupees, impacting revenue targets and fiscal sustainability. Experts stressed the urgency of a uniform tax regime to stimulate economic growth and combat the shadow economy, which currently represents approximately 40% of Pakistan’s GDP.

Dr. Manzoor Ahmad, former Ambassador to WTO, noted discrepancies in trade policies and customs tariffs. “The budget’s emphasis on import substitution could hinder Pakistan’s integration into global markets,” he cautioned. “We must align with global economic trends and adopt policies promoting competitiveness and innovation.”

Dr. Nadia Tahir, Economist, expressed concerns about sector-specific impacts, particularly within healthcare and education. “Unbalanced tax measures risk undermining sectors critical to Pakistan’s socio-economic development,” she cautioned.

Dr. Mahmood Khalid emphasized the need for clarity and accountability in fiscal planning. “The budget lacks a coherent long-term perspective,” noted Dr. Khalid. “Targets set in previous years have not been met, reflecting a disconnect between policy objectives and outcomes. The absence of a comprehensive 13th five-year plan exacerbates this issue, leaving us without a clear roadmap for sustainable fiscal management.”

He further highlighted issues such as tax exemptions disproportionately impacting revenue collection, concealment of public sector debts and liabilities, and circular flows of government funds that undermine transparency. “The budget’s reliance on charging expenditures limits
flexibility in fiscal management,” Dr. Khalid added.

The roundtable also addressed transparency in budgetary processes, advocating clearer disclosures on debts and contingent liabilities. Experts called for proactive governance and evidence-based policymaking to effectively navigate Pakistan’s economic challenges. 

The event concluded with a consensus on the need for continued dialogue between policymakers, researchers, and stakeholders to shape inclusive economic strategies. Participants emphasized fostering transparency and accountability in fiscal decisions to strengthen Pakistan’s economic resilience.

For further inquiries or information on the outcomes of the roundtable discussion, please contact Mr. Farhan Zahid at +92 331 522 6825

Budget must be incentives-free

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Budget must be incentives-free

While people expect some relief, best relief is cut in public spending

By Dr Ali Salman

The federal government will be announcing its annual budget in a matter of days. As happens every year, there is a lot of interest and anticipation in the media about what the budget will entail. 

The private sector and industrial lobbies are making their demands public and want incentives. Business associations have submitted their tax proposals and demand tax reliefs. The public is expecting a relief from the back-breaking inflation and wants prices to come down. 

These expectations from the budget arise from an erroneous understanding: government’s budget and national economy are the same. 

The budget is an exercise of state’s financial management and it cannot encompass the economy as a whole. It’s a document where the state declares its intent and plan to collect taxes and manage its expenditures. 

Beyond a necessary level of tax collection required to run a limited and smart government, the budget exercise does not have the capacity to influence economic direction of the nation. 

To give one parameter, let’s consider jobs creation. Our workforce is 80 million strong. Assuming a 15% rate of unemployment (PBS estimates it to be 8%, PIDE estimates youth employment at 31%), we have around 68 million people employed out of a population of 235 million. 

From these 68 million people employed, the federal and provincial governments employ around 3.2 million people. In other words, the state provides jobs to hardly 5% of the population. 

As 90% of budget resources (tax revenue, non-tax revenue and loans) will be spent on current needs, I make a straightforward inference: budget is essentially a statement of how the state intends to keep its infrastructure running, including work for 3.2 million people and pensions of those who have retired or died. 

Now let’s talk about incentives. Each budget is expected to provide incentives and disincentives to selected industries and products, thus influencing consumer choice by using its financial and legal power.

The state can withdraw exemptions, can offer new subsidies and can raise tax rates on its own will. Obviously, in making these choices, it is influenced by stakeholders such as special interest groups as well as lending agencies and commercial banks. 

In my opinion, the budget should be incentives-free. Instead of opening the possibility of changing the incentive structure, which then opens the door on rent-seeking, if not corruption, the state should close its doors on seeking suggestions and demands from the public and private sectors. 

It should just focus on keeping its own economy – public finance in essence – in a good order. It should not default. 

By making futile attempts to change incentives through budget, the state misallocates scarce resources. Even if it is done with good intentions (which may be a path to hell, if you believe in this idiom), such an exercise is done on a false premise of access to perfect information, which remains dispersed. 

In practical terms, the exclusive focus of budget should be to minimise fiscal deficit while considering balancing budget as the ideal type. We may not be able to achieve the ideal, but we should always keep it as a benchmark. 

While the state should enforce its writ on tax collection and take all legitimate measures to collect due taxes, it must always confine its expenditures to the revenue collected. Parliament should have powers to declare any unfunded expenditure as illegal and unauthorised.

To save itself from the complex exercise of calculating the rates of taxes and tariffs on millions of transactions and products, the government should come up with an average and single number where the current tax revenues are not compromised. 

A single rate of general sales tax (GST) should be the starting point, as understandably we may not be able to achieve the uniform tariff rate instantly. 

We should begin to confine the government to a size which the economy can afford without making unrealistic assumptions about growth. That should lead to an exercise where we may have to close some government departments and almost all commercial state-owned enterprises. 

This should also include the rationalisation of defence budget. By moving in its direction, the state will save itself from default.

While the public anticipates some relief from the budget, the best relief is the reduction in public spending. All government expenditures are either funded by present taxes, present loans, future taxes or inflation taxes. 

To allow this and future generations to earn their own livelihood and minimise the burden on their hard-earned income, the state should reduce its size and should free itself from the burden of allocating budgetary resources to specific sectors. 

We should not view the budget as a substitute of growth strategy and should only view this as a plan to manage state finances.

To foster fair competition, the budget should be incentives-free as such incentives distort the market, create an uneven playing field for businesses and can become a breeding ground for lobbying and corruption. In a system without these distortions, firms compete on the basis of merit and efficiency.

The writer is the founder and executive director of the Policy Research Institute of Market Economy (PRIME)

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This article was originally published in The Express Tribune on June 10, 2024

Stable, Predictable Tax Regime and Not Ad-hoc Budgetary Measures for A Growing Young Economy; PIDE-PRIME Tax Reforms Commission

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Stable, Predictable Tax Regime and Not Ad-hoc Budgetary Measures for A Growing Young Economy; PIDE-PRIME Tax Reforms Commission

Islamabad, June 10, 2024 – The Pakistan Institute of Development Economics (PIDE) and the Policy Research Institute of Market Economy (PRIME) have collaborated to form a Tax Reforms Commission, comprising several eminent thinkers. Currently, tax is a crucial issue in the media, and our lenders prioritize revenue collection over growth and employment. The commission highlights several flaws in the existing tax system. It is neither citizen-friendly, transparent, stable, nor predictable. Faced with increasing budgetary difficulties, reliance on ad-hoc measures has grown, leading to arbitrary withholding income taxes, turnover taxes, taxes on deemed incomes, and arbitrary revisions of tax rates. Approximately 68% of revenue is collected through excessive use of withholding and minimum tax regimes. The fragmented system, with numerous exemptions and rates, creates complexity and confusion for taxpayers. Problems include a broken refund system, high compliance costs, and a predatory Tax Authority. The budget period is marked by extreme uncertainty and speculation due to this approach to taxation. This arbitrary approach has resulted in numerous court cases and reversals of initiatives. More taxes are not the solution to deep structural fiscal policy issues where expenditure control is not possible.

According to the press release issued by PIDE, these statements were made during a press conference at the National Press Club in Islamabad, where Dr. Nadeem ul Haque, Vice Chancellor of PIDE, Dr. Ali Salman, Founder of PRIME, and Dr. Mahmood Khalid, Senior Research Economist at PIDE, addressed the audience.

They further stated that our approach emphasizes developing a predictable tax policy to build trust between citizens and the government. Key recommendations include simplification and harmonization of the tax system to facilitate taxpayers and ease tax payments, which is more effective than arbitrary measures imposed annually. Eliminating categories such as filer/non-filer and registered/unregistered for sales tax alone would compensate for many arbitrary tax measures. Reducing reliance on revenue collection through tariffs, additional customs duties, and other arbitrary measures has eroded confidence and closed the economy, leading to declining investment and growth. Long-term goals should include openness with low tariffs, not arbitrarily disturbed by any government. Automation and digitization to eliminate direct interaction between taxpayers and the tax authority are crucial. Transparency and digitization are key for tax administration, along with necessary changes in human capital and FBR service organization.

The Commission has worked tirelessly to ensure that reforms will not result in revenue loss and will lead to revenue growth. The proposed policy relies on simplification, harmonization, and improved FBR administration through digitization. Conservative estimates suggest direct revenue gains of at least Rs 4 trillion in the first three years, with significant benefits to the economy in terms of higher investment, growth, and job creation.

Key problems and recommendations highlighted by the Commission include: reliance on tariffs is outdated. Pakistan has become increasingly isolated due to a closed economy. Strong policy commitment to openness is necessary to benefit from global trade. Decreasing tariffs has shown positive impacts on revenues and substantial reductions in smuggling and mis-invoicing. Zero-rated import of plant and machinery, industrial raw materials, and intermediate goods should be implemented. Withdrawal of regulatory duty (RD), additional custom duties (ACD), and withholding income tax on imports is also recommended. The decades-old GST/VAT agenda needs to be firmly implemented. Problems with sales tax registration, harmonization, digitization, and the refund system should be resolved this year. Key reforms include harmonization of GST/VAT and no new exemptions on GST except in areas such as education and health. A fully functional GST/VAT system must be a performance goal for FBR with consequences. With a good GST in place, we should consider lowering the rate. Existing literature indicates that countries like India, Georgia, and Mexico, which shifted from high GST (17 to 19%) to VAT with a low rate (7 to 10%), have experienced an immediate positive impact on the tax-to-GDP ratio by 3 to 4%. PIDE research shows that in the short run, on average, a 1% increase in GST increases revenues by 2%, while in the long run, FBR revenues tend to decrease by 4% rates. Over the long run, the goal should be a gradual reduction of VAT to 10%.

 

Taxing all incomes equally and facilitating corporatization is crucial. There should be no new exemptions in the income tax system, and all sources of income need to be taxed. For equity reasons, the marginal income tax should increase. However, the effective income tax of AOPs and individuals should be lower than the corporate income tax to incentivize corporatization. The commission proposes new income tax slabs while suggesting decreased effective tax rates. For example, on an annual income of Rs. 3.6 million, the effective tax rate should be reduced from 12% to 6.38%. Other recommendations include uniformity of the tax regime on all sources of personal and non-corporate incomes, including agricultural income; decreasing the corporate tax rate to 25%; withdrawal of deemed rental income tax, CVT, super tax, turnover tax, and presumptive/final tax; and restoration of investment credits for plant and machinery.

 

The withholding regime needs to be replaced with an advanced income tax regime. Excessive withholding taxation should be withdrawn, as it operates like an indirect tax and burdens businesses. Withholding should only apply to salaried individuals, while others should pay advanced tax based on 75% of the previous year’s tax. Long-term reforms include reducing the number of withholding taxes and rolling back the WHT regime, except on payroll, interest, dividends, and payments to non-residents. Simplifying and lowering capital gains tax is necessary. Current collection is Rs 10 billion only. Lowering the rate and improving collection can allow capital building. Tax exemptions should be removed, as they create distortions and uncertainty. Removing all exemptions, including those related to income tax, could increase FBR revenues by 37% and raise the tax-to-GDP ratio by 3.36%.

 

Tax administration reforms are long overdue. These reforms could increase tax revenues by 2-3% of GDP, as seen in countries like Jamaica, Rwanda, and Senegal. The commission recommends mandatory GST registration starting with commercial importers, wholesalers, and tier-1 retailers. Automation and digitization should reduce interaction between taxpayers and tax authorities. The non-filer category should be abolished. Enhancing the capacity of PRAL is also necessary. A Pakistan Fiscal Policy Institute/Budget Office for budgetary and reform with teeth is needed. PIDE, PRIME, and other think tanks should be involved, ensuring that proposals and analyses reach the cabinet and parliament, playing a central role in policy, including international negotiations. The current whimsical approach must end.

 

The commission has done extensive economic analysis to estimate revenue implications of these reforms. Reforms in customs tariff revenue, including withdrawal of concessions and exemptions, and reduction in under-invoicing and misdeclaration, could bring Rs 314 billion with 36.5% growth over three years. General Sales Tax reforms could yield Rs 2,566 billion in additional revenues with 33% growth in the tax base over three years. Improved compliance in FED could yield Rs 48 billion in additional revenue over three years, assuming a 5% growth rate. Capital gains tax reforms might result in a 20% revenue reduction in the first year but would gradually return to existing levels within three years. Direct tax reforms are expected to result in Rs 1,545 billion over three years, assuming a 27.7% growth rate in the base. Overall revenue gains from tax rationalizations are projected to be approximately Rs 4 trillion, showing a 26% increase in the base over three years.

The PIDE-PRIME Tax Reforms Commission comprises eminent economists and tax experts, including Dr. Nadeem ul Haque, Vice Chancellor of Pakistan Institute of Development Economics (PIDE); Dr. Ali Salman, Executive Director of Policy Research Institute of Market Economy (PRIME); Mr. Shahid H. Kardar, Former Governor of the State Bank of Pakistan; Syed Shabbar Zaidi, Former Chairman of the Federal Board of Revenue; Dr. Ikram ul Haq, Advocate Supreme Court; Dr. Manzoor Ahmad, Senior Fellow at PIDE; Dr. Nasir Iqbal, Head of Macro Lab, PIDE; Dr. Mahmood Khalid, Senior Research Economist, PIDE; and Dr. Khalil Ahmad, Distinguished Research Fellow, PRIME. 

The Prime PIDE Tax Reforms can be accessed by downloading the attached file.

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For inquiries, please contact Mr. Farhan Zahid, Communications Officer at PRIME, at farhan@primeinstitute.org

 

Economic Policy Think Tank PRIME Signs MOU with Quaid-e-Azam University to Strengthen Policy Linkages

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Economic Policy Think Tank PRIME Signs MOU with Quaid-e-Azam University to Strengthen Policy Linkages

Islamabad, June 5, 2024 – The Policy Research Institute of Market Economy (PRIME), Pakistan’s leading economic think tank, has signed a Memorandum of Understanding (MOU) with the prestigious School of Economics at Quaid-e-Azam University (QAU). This partnership aims to bridge the gap between academia and policy research, enriching the intellectual development of students, particularly in economic policy.

The MOU establishes a collaborative framework where PRIME will facilitate seminars, internships, and mentorship programs to educate and build capacity among QAU students and faculty. Both institutions will contribute resources, with PRIME providing experts and QAU offering logistical support for events. PRIME will also host quarterly policy seminars featuring QAU faculty research.

This partnership represents a significant step forward in advancing policy education and fostering collaboration among future public policy leaders. It signifies a shared commitment between PRIME and QAU to elevate the standards of economic policy discourse and contribute to the socio-economic development of Pakistan.

At the ceremony, the Executive Director of PRIME, Dr. Ali Salman, expressed confidence in its potential positive impact on society. Similarly, Dr. Tariq Majeed, Head of the Economics Department at Quaid-e-Azam University, expressed satisfaction that the collaboration will nurture the next generation of policy leaders.

During the signing ceremony, the Vice Chancellor of Quaid-e-Azam University, Prof. Dr. Niaz Ahmad Akhtar, was also present.

For inquiries, please contact Mr. Farhan Zahid, Communications Officer at PRIME, at farhan@primeinstitute.org

Biting the hand that feeds you

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Biting the hand that feeds you

If rich are taxed too much, they will flee for favourable pastures and not pay any taxes

By Rizwan Rawji

Cutting tax rates in the highest income tax brackets has the most positive impact on tax revenues and the economic growth. The important point is to recognise that people don’t work to pay taxes; they work to earn what they can after tax.

 It is the after-tax rate of return on work, after all, that is the incentive that propels output and employment growth. 

Given the data on tax rates and tax revenues from the highest income earners, there is no way anyone can take for granted that higher tax rates mean higher revenues. The highest tax bracket income earners when compared with those people in lower tax brackets are far more capable of avoiding and evading taxes.

Rich people are highly incentivised to keep their money. They are smart and they have money – they can hire lawyers, they can hire accountants, they can hire members of the National Assembly, senators and bureaucrats. 

They are the people who want a favour from the government. Rich people can buy influence. They don’t only have the means to buy influence, but they also have the ways of doing it. This fact is universal and Pakistan is no exception. 

Money is a universal language, but it speaks at different volumes. Rich people can get around taxes. If the government taxes rich people too much, they will flee the jurisdiction for favourable pastures and not pay any taxes. 

The optimal tax system is one where taxpayers recognise their obligations to pay taxes and believe the tax system is fair and equitable. Then rich people will pay taxes willingly.

Pakistan’s tax agenda should be to stop high-income earners from not paying their fair share of income taxes. Given that they hold the majority of the nation’s wealth, they contribute disproportionately in income taxes to the national exchequer.

What’s missing in Pakistan is a simple, straightforward, broad-based, flat rate and predictable tax system. A flat tax system should be with no exemptions, no exclusions, no deductions and no credits.

A flat income tax means that all taxpayers, regardless of their income level, pay the same percentage of their income in taxes. It is fair and creates incentive for better compliance and more tax revenues. 

For example, say the tax code has a flat tax rate of 10%. A taxpayer earning Rs9,000,000 would pay 10% of the income in taxes (Rs900,000), while a taxpayer earning Rs90,000,000 would also pay 10% of the income (Rs9,000,000). So, while the tax percentage stays the same across all income levels, your specific income determines how much you owe in taxes. 

The advantage of flat income tax over complex progressive or graduated rate tax systems is that it is straightforward and takes the same proportion of income from each taxpayer. The simplicity of this model, offering clarity and ease of administration, shouldn’t fool you. It will have massive beneficial consequences. 

In a progressive tax system, the tax rate increases as income levels rise. Higher-income individuals pay a higher percentage of their income in taxes when compared to those with lower incomes. 

Unreasonable high progressive tax rates lead to quixotic tax enforcement, corrupt implementation of rules and regulations, counter-productive behaviour of individuals resorting to avoiding, evading and misrepresenting their true income. 

The rich are particularly sensitive to high income brackets. The elasticity of supply of taxable income is the greatest in the highest income brackets. Tax rate cuts in the highest income tax brackets have the most positive tax revenue and growth impacts. 

The government should incentivise high-net-worth individuals by being a protector, a creator and a friend by bringing them gradually in the tax fold. It will also diminish the “trust deficit” that exists between the high-income earners and the tax collector.

The rich, in return, should recognise their obligation to pay taxes and believe that the tax system is fair and equitable. They should set an example by marketing themselves as patriots who care for all the citizens and want to share a common prosperity for all Pakistanis.

This article was originally published in The Express Tribune on June 3, 2024.

The writer is a philanthropist and an economist based in Belgium

Economic policies: confusion prevails

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Economic policies: confusion prevails

Solution lies not in distorting market with protests, but in pro-market approach

By Bilal Zahid

In the span of just a few days, two seemingly contradictory headlines graced the front pages of Pakistan’s newspapers, shedding light on the perplexing state of the country’s decision-making. 

The first headline, about wheat crisis, detailed how wheat prices had plummeted, leaving farmers unable to secure the guaranteed support price for their produce due to the influx of imports. This led to widespread protests by farmers demanding fair compensation. 

The second headline, highlighting soaring prices of onions and other vegetables due to increased exports, painted a starkly different picture of consumers struggling with inflation and trying to afford basic necessities. 

These ironical headlines encapsulate the confusion and contradictions prevalent in the country’s economic policies and the broader state of affairs. On the one hand, farmers are protesting for higher prices, while on the other hand, consumers are grappling with skyrocketing costs while agricultural exports are bringing in the much-needed foreign exchange. 

If we were to follow this line of reasoning, our approach would entail importing food items from abroad only when they are expensive. Otherwise, such imports would lead to reduced prices locally, adversely affecting the profitability of farmers.

Moreover, exporting any food items should be avoided altogether, as it would drive up prices for consumers domestically. The notion of exporting only surplus food becomes questionable when we consider the millions who suffer from hunger and malnutrition. 

On the surface, the farmers’ grievances seem legitimate. After all, who wouldn’t want a guaranteed income for their hard work? But here’s the rub: the artificially inflated support price for wheat, higher than the market price, makes it more expensive for consumers than it has to be. 

In a country where nearly half the children under the age of five are stunted and half a million people die annually due to malnutrition, this situation borders on criminality, and its impact on poverty cannot be overstated. 

The estimated loss of Rs400 billion to farmers can be seen as a benefit of the same amount to consumers. To put this figure in perspective, it is equivalent to providing a year’s worth of wheat supply to 26 million people at current market prices. 

These contradictory crises reflect a broader systemic issue: centralised control and Soviet-style planning and decision-making.

Almost every year, there are headlines about wheat and sugar shortages or high prices, but nobody remembers the last time there was a rice crisis because government intervention is relatively minimal, with no minimum support price or export subsidy.

The government’s role should be that of a facilitator, not a meddler. Abstaining from price controls, import restrictions, export quotas, and guaranteed minimum prices allows the market to function organically. 

Consumers should have the opportunity to benefit from the productivity of other nations by obtaining wheat and other food items at lower prices. At the same time, farmers should have the flexibility to seek higher prices in the global market.

Imagine a scenario where Pakistan imports food items that are cheaper globally, allowing consumers to enjoy the affordability of these items while enabling farmers to invest in crops that could potentially fetch higher prices, either domestically or internationally. This wouldn’t just put food on more tables but also inject much-needed efficiency into the system. 

The solution lies not in further distorting the market with protests and support prices, but in embracing a pro-market approach. This promises not only greater efficiency and fairness but also a more sustainable solution to the nation’s food security challenges.

Embracing a pro-market approach is not just a choice; it’s a necessity for Pakistan’s economic prosperity and social well-being and can help balance interests of both farmers and consumers.<span style="color: rgb(0, 0, 0); font-family: georgia, sans-serif; font-size: 18px; letter-spacing: normal; white-space-collapse: collapse;"  

"This article was originally published in The Express Tribune on June 3, 2024.

The writer is affiliated with the Policy Research Institute of Market Economy (PRIME) as a fellow

Unshackling Pakistan’s economy

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Unshackling Pakistan’s economy

By Dr Khaqan Hassan Najeeb

Australia taught me a considerable amount of what I know about successful economic deregulation. Australia was a heavily regulated economy post-World War II. Protectionist measures like high tariffs and import controls were well in place. The financial sector was highly regulated. The government exercised price controls through agricultural boards. 

This ambiance hindered competition, created inefficiencies, and restricted productivity potential. A similar story holds back the potential of Pakistan's economy to this very day. 

Australia's exceptional journey towards economic deregulation began in the mid-1970s. Since then, it has been an impactful and transformative process – one that has been pursued quite well by successive Australian governments over the decades. Authorities have endogenously conceived and implemented a regulatory overhaul – insourcing economic thinking rather than relying on the outside. A path Pakistan consistently seems to miss.

  Some key deregulation measures included floating the Australian dollar, deregulating financial markets, removing controls on foreign capital flows, decentralizing industrial relations, pushing a competition policy, broadening the tax base, and corporatizing state-owned enterprises. These reforms aimed to enhance economic freedom, reach new international markets, shape competitive behaviour, and better the economy's flexibility. The very story Pakistan needs to craft for itself.

  Important areas of deregulation also included enhancing global trade by lowering trade barriers and tariffs and liberalizing sectors like telecommunication dominated by government entities, by removing prohibitions for new entrants. Government authorities engaged private-sector business development service providers for legal services and training for job seekers. Australia moved away from centralized wage fixing to enterprise bargaining. All worth learning lessons for Pakistan’s decision-makers. 

Authorities responded to Australian-based Industry Commission reports on the payoffs and risks related to the corporatization and privatization of public utilities. The recommendations included administrative reform of public utilities and structural reform of a sector as a whole. The outcome included the introduction of competition into power generation and retail areas, and the privatization of publicly owned generation, transmission, and distribution assets. This is a valuable insight into Pakistan’s crumbling energy sector. The deregulation process gained steam in the energy sector in the early 1990s. Australia made a push to develop a National Electricity Market. The creation of an energy market has been pending in Pakistan for eons. 

Australia's National Competition Policy (NCP) framework cut out regulatory barriers to competition, giving stronger incentives for suppliers to operate efficiently, be price competitive, and pursue innovation. A significant component of the NCP was the Legislation Review Program. This reform assessed whether regulatory restrictions on competition were in the public interest. It covered a large area of the economy including professional licensing, agricultural markets, insurance, and transport, among others. 

A competition framework is a less understood area and a missing link in reforming the Pakistan economy. As a result, most businesses are uneasy operating outside the confines of our borders, protected by generous government concessions, exemptions and subsidies, and barriers to competition. 

It is asserted that deregulation has been largely beneficial for the 26 million Australians. Competition has improved services, created long-term price stability and increased consumer choices. Labour has much higher wages, and citizens have experienced a surge in wealth and living standards. Importantly, the decades of economic growth are driven by private investments, not debt-funded fiscal largesse. Tragically, many of us are still unable to internalize this story for Pakistan. The thinking that foreign-funded projects, niche area investments, and an outsourced thought process can help us out of our morass is probably over-optimism. These actions are only likely to help at the periphery. 

The present regulatory regime in Pakistan is a relic of a bygone era conceived to control and manage rather than facilitate and enable. We are still uncomfortable with market signals and rely on controls in many markets. It is time to recognize that undertaking economic reforms and liberalizing price controls and quotas creates a flexible and resilient economy. By prioritizing deregulatory policies, Pakistan can unlock productivity gains, and begin its journey to competitiveness in the global economy. 

Australia carried out several studies to calculate the compliance costs of the prevalent regulations. These studies also considered the flow of regulation. They then set new guidelines to help reduce the flow. With little supporting evidence, most policymakers in Pakistan cannot relate to the heavy compliance costs that stifle entrepreneurship, create excessive paperwork, linger decisions, and lower the efficiency of the economy. The flow of new regulations and setting up of bodies has continued in Pakistan. 

Australia’s success underscores the value for Pakistan in reducing unnecessary compliance costs, enhancing productivity, and driving economic growth. Deregulation is a potential driver of productivity growth. A step-up in Gross Domestic Product (GDP) growth is possible by freeing up the economy, reducing efficiency costs, and improving competition in several markets where it is currently constrained. The largest gains of a deregulatory effort would come from prioritizing a reduction in compliance costs relating to regulations that apply to large numbers of people and businesses, including an estimated 5.2 million small and medium businesses and their taxation regulation. 

In 2016, I helped author a Doing Business Reform Strategy within the government. The reform agenda focused on smart regulations, simplified procedures, and competitive costs. This was to lay the foundation of a far wider effort to deregulate the economy. Short of a decade down the road, a few attempts have been made by the government through initiatives such as the Pakistan Regulatory Modernization Initiative, SMART, Digital Economy Enhancement Project, and Zero-time to start-up policy of the government of Punjab to signal regulatory reforms; albeit to our chagrin, we are a long way from home. 

Research highlights that regulatory compliance costs across certain sectors can be as high as 40 per cent of GDP in Pakistan. An unnecessary and obsolete regulatory system burdens Pakistan’s investment climate. The economy is strangled at the federal, provincial, and municipal levels by a plethora of agencies. Regulatory overhang distorts markets and hinders economic activity while inflating costs and hurting the ease of doing business. 

Regulatory Guillotine efforts, an approach towards determining the legality, necessity, business friendliness, and associated cost of regulation hangs in balance, as the Asaan Karobar Act, needs to move forward. The much-discussed single window for business and investment, Pakistan Business Portal is yet to be fully functional. 

Brooding over the technically correct noises raised over the past decade regarding regulatory reforms and seeing limited impact on the ground, one feels that a serious action-oriented effort towards doing away with regulations that are no longer considered necessary; streamlining and harmonizing regulations across jurisdictions; and moving towards technology or digitization to ease frictions should be the hallmark of the economy for the next few years.

Sometimes life can be gratifying. The arduous hours of completing a doctorate, my engagement with a research think tank, and my industry work in Australia gave me invaluable insider perspectives into remodeling a well-regulated market economy. One could always feel the sense of this transformation in the air. 

One understands Pakistan’s policymakers' mindset for focusing on visible outcomes. However, simplifying rules and regulations shows the state’s capability of deeper reforms. It is Pakistan's time to realize the depth and breadth of work required to make such a transformation – one sincerely hopes we can nudge the mindset of the nation for hard work to achieve a seriously deregulated competitive economy. God bless Pakistan.

The article was originally published in The News International on May 26 2024.

The writer is former adviser, Ministry of Finance. He tweets @KhaqanNajeeb and can be reached at: khaqanhnajeeb@gmail.com

Join ECONOMIC N-GEN Fellowship

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ECONOMIC N-GEN Fellowships at PRIME

The Policy Research Institute of Market Economy is now accepting candidates for the Economic N-Gen Fellowship Program.

The Economic N-Gen Fellowship is exactly what it sounds like; it is a program designed to prep the next generation of Pakistanis to become the economic engine which drives Pakistan toward a future of economic openness, freedom, and prosperity.

Ideal candidates must be enrolled for a Master’s Degree in Economics at their University, and must demonstrate a will and enthusiasm for solving Pakistan’s economic problems through the improvement of public policy outcomes. Candidates will be selected based on their knowledge and understanding of competitive markets, private property, productive efficiency, and the fundamentals of capitalism.

Through the course of the 2-month Fellowship period, candidates will be familiarized with the work of think tanks and governments, be provided with educational lectures on contemporary economic policy issues, policy philosophy, and be required to write multiple short policy papers.

Candidates who will be able to successfully complete the program will have their work published by PRIME, and will be inducted into the Economic N-Gen Policy Fellows panel, after which they may be engaged for future assignments upon the completion of their Master’s degree.
This is a hybrid opportunity with about 70 percent of remote work, and 30 percent on site at PRIME HQ, Blue Area, Islamabad.
Send your resume to saad@primeinstitute.org, along with a cover letter explaining how you may be a suitable fit for the Economic N-Gen Fellowship. Please use the subject line “N-Gen Application-<Your University Name>-<Your Full Name>"

Propelling the ICT sector via imports of IT products

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Propelling the ICT sector via imports of IT products

As the second most prominent source of exports, easier access to IT products is critical

Author: Dr Aadil Nakhoda


The information, communication and technology (ICT) sector is often hailed as the engine of export growth amongst all the services sectors. The ICT sector generated $2 billion worth of exports in the first eight months of FY24, which is approximately 15% higher than the amount generated in the first eight months of the previous fiscal year. The exports from the ICT sector in FY23 and FY22 was reported at $2.6 billion. If the trend in the current fiscal year is to continue, the current exports can likely close in at $3 billion. This makes it the second most prominent source of exports, after the textile sector. However, as a technology intensive sector, it is likely that the IT firms are heavily dependent on the imports of IT goods. Hence, easier access to IT products becomes ever more critical.

A recent study by the Information Technology and Innovation Fund, titled “How Expanding the Information Technology Agreement to an ‘ITA-3’ Would Bolster Nations’ Economic Growth,” reported that several developing countries could benefit significantly by signing the ITA (Information Technology Agreement) and allowing duty-free imports of the proposed expanded list of ITA products. These countries could benefit by increasing the size of their GDP, increasing the size of the tax revenues and benefit from the improvement in the ICT-related infrastructure as well as from improved digitalisation.

The expanded list of ITA products used in the aforementioned study includes semiconductors, smart appliances, robots, energy efficient storage systems and smart medical instruments. The GDP of Pakistan would increase 2% in the next 10 years if it provided duty-free access on the expanded list of products. ICT products are often labelled as ‘super capital’ as they are not only likely to add to the infrastructure but also help in improving the productivity levels in a country. Adoption of smart technologies can help boost productivity levels significantly as it improves the efficiency levels of several processes and procedures in manufacturing and service industries.

ITA was introduced in 1996 with a purpose to eliminate tariffs on the imports of IT products. Although, the signatories of ITA agreed to reduce their tariffs, several non-signatories also benefit from tariff reduction by the member countries due to the most-favoured nation principle of the World Trade Organisation, which requires members to give favourable treatment to all member countries. Currently, there are over 80 signatories of ITA, who contribute to more than 96% of global trade in ICT related products. Afghanistan, China, India and Vietnam have already signed the ITA, while Pakistan and Bangladesh are yet to do so. ITA-2 was introduced with an expanded list of products. The ITIF report discusses the benefits of ITA-3, which further expands the list of products provided in the ITA-2.

One of the largest exporters of IT products, as listed in the proposed ITA-3, is China. It exported more than $1.5 trillion worth of products on average between 2019 and 2022. Vietnam exported more than $165 billion. Both these countries exported more than they imported, running a trade surplus in this category of products. The South Asian countries reported a trade deficit in IT products, with India importing more than $100 billion and exporting $35 billion. Pakistan exported $1 billion, while it imported $7.2 billion. Bangladesh reported a similar pattern as Pakistan. The largest imports for Pakistan were mobile phones, photosensitive electrical equipment and other communication devices. All of these products are categorised as capital goods as they can be used to add further value in the economy. The main exports were refined copper, listed as an intermediate good, and medical and surgical devices listed as a capital good. The highest tariff rates on the imports of IT products are imposed by Pakistan and Bangladesh, which are significantly higher than those applied by the East Asia countries. The imports of consumer goods into Pakistan face an average tariff rate of more than 10%, while imports of similar goods into China face average tariff of less 5%. On the other hand, Pakistani and Bangladeshi exporters face lower tariff rates on their exports to their export destinations than their counterparts in China and India. Even with such preferences, the exports of IT-related products have not achieved the desired results in Pakistan. The total amount of trade creation, using a methodology based on tariff change and import elasticities, if tariffs are reduced to zero is approximately $2 billion.


Although, the tariff rates on IT products are relatively high, the non-tariff measures (NTMs) are relatively non-existent on the imports of IT products into Pakistan. The East Asian countries, such as China and Vietnam, impose several measures across the products, while they are significantly lower for the South Asian countries. Further, the Pakistan imposed different measures to curtail imports as a response to the rising trade deficit. These included import licensing requirements, internal taxation of imports, import tariffs and trade payment measures. The complex web of government interventions makes the import policies more intricate as businesses face several challenges that result in a less conducive business environment.

In essence, the share of the imports of the IT products in total imports tends to be higher in the richer countries than in the lower countries. IT products are not only likely to boost productive capabilities but can also aid the digitalisation of procedures and processes. For instance, digital products can help improve connectivity and take advantage of new innovations and facilitation tools. It is essential that the government rethinks its policies on the imports of IT products if it is to not only propel the exports of ICT services from Pakistan but also the country into the digital age.

Note: The content was also presented by the author at the 17th Annual Conference on Management of Pakistan Economy held at Lahore School of Economics in April 2024.


WRITER IS THE ASSISTANT PROFESSOR OF ECONOMICS AND RESEARCH FELLOW AT CBER, INSTITUTE OF BUSINESS ADMINISTRATION, KARACHI


THE ARTICLE WAS ORIGINALLY PUBLISHED IN THE EXPRESS TRIBUNE ON MAY 20TH, 2024.

A pro-growth flat tax policy

by PRIME Institute PRIME Institute No Comments

A pro-growth flat tax policy

Flat tax plan will dramatically change taxation structure by aligning incentives

Author: Rizwan Rawji

Pakistan can replace all taxes by introducing a flat-rate tax of 10% on personal income, 5% general sales tax (GST), 20% tax on corporate income, 5% customs duty and 3% excise duty. Arguments for a flat tax are cast in a number of ways, with simplicity and efficiency being the two key selling points. These lead to two distinct and complementary paths for tax reform.

One focused on the broadest base and the lowest rate possible. The second focused on the concept of single taxation on the principle that income should be taxed only once (fairness and efficiency).

The broadening of tax base accomplishes, in part, the second objective. With the broader base, there is a less likelihood of double taxation.

To make the tax base as broad as possible and void of substitution effects, virtually all deductions and tax credits for individuals and businesses should be repealed.

Lowering the overall marginal tax rates acts as a ceiling for incentive-based activity. The higher the tax rate, the lower will be the incentive for highly productive individuals to step up their efforts.

With the lower marginal tax rates, economic activity will increase, with the added benefits of lower government entitlement spending and increased revenue generation.

Tax rates have two effects on tax revenues. First, “the arithmetic effect” which shows that when tax rates change, tax revenues per dollar of the tax base also change in the same percentage.

Second, “the economic effect” which shows that when tax rates change, the tax base also changes, but in the opposite direction. The economic effect, thus, always works in the opposite direction from the arithmetic effect. This is the logic behind the Laffer Curve.


Economics is all about incentives and taxes have consequences. Pakistan needs a pro-growth flat-rate broad-based tax system. A flat tax system is inherently equal, as everyone pays the same proportion of their income and treated the same.
Fairness in taxation creates incentive for better compliance, accelerates economic growth and generates more government tax revenues. A paradigm shift is required to restructure the entire tax system to induce more work, savings and investments.

High tax rates, complex tax codes with exceedingly technical and abstruse wording and procedures, weak enforcement, inefficiencies riddled with SROs, exemptions, concessions, amnesties, etc have kept Pakistan struggling with a low tax-to-GDP ratio, high fiscal deficit and sluggish growth.

Pakistan can learn and adopt a pro-growth flat tax experience from a number of flat tax countries in Central and Eastern Europe that were part of the Communist bloc just three decades ago.

The flat tax revolution of the 1990s had put pressure on politicians to lower tax rates and reform their tax systems to attract jobs and capital from the uncompetitive high tax nations. Globalisation had a positive impact on tax policy because governments had to compete and “converge” with wealthier nations.

Leading the flat tax trend were the Baltic states (Estonia, Latvia and Lithuania), then soon followed by the Balkan nations (Macedonia, Montenegro and Albania), Romania, Bulgaria, Georgia and Russia.

Critics such as the International Monetary Fund (IMF) then said that flat tax was unrealistic and that it only works in small jurisdictions and cannot work in large economies.

But when Russia and other large Eastern European countries got on the flat tax bandwagon, opponents began to concede that flat tax regimes were feasible, but reasoned that tax reform worked only in transition economies.

The IMF, in its study in 2006, labelled it as a fad and boldly stated; “looking forward, it is not so much whether more countries will adopt a flat tax as whether those that have will move away from it”.

None of the flat tax nations returned to a discriminatory rate structure and the flat tax seems securely enshrined. The international bureaucracy’s powers of prediction certainly leave much to be desired, because the study was wrong about countries moving in the other direction.

Bulgaria, now a European Union and NATO member, adopted a flat tax regime (10% flat tax on income and corporates and 20% flat tax on value addition) two decades ago and has kept it intact till today. Ironically, Bulgaria also happens to be the country of birth for the current IMF Managing Director Kristalina Georgieva.

However, the flat tax is not a cure-all for every economic ill. To maximise the economic benefits of tax reform, a nation should have the rule of law, property rights, sound money, limited government and low levels of regulations. In such an environment, the flat tax ensures the tax code will not be an obstacle to growth.

A flat tax reform plan would dramatically change the structure of taxation in Pakistan by correctly aligning incentives to promote economic growth, voluntary tax compliance and increase in government revenues.

It will launch Pakistan onto a new trajectory of economic growth and prosperity for all of its citizens.


The writer is a philanthropist and an economist based in Belgium

The article was originally published in The Express Tribune on May 20th, 2024.

Illegal trade: short-term gains, long-term economic decline

by PRIME Institute PRIME Institute No Comments

Illegal trade: short-term gains, long-term economic decline

Instead of asking IMF for $6b, govt must aim to plug tax loss hole of Rs1.5-2tr

Author: Dr Ali Salman

When Pakistan’s government imposed restrictions on imports to reduce the country’s trade deficit in 2022, it did not deter the inflow of goods – it encouraged substitutes and possibly smuggling, which is growing at 18% annually.

In particular, the large-scale manufacturing firms and multinational companies were negatively impacted, whereas small-scale firms and commercial importers managed to find alternative routes, often without the knowledge of the government, and at times in connivance with some elements within the state.

Taking account of the impact, Prime Minister Shehbaz Sharif had to recently declare that “illegal trade and smuggling have caused huge losses to the country”.

I present an informed guess to quantify this loss here. First, I qualify that for this article, illicit trade comprises legitimate goods, being produced, sold, and consumed through illegal means including non-documentation and tax evasion.

The illicit trade can be classified into: counterfeit, tax evasion, smuggling, and under-invoicing/misdeclaration.

According to some sources, smuggling through the Afghan Transit Trade (ATT) alone may be responsible for causing at least Rs1,000 billion loss to the national exchequer in terms of foregone import-related tax revenue.

Looking at another dimension of the illegal trade, the government is losing approximately Rs300 billion every year in tobacco taxes, which is rising. If we add another Rs270 billion estimated to be lost due to Iranian oil smuggling into Pakistan, the overall loss is at least Rs1.5 trillion.

These are only estimated numbers and as the nature of illegal trade would dictate, it is impossible to find a reliable number.

Using another source, the Pakistan Business Council estimates the size of grey and shadow economy to the tune of $68 billion. If the tax is assumed to be 10%, this would translate into tax losses of almost Rs1.9 trillion.

Therefore, it is safe to assume that the overall loss to the national exchequer caused by illegal trade, smuggling and tax evasion can be between Rs1.5 trillion and Rs2 trillion, which would be 21% of the current tax target.

This is more than 100% of the total targeted collection of federal excise duty and customs duty, as announced in the budget for 2023-24. This is coincidentally almost equal to the new loan being negotiated with the IMF.

These estimates do not include under-invoicing or misdeclaration as well as losses due to counterfeit products. These also do not include implications for business environment, and in particular, incentives for international investors, who look for a level playing field when it comes to tax policy and its practice.

Clearly, in a country where the government is seemingly focused on extracting taxes only from large-scale and corporate businesses, it provides wrong signals to existing investors, who essentially sends similar messages to future investors.

One should not be surprised that foreign direct investment (FDI) rates in Pakistan have remained abysmally low over the last few years.

According to the Transnational Alliance on Combating Illicit Trade (TRACIT), Pakistan is ranked 72nd out of 84 countries on the “Global Illicit Trade Environment Index”, which is published by the Economist Intelligence Unit. Its parameters are government policy, supply and demand, transparency and trade, and customs environment.

Illegal trade may provide short-term benefits to the economy in terms of cheaper alternatives, but in the long run, it deprives the country of productive investment, innovation, and competitiveness. In some cases, such as spurious medicines or pesticides, this also implies direct threats to public health.

Prime Minister Shehbaz Sharif’s government is rightly concerned about damages being caused by illegal trade activities and tax evasion. The strategy is multi-dimensional: tax compliance, improving enforcement, evaluation of track and trace mechanism and digitalisation of FBR.

It is not the first time that the government has launched such drives. A tax compliance initiative, known as “Tajir Dost Scheme” launched without due homework, is already failing.

It was able to bring only around 200 enterprises on the tax register, out of, well over, three million enterprises. The prime minister has already expressed his dismay over the track and trace system, which was implemented in four sectors in 2020.

Industry sources claim that counterfeit stamps are being produced in tobacco and sugar sectors. This system has met with similar failures in many other countries.

We have borrowed hundreds of millions of dollars for digitalisation of FBR in the last few years, and have found, to the national embarrassment, that FBR was using fake software!

While I hope that recent measures will bear fruit, one should remain wary of over-reliance on technology where policy design is faulty.

As Pakistan remains one of the most protected economies of the world, unless we minimise barriers (as demonstrated in taxes, tariffs, and regulations) to legal trade, the government has no chance of generating enough growth to raise required tax revenues and is set on a clear path towards bankruptcy.

The prime minister has a stark choice: instead of asking the IMF to provide another $6 billion (or Rs1,674 billion) to be disbursed over three years, he can take a different route and aim to plug the hole of tax losses estimated at Rs1.5-2 trillion over the same time period.

The writer is founder and executive director of the Policy Research Institute of Market Economy (PRIME), an independent economic policy think tank based in Islamabad

The article was originally published in The Express Tribune on May 13th, 2024.

Illicit Trade in Pakistan: The Twin Task of Combating Illicit Trade and Boosting Economic Growth

by PRIME Institute PRIME Institute No Comments

Illicit Trade in Pakistan: The Twin Task of Combating Illicit Trade and Boosting Economic Growth

The report investigates the situation of illicit trade across sectors in Pakistan. The convergence of various structural weaknesses in Pakistan’s economy challenges its ability to sustain recent gains in poverty reduction and undermines objectives for long-term growth in GDP. Since these factors also create fertile ground for illicit markets to strengthen, this report investigates the associated impacts and suggests remedies for consideration by Pakistan’s policy leaders. The report highlights that high levels of inflation and tax evasion compound the problems, and urgently calls for a comprehensive and coordinated approach to address them. The report contends that effectively tackling illicit trade will be a crucial ingredient in achieving Pakistan's economic prospect

The report has been published by TRACIT. To access the report, kindly click on the link provided below.

Click Here