A Reuters file photo of Athens.

ISLAMABAD: Pakistan and Greece may not have many things in common. They are located on different continents and the population of Greece is about one-20th of Pakistan. Pakistan is a low middle-income developing country while Greece is a high-income developed country.

But there are many similarities as well.

Both countries have been living much beyond their means and have to seek bailouts from the International Monetary Fund (IMF) as well as from other friendly countries. In fact, during the last 10 years, each of them took three bailouts.

Both countries have been facing serious problems with tax evasion. A study by Chicago University concluded that tax evasion in 2009 by self-employed professionals (accountants, dentists, lawyers, doctors and other service providers) alone in Greece was €28 billion.

Pakistan is facing the same problem. IMF estimates that tax capacity of Pakistan is 22.3% of gross domestic product (GDP), which implies a tax revenue gap of at least 10% of GDP or about the same as of Greece.

Another common factor is that both countries have seen several military governments. Both have been involved in long-standing and intractable territorial disputes with neighbors. Both countries spend heavily on defense compared to their GDP.

However, Greece is now turning the corner. Its new prime minister, Kyriakos Mitsotakis, has embarked on a series of bold reforms. As a result, Greece has become the fastest-growing eurozone economy with consumer confidence rising to a 19-year high. Its 10-year bond yield has dropped to 1.59%, enabling Greece to repay the expensive IMF loan of 3.7 billion euros much earlier than the deadline.

On the other hand, Pakistan’s economy is still not stabilized. The annual fiscal deficit has risen to the highest level of 8.9%, not seen in the last three decades. Foreign direct investment (FDI) has continued to fall and this year it is down by over 50% compared to last year.

How has Greece finally managed to change things for the better while Pakistan’s economic situation seems to be worsening?

First, the new Greek government embarked on bold taxation and other reforms including cutting the corporate tax from 28% to 24% in 2020. Banking restrictions on the transfer of money have been removed to restore confidence.

Second, it is going for quick gains and focus on those areas where it already enjoys a preferential advantage. In 2018, there were 32 million overseas visitors, which were more than double the number in 2010.

It has introduced a golden visa scheme, which grants five-year residency rights for third-country nationals. Greece has become a top destination for China’s middle class.

Third, it has been working on improving its balance of trade through an export-led growth strategy rather than import substitution. This is despite a recurring substantial trade deficit, with exports of $30.2 billion versus imports of $52.8 billion, resulting in a trade deficit of $22.5 billion. This year, its exports are expected to exceed $33-34 billion, which is the highest ever. It has modernized trade procedures and explored new markets and new products.

If Pakistan wants to halt its falling growth rate, it has to start freeing the economy of most of the restrictions. Liberalisation of telecom, financial and construction sectors during 2002-04 was the main driving force behind the fast GDP growth during the Musharraf era.

Due to recent adverse changes in taxation and other recent regulatory restrictions, business activities in all these areas have slowed down considerably.

Second, the government has to embark on an export-led strategy rather than trying to stick with the outdated import substitution policy. Its mild tariff reforms during the last budget have boosted local production and exports to some extent but to reach a tipping point, it needs to speed up the reform process.

Furthermore, it is high time Pakistan brings interest rate to a more reasonable level to stimulate growth. It has also to be more practical about its accountability drive, which has had a rather dampening impact on economic growth and new investments.

If Pakistan is to get out of its economic woes, it will have to embark on bold reforms. It has to open up its economy and cut red tape so that it can also attract some of the industries now being relocated from China to Vietnam, Bangladesh and other developing countries.

The writer served as Pakistan’s ambassador to the WTO from 2002 to 2008

Published in The Express Tribune, September 23^rd, 2019.

By Syed Talha Hassan Kazmi

The government of Pakistan has announced to intervene in the market of bottled water by launching a state-owned mineral water brand. Mr. Fawad Chaudary, Federal Minister for Science and Technology claimed that the bottled water costs Rs 1 per liter and it will be introduced in two phases. In the first phase, it will be used at government offices and in the second phase it will be made available to the general public.

Mr. Chaudary also said that it would be a cheaper alternative to other mineral water brands available in the market. In simple words, the government has decided to launch a SOE to compete with private market players. This article explains why such decisions are bound to fail. It also recommends some basic solutions to fix financial woes of the State Owned Enterprises.

Existence of a SOE can be justified only in that segment of the economy in which private sector is not willing to participate. Launching of “Safe Mineral water” cannot be justified in the presence of multiple private enterprises in this sector. In Lahore and other cities, one can find several privately-owned water shops providing quality water to the consumers at their door step at a price of around Rs. 5 per liter. Does the government really want to compete with them?

Ironically, we have many other sectors of economy in which loss making SOEs are unfairly contesting with private enterprises. For instance, despite having multiple privately-owned steel mills, Pakistan Steel Mills (PSM) is haunting the economy with total losses and liabilities of over Rs 480 billion. PSM was closed down in 2015 but government is bearing an expenditure of Rs 370 million every month in terms of employees’ salaries.

SOEs are generally established to provide certain goodsat a lower price. These goods are not normally provided by the market as they are usually non-rivalrous and non-excludable. Provision of a good at an economical price requires efficiency at each and every stage of business process. However, most of the SOEs in Pakistan have lost their financial viability stemming from bad governance, over staffing andpolitical interference. Most of them are so inefficient that they cannot even meet their operating costs.

There is no economic or even moral justification behind the existence of SOEs in those sectors of economy in which private sector is participating actively. Every year government injects huge sums of tax payers’ money to keep them alive. We the taxpayers are facing consequences of the crimes which we haven’t committed but the white elephants still exist and incurring huge loses.

A report prepared by the Ministry of Finance reflects that the net losses of SOEs have surged by 330 percent in FY17 and reached to Rs191.5 billion. Among the top ten loss making SOEs, National Highway Authority sealed top position with net losses of around Rs 133 billion, followed by Pakistan Railways Rs 40.7 billion, PIAC Rs 39.6 billion and losses of PSM jumped up to Rs 14.9 billion. This is the price of government intervention in the markets.

Explaining why SOEs fail

The answer to this question lies in looking at the end result of government programs. The owners of private enterprises and the people who are involved in running SOEs have the same incentive: to serve their own interest. However, the bottom line is different in the private sphere than in the public sphere. Under a well -functioning market mechanism if an enterprise fails it will go out of the market and owners will lose their investments. So, they have a strong incentive to make it efficient to avoid losses. However, if same people run a government program and it fails, they know that can get a bailout package from the government. They have no incentive to make it efficient.

After coming to power, the PTI government has given two bailout packages worth Rs 38 billion to keep the national flag carrier in the skies. The first bailout package of Rs 17 billion was approved in November 2018 and the second “dose of oxygen”was provided in February 2019. In August 2019, PIA management has demanded another injection of nearly Rs10bn to remain afloat. The fresh assistance was demanded to pay off foreign loans and for repair and maintenance of aircrafts. The government however, showed its reluctance to inject more money due to IMF restrictions.

As of June 2019, SOEs domestic debt peaked to Rs 1.4 trillion (3.6 percent of GDP). The financial black holes are also borrowing from commercial banks which is fast crowding out private sector. SOEs have borrowed Rs 228 billion from banks for commodity operations.

What needs to be done?

The government of Pakistan must privatize all the loss-making SOEs as revamping of these loss-making entities is not an easy option. Many governments have tried first to revamp these entities before putting them on the privatization list. PTI government also wasted one year to realize that the privatization of loss-making entities is the only solution to avoid further losses.

However, before privatization, the government of Pakistan must formulate a sound privatization policy and create an enabling business environment. The policy should explain the prerequisites for privatization, its process, and criteria. The government of Pakistan must also reduce the regulatory burden and liberalize the economy to incentivize private investment. 

It is highly appreciated that the PTI government has selected 17 SOEs for privatization. It is recommended that the government must ensure transparency in the whole process and rules should not be violated to give any SOE to a particular group or individual.

In those sectors of the economy where the private sector is not participating, corporate structure can be introduced to minimize the losses. Pakistan introduced corporate governance rules in 2013 but these rules were practically ignored by the government of PMLN. World Bank has recently launched the “Report on Observance of Standards and Rules”. The report highlighted serious flaws in the affairs of SOEs, such as lack of performance management system, fragmented ownership structure and lack of staff with financial and commercial expertise.

Many countries have implemented corporate governance rules to ensure accountability, transparency, and clarity in the mandate of all the stakeholders. Independent central boards in the form of holding companies, specific boards, and monitoring authorities are established to enhance the efficiency of the SOEs. Examples include Tamasak Holding of Singapore; Department of Public Enterprises in India and New Zealand’s crown monitoring authority. The PTI government has also decided to set up a holding company named Surmaya e Pakistan Holding Limited (SPHL) for the management of SOEs. Under this initiative all the entities will become subsidiaries of PSHL and shares of the federal government in all the SOEs will be transferred to holding company. The initiative will not only be helpful in improving coordination among different public entities, but it will also help them in focusing on their core matters and non-core issues such as legal services can be outsourced to PSHL.

SOEs lack capital due to which the entities face problems in the development of new assets and in maintaining the existing ones. This issue can be resolved through public-private partnerships. For instance, private investment can be mobilized into the aviation sector of Pakistan. The aviation policy of 2015 provides a business-friendly framework that can be helpful in attracting private investment in the airline. Private investment can also be mobilized to minimize budget constraints faced by Pakistan Railway. For instance, trains can be outsourced to the private sector and the receipts generated through this initiative can be utilized to maintain railway tracks. Also, redundant real estate assets owned by Pakistan Railways can also be utilized to attract funds.

Conclusion

Most of the SOEs in Pakistan are facing severe financial crises. Custodians of Naya Pakistan have to realize that bailout packages have done more harm than good.

It is recommended that all loss-making enterprises which are unfairly competing with private enterprises must be privatized. But, before privatization, the government should formulate a sound privatization policy. The government should also minimize regulatory constraints and reduce its control over market forces to incentivize private investment.

Public Private Partnership and corporate governance may also help in revamping the SOEs which are operating in those segments where private sector is not willing to invest.

The PTI government must understand that government intervention in an efficiently functioning market mechanism is always destructive and Pakistanis have already paid enough price of such misadventures.

Author is a Research Fellow at PRIME Institute and holds an MPhil in Economics.

1.Do not control prices, work on supply

The government should resist the temptation on controlling prices, as this provides wrong signals to both producers and consumers. Consumers go on panic buying and producers stop investing in supply. The government should still regulate, focus on supply, and take measures against cartelization and hoarding especially when it comes to food and medicines.

2.  Remove trade barriers

As we have advocated in the past, open trade helps in free flow of medicines and medical equipment, and government should withdraw such tariff and non-tariff barriers at least till the time the crisis is over. If Pakistan was a signatory to the Information Technology Agreement, as we recommended many times, import of medical machinery would be possible duty-free. Allow the free import of 3-D printer to help boost innovators.

3. Re-allocate resources to invest in critical manufacturing

Government should further reduce the interest rate and induce commercial banks to reallocate capital to the industries with plans to boost production in critical medical equipment such as ventilators and hospital beds..

4. Protect daily wage workers in the industries

Government should announce a new regulation to ensure that the workers on daily wages employed by the industry should continue to be paid during the factories closure.

5. Re-prioritize Zakat spending

Government should re-prioritize Zakat spending and should also encourage private companies and foundations to create a pool of funds to provide cash to informal workers in the industrial, agricultural and services sector during the crisis.

Pakistan’s policymakers are in an unenviable position while formulating the upcoming fiscal year’s budget

Everyone from small and medium enterprises to large-scale manufacturing industries is looking for relief measures to cope with the Covid-19 crisis. Even without the pandemic, many would expect some relief in the existing taxation regime as the government is reaching the halfway point of its tenure.

Unfortunately, there may not be much room for any major tax reductions. Already this year, the country would be fortunate even to achieve 70% of the original tax collection target of Rs5.5 trillion (which has been revised downwards several times).

While some blame lies with Covid-19, it was apparent from the beginning that the original target was almost impossible. One key lesson is that there should be some realism in setting the revenue target as that is the foundation of the whole budgetary exercise.

It should not be too difficult to estimate a ballpark revenue figure as the size of gross domestic product (GDP) and the growth rate are relatively better estimated, and the tax-to-GDP ratio does not change much.

Given historical trends, expenses almost always surpass estimates, while revenues are often much lower than the set objective. Notwithstanding these realities, according to press speculations, the IMF is pushing for a significant rise of 34% in overall revenues next year.

As the economy is likely to contract into negative territory, any tax increases will be self-defeating and not likely yield any additional revenues. It would be in everyone’s interest to have a realistic tax target – say about 15% higher than the anticipated receipt this year.

Having an achievable revenue target will result in more credibility on the expenditure side. Also, major stakeholders on the expenditure side will realise the seriousness of the situation and limit their demands.

Next fiscal year’s priority should be to curtail non-development expenditure and focus on such budgetary expenses, which can create employment. Thus, keeping a reasonable level of Public Sector Development Programme (PSDP) would be valuable.

At the same time, tax reforms can facilitate the business environment and often bring more revenues. It is particularly vital that the industry, especially the small and medium enterprises, can restore its activity so that some of the job losses could be recovered.

Tariff board

The budgetary measures, which are also the main channel for determining the trade policy, will be the first test of the new Tariff Policy Board, headed by the prime minister’s adviser on commerce. The initial milestone will be whether the new tariff policy can change the direction to support Pakistan’s industrial growth, international trade and other public interests.

Even if the tariff rates cannot be seriously rationalised to give much-needed relief to the local industry with cheaper inputs and reduce rampant smuggling, at the very least, the Tariff Policy Board can simplify the tariff.

Every government intended to provide a level playing field for various industries by reducing the number of Statutory Regulatory Orders (SROs) and tariff slabs to reduce tariff dispersions. Still, for more than a decade, it had been mostly lip service with no real reforms.

The Tariff Policy Board can change it. In addition to the simplification of tariff, there is an urgent need for budgetary measures to cope with the Covid-19 health emergency.

The minimum concessions for coping with Covid-19 should include an extension of the temporary exemption for medical and other healthcare equipment from import taxes till the pandemic is over.

A recent study by World Bank economists, giving the comparison of applied tariffs in 20 developing countries, showed that Pakistan is one of the three countries which have the highest import taxes on Covid-19 products. It is unfair to not prefer people’s health and welfare for the sake of minor revenue.

Malnutrition

Another linked issue is that of malnutrition, which is already affecting almost half of the Pakistani children and women but will become worse with the impact of Covid-19.

Prime Minister Imran Khan highlighted stunting in his inaugural address. According to a recent study, the consequences of malnutrition cost Pakistan’s economy $7.6 billion every year.

With the help of the World Food Programme, the government has been working on increasing access to food supplements for the vulnerable section of society. But the high incidence of import taxes on the ingredients of food supplements makes it difficult to manufacture them locally. In this Covid-19 period, malnutrition must not increase.

The budget may not be able to set any lofty goals but it should at least save common people from further economic losses and protect the poor from falling into destitution.

The writer is a senior fellow with the Pakistan Institute of Development Economics and has served as Pakistan’s ambassador to WTO

Published in The Express Tribune, May 18^th, 2020.

Federal Budget 2020-21

By DR MANZOOR AHMAD

COVID-19 (coronavirus) is an unprecedented catastrophe of modern time. Governments all over the world are looking at all sorts of options and policy tools to meet this challenge.

Pakistan’s government has recently taken many reasonable steps, including adjustment of fiscal and monetary policies to combat this. Still, considering the magnitude of the problem, a lot more will need to be done.

This article points out some other areas where policy decisions are urgently needed.

First, looking at the trade policies, the government has exempted medical and other health care equipment from import taxes initially for a period of three months. It is not likely that within this short period, the objectives will be met, considering that there is an acute shortage of these goods and many countries have imposed export bans.

Importers face severe constraints while entering into any purchase contracts. In case there is any delay, punitive tariffs and other import taxes will be applicable when the goods arrive.

There are very few countries that are usually taxing life-saving medical instruments. Most countries are members of the World Trade Organisation (WTO) Agreement on Information Technology, which was updated in 2015 to include advanced medical equipment.

Under the agreement, the member countries allow duty-free imports. Pakistan should consider becoming part of this global alliance. Still, if it is not possible immediately, it should not limit the exemption from taxes on life-saving goods to only three months.

In the context of COVID-19, the most urgent problem is the lack of ventilators, which are currently the only option to save lives.

Due to high cost and unavailability at present, groups of local volunteers including engineers, doctors and biomedical professionals are working round the clock to make affordable ventilators and related accessories.

They could take cue from the efforts of an Irish team that has recently developed a 3D-printed mechanically operated ventilator prototype. It is an open-source ventilator implying that anyone can make use of this model to make their own.

Pakistani entrepreneurs may find themselves disadvantaged by the fact that currently the import of 3D printers is not allowed in Pakistan. 3D printers are being used in various countries to meet high demand for reusable plastic facemasks and protective gears for health workers.

These printers build almost anything, including body parts, physiotherapy goods and hospitals.

Even before the current crisis, they were spearheading the digital industrial revolution. Maintaining a ban on their import does not make any sense. We need them urgently to produce mass-customised health care and other products.

Import of insecticides

Another related and foremost issue is last week’s federal cabinet decision to reject a proposal from the Ministry of Commerce to allow the import of insecticides from India even on a one-time basis to control the imminent threat of the spread of dengue fever.

Punjab government’s health care department made the proposal. There is no realisation that just last year there were about 45,000 confirmed cases of dengue fever, including 75 deaths in the country.

If dengue spreads as widely as it did last year, the casualties could be even more than anticipated from the coronavirus.

Since the mosquito that causes dengue fever starts laying eggs in early summer, there is very little time for taking preventive measures. It is hard to imagine the doomsday scenario resulting from the combined havoc from dengue and coronavirus.

Considering the social, economic and political implications of COVID-19, all national stakeholders must adequately be represented in the decision-making process. What we are still missing is a cross-functional COVID-19 response team representing all the three sectors.

There is also a need for frequent virtual meetings of the Council of Common Interests (CCI) to avoid any misunderstanding and ensure a coordinated effort.

In case essential supplies from one part of the country fail to reach another, it can give rise to severe law and order situation.

Global cooperation

As at the national level, cooperation is proving to be a challenge at the international level. Over 50 countries (including Pakistan) have applied new trade restrictions on medical supplies, and the trend is continuing.

But there are some bright spots as well. China is one of the few countries, which having overcome its adversity is now extending material and technical assistance to many other countries including Pakistan.

Many countries are also forming regional forums and funds to fight the crisis. South Asian countries have set up the Saarc Corona Emergency Fund. India has made an initial contribution of $10 million while all other countries have also made their contributions ranging from $5 million from Sri Lanka to $1 million by Afghanistan and $100,000 by Bhutan.

Pakistan is the only country, which is so far staying apart from this regional initiative. The country’s policymakers must realise the importance of cooperation, whether domestic or international.

The writer is the senior fellow at Pakistan Institute of Development Economics and ex-ambassador to WTO

Published in The Express Tribune, March 30^th, 2020.