Privatising successfully – the case of Czech Republic
Privatising successfully – the case of Czech Republic
Non-standard methods, experiments of privatisation may be good for Pakistan
Dr. Khalil Ahmad | 01, January, 2023
Altering the economic system is not an easy task. It is more complex when carried out half-heartedly. Privatisation is only a part of this process. It may not succeed if done in an isolated manner. Among other things, it requires a competitive environment to bear fruit.
A case in point is the erstwhile Czechoslovakia. It provides us with a good learning experience to see how after the fall of a collectivist state, the gigantic task of changing the economic system was handled.
Dr Vaclav Klaus was one of the key members of a movement, Velvet Revolution, which overthrew communism in Czechoslovakia. He was the prime minister (1993-1997) and the president (2003-13). An economist and politician, he was the first non-communist finance minister of Czechoslovakia.
According to Klaus, the starting point of a change in Czechoslovakia was liberalisation and deregulation of markets. And this move consisted of three main liberalisations: i) price liberalisation, ii) trade liberalisation, and iii) business liberalisation.
As to the price liberalisation, for 40 years the people in Czechoslovakia had totally frozen and administered prices. So, liberalising prices was a dramatic shock.
He makes a comparison. The Australians spent years or decades discussing liberalising the price of milk in Australia. But in Czechoslovakia they didn’t have just one case of milk. They had hundreds and thousands of prices with possibly the same impact on individuals in different groups of society.
The second move, trade liberalisation, was also a dramatic one. It meant opening the country after 40 years of semi-autocratic and protected economy.
And, the third move was liberalisation of entry into market for all types of enterprises, both private and foreign.
These three liberalisations represented the first stage of transition, and not only changed the whole society but also enormously increased the supply of goods and services.
It brought equilibrium in the market overnight. It interrupted some of the old, deeply built-in behaviour of citizens, and it attacked and endangered various old habits they inherited from the communist past.
Klaus readily admits that realising such changes was socially difficult, politically brave but technically easy because most of the measures required just had to be announced.
Again, citing the case of milk price, he says that to deregulate or liberalise the price of milk, Australians, or for that matter anyone, don’t need sophisticated theories.
It doesn’t need the involvement of university professors or experts on micro- or macroeconomics. It is sufficient to meet at eight o’clock in the evening and announce on TV that tomorrow morning at 8am the price of milk is free to move. That is what they did in Czechoslovakia.
However, he admits, the second stage of transition was not an easy one. It required more positive and constructive activity from the government. Because, it was necessary not only to introduce such passive transformation measures, but also to implement some active measures. It was necessary to build, establish new and/or transform old institutions and organisations.
And, of course, he says, the crucial point in this respect was privatisation. But it was really impossible to wait for the slow emergence of hundreds and thousands of private enterprises – built from nothing – and for the slow disappearance of state-owned enterprises (SOEs), which 11 years ago in former Czechoslovakia represented almost 100% of the whole economy. He emphatically says: So, we had to privatise. It’s an accepted exercise.
Klaus’s narrative of their privatisation is all but immeasurably instructive. He says: We had to privatise, we decided, and it was necessary to privatise the state-owned firms on a massive scale, on a wholesale basis, not just individual firms.
That is something he always had to repeat and to stress because everyone compares privatisation in post-communist countries with privatisation in France, Sweden and the Netherlands.
I am not an expert on it, he says, but I always say that the brave Margaret Thatcher privatised three or four firms a year, whereas we had to privatise three or four firms per hour! Because otherwise it would have taken a century to do that job.
For that reason, we had to use some non-standard methods of privatisation; we had to do experiments and different exercises.
Lesson to be learnt: In Pakistan, neither the government runs the SOEs successfully, nor does privatise them successfully. So, any non-standard methods and experiments of privatisation would after all be good.
It’s better through political consensus. The way a lot of private entities were nationalised simply by an Act of parliament, all the SOEs be also written off and considered privatised in a wholesale manner by another Act of parliament. Or the executive order will do that
Another lesson: Deregulate and liberalise the sectors the SOEs belong to, and liberalise trade and prices also. These measures would make the existence of SOEs more obsolete.
The writer is a political philosopher and political economist and is a distinguished research fellow at PRIME.
The Article was originally Published on The Express Tribune, on December 18th, 2023.
World Bank approves $350m package
World Bank approves $350m package
Board members deem 10% tax-to-GDP ratio insufficient to meet growing expenditure
This Article was originally Published in The Express Tribune, on December 21st, 2023.
GSP Plus & EU Market: Export Potential of Balochistan-Pakistan
GSP Plus & EU Market:
Export Potential of Balochistan-Pakistan
Authored by:
Jahangir Shah Kakar
Research Intern PRIME
Kakarat433@gmail.com
Supervised by:
Sarah Javaid
Research Economist Sarahkazmi1214@gmail.com
Supervised by:
Ali Salman
Executive Director PRIME
ali@primeinstitute.org
The study provides an overview of Pakistan's trade relations with EU countries as well as trade benefits for Balochistan-Pakistan's largest and least developed province. GSP+ status was granted by the EU to Pakistan in 2014 with the aim to promote human rights. sustainable development, and good governance through trade. After attaining the GSP+ status in 2014, the exports of Pakistan to the EU have augmented by more than 100% and have increased by 42.6% in 2022 as compared with 2021. Pakistan, along with other Asian countries like Bangladesh, Sri Lanka, and India, exports textiles and other goods to the EU markets while importing heavy machinery and other high-value items from the EU. Keeping Pakistan’s trade trends in view, unfortunately, little to no attention is given to other sectors including agriculture. This research study has attempted to identify the unrealized trade potential of Balochistan with respect to its trade with EU member states. Interestingly, Olives from Balochistan have great potential to be exported to the EU. Seafood from the country as well as the province is also being exported to Belgium, Spain, the Netherlands, and the UK. Balochistan, being one of the mineral-rich provinces with a vast track record of arable land, has the potential to benefit from the status with respect to agriculture goods, livestock products, and mineral resources to EU markets without any duties. This research suggests that Balochistan has not quite benefited from GSP+ status as compared with its existing potential in the fields of agriculture, livestock, and mining, and proposes a way forward. The government needs to work on devising policies in compliance with EU requirements to explore trade avenues with EU member states.
Download the report now by clicking the link below.
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Election 2024 And Tax Reforms
Election 2024 And Tax Reforms
Dr. Ikramul Haq | 21, December, 2023
Now that the Supreme Court of Pakistan has made it clear that no case will be entertained that disturbs the schedule announced by the Election Commission of Pakistan (ECP) for general elections, to be held on February 8, 2024, it is the time that all the political parties unveil their election manifestos. It is high time that agenda for tax reforms should be made the central theme of election manifestos by all contesting parties. Pakistan cannot come out of the prevailing economic crisis, the worst in its 76-year-old history, unless long-delayed and much-needed fundamental structural reforms are made. These alone can ensure self-reliance for the country bringing relief for all citizens and bringing the nation back on the road to prosperity.
Since the adoption Constitution (Eighteenth Amendment) Act, 2010, [commonly called “18th Amendment”], became effective on April 19, 2010 after receiving the assent of President of Pakistan, fiscal management, both at federal and provincial levels, has been posing serious challenges for the country.
In this article an attempt is made for establishing a fair and just tax system. Taxes should be collected justly and spending must be prudent ensuring delivery of social services, equal opportunities and economic justice to all citizens. Reform in one sector ignoring the ills in the other, resorting to improving something at the cost of leaving aside the one interlinked, will not yield desired results. The case of tax reform divorced from elimination of black economy is the point in focus. The main cause of fiscal deficit is allowing an unprecedented size of underground economy to flourish and the perpetual existence of incompetent and inefficient tax machinery as well as borrowing for non-productive projects to receive hefty kick backs.
The inquiry ordered in 2018 on this issue, soon after coming into power on August 19, 2018 by the ex-premier, now serving a jail term, was never completed whereas under the existing bilateral and multilateral tax treaties, this kind of information could have been very easily obtained. In fact information did come, but the Government of Pakistan Tehreek-e-Insaf (PTI) and National Assembly gave unprecedented assets-whitening amnesty, see details in Unconstitutional asset-whitening schemes & amnesties.
The lesson from above is clear that reforms in tax administration without routing the causes of parallel economy and vice versa is not going to improve our fiscal woes. The failure of democracy in Pakistan, among many other factors, is attributable to lack of democratic values within political parties—they do not file their own tax returns. It is highlighted in Civil governments, ‘Ordinance’ factories as under:
“Exemplary punishment should be awarded to all holding public office, members of services, or holding any constitutional position, as custodians of public trust, if they commit corruption or are found guilty of wrong declarations of their assets/liabilities or avoid paying any dues (taxes and/or others).
The main job of the legislators is to pass laws to protect public rights, ensure welfare for all, especially the less-privileged and provide effective justice system safeguarding that rule of law and transparency are key to counter private interests over public interests. On the contrary, since 2008, all successive governments have shown formidable resistance against establishment of an independent anti-crime authority, as National Crime Agency of United Kingdom. We follow its model of democracy but when matter comes to accountability, defy it with impunity. All in power and in opposition know that such a body would expose their corruption and other malpractices—especially the command of the Constitution under Article 17(3) saying: Every political party shall account for the source of its funds in accordance with law.
It is shocking that only two political parties filed income tax returns for tax year 2020 out of 27 registered with FBR and 127 with Election Commission of Pakistan despite section 114(1)(ac) of the Income Tax Ordinance, 2001 that makes it mandatory. How can we expect rule of law in Pakistan, when 125 political parties are committing flagrant violation of Article 5(2) of the Constitution? They keep on bashing FBR but fail to fulfill the commands of the Constitution.
The civil society and media should join hands to force the Parliament to abolish all laws of secrecy and/or immunity and enact a law in terms of Article 19A of the Constitution for compulsory disclosure of assets/liabilities/taxes paid by judges/generals/high-raking civil officers. In 2020, members of Women’s Action Forum (WAF) sought under the Right of Information Act, 2017, information regarding assets, salaries and perks of honourable judges of Supreme Court and High Courts as well as of military leadership. However, none responded, except Justice Qazi Faez Isa, who provided the details of him and his spouse and all family members”.
It is, thus clear that unless the parties reform themselves by introducing fundamental changes in their working, there is dim hope for meaningful (sustainable) democracy in Pakistan. In all established democracies, political parties regularly hold elections, publish their audited accounts, file tax returns, disclose details of expenses and names of donors—all these elements are conspicuous by their absence in our political culture. Media must start a campaign asking political parties to meet these standards.
The agenda/roadmap for reforms to achieve accelerated and sustained growth was launched on April 22, 2021 by Pakistan Institute of Development Economic (PIDE) in ‘PIDE Reform Agenda for Accelerated and Sustained Growth, It must be seriously considered by the policymakers and legislators. In Part 10 of this study, reforms and actions for fiscal consolidation have been discussed succinctly.
As suggested in the study of PIDE, Pakistan has to move towards higher growth for which comprehensive tax reforms are inevitable. We must strive for 7% sustainable growth for at least a decade for achieving desired tax-to-GDP ratio of 20-25%. This is not possible unless we have a paradigm shift in tax policy and revamping of national tax administration for generating sufficient resources for the federal and provincial governments with drastic cuts in wasteful and unproductive expenses and bring innovation and efficiency in public and private sectors. It must be the top priority in national budget 2024-25 after general elections to reduce rate of all taxes and broadening the base.
The enactment of new income tax law, taxing all sources, including agriculture, and harmonised sales tax (HST) on goods and services and establishment of single national tax agency [National Tax Agency (NTA)] are essential. This is possible under Article 144 of the Constitution of Islamic Republic of Pakistan [“the Constitution”]. While the collection will be through NTA, distribution is going to be strictly under Article 160 of the Constitution. The fully automated NTA, operated by professionals under All Pakistan Unified Tax Services, will be supervised by an independent Board of Directors. The status of the NTA should be as provided in Federal Board of Revenue Act, 2007 that after merger will be renamed as Pakistan Revenue Board (PRB).
The crux of two studies [Towards Flat, Low-rate, Broad and Predictable Taxes (PRIME Institute, Islamabad, 2020] and Tax Reforms in Pakistan: Historic & Critical View [Pakistan Institute of Development (PIDE) 2020] is: lower, predictable and broad-based taxes, administered through efficient tax apparatus enabling Pakistan to achieve fairness in taxation system. It will create incentives for better compliance and lead to accelerated economic growth. A paradigm shift is required to restructure the entire tax system to induce more investment, accelerate growth and ensure economic prosperity for the country benefitting all members of society.
These studies analyse the structural and operational weaknesses of the existing tax system at federal level and suggest alternate solutions in the following areas that require fundamental reforms:
Area Solution
Complex Income
Taxation: Low-rate Income
Taxation
Distorted/Multiple
Sales Taxes Single-stage,
single-digit Sales Tax
Customs/SRO Culture Single-rate Customs Duty Multiple Tax Collection Agencies National Tax Agency
Inefficient Appellate System Federal Tax Tribunal
The PRB, unlike FBR, should not have any role in framing tax policy. For this a permanent Tax Policy Board should be established in the light of Article 156(2) of the Constitution with Planning Commission to become a permanent secretariat for federalised economic development. The role of Policy Board in this permanent secretariat should be of a think-tank to recommend policies for equitable and accelerated growth on national level as well as helping all assemblies and Senate for legislation to achieve the desired goals. For example, 2% cess exclusively for debt retirement, imposed on the ultra-rich.
Through democratic process, all the provincial parliaments may pass resolutions under Article 144 of the Constitution, giving powers to the National Assembly and Senate to enact laws for harmonising sales tax on goods and services and income tax from all sources to be collected through PRB. It would facilitate people to deal with a single body, one-window facility at national and provincial levels.
The mode and working of PRB can be discussed and finalised under Council of Common Interest [Article 153] and its control can be placed under National Economic Council [Article 156]. Tax collection and compliance at national level cannot be improved without establishing NRB and introducing an integrated Tax Intelligence System (ITTS) that can correlate imports, exports, sales tax collection on goods and services with income tax returns and monitor all transactions. A fully automated, professional and efficient PRB would alone be in a position to improve capacity by detecting tax avoidance and evasion through ITTS.
India, after long consultations and deliberations enacted the Central Goods and Services Tax Act, 2017 (CGST Act). The CGST Act, through harmonising indirect tax on goods and services, has broadened the tax base. Voluntary compliance, due to a robust IT infrastructure, has increased registration by almost 90% (23 million active CGST Act registrations, as on March 31, 2022). Collection showed substantial growth, from INR 7.7 trillion in FY 2018 to INR 11.7 trillion in FY 2019 to 18.2 trillion in FY 2022. Due to the seamless transfer of input tax credit from one state to another in the chain of value addition, there is an in-built mechanism in the design of CGST Act that incentivizes tax compliance by businesses.
It is thus imperative that the new elected federal government with the consultation and consent of all provincial governments introduce Harmonised Sales Tax (HST) on goods and services in Pakistan that will foster a vibrant market and contribute significantly to the growth of economy. Pakistan needs to move fast towards harmonising taxes and collection through PRB. In India, this is under Goods and Service Tax Council. It will not only reduce the cost of collection of taxes but help in creating a centralised data bank for efficient collection of taxes and counter avoidance and evasion.
Before establishing PRB as an efficient and integrated tax administration, major information technology and human resource improvements in tax collection methods as well as effective audit techniques should be developed along with development-oriented tax policy. Tax reforms are meaningless without an effective tax administration and rational tax policy that can ultimately provide funds for social services to all citizens at grass root level as envisaged under Article 140A of the Constitution.
As a long-term reform measure, we must concentrate on devolution of political, administrative, financial responsibility and authority to the elected representatives of the local governments, after training candidates (preferably fresh graduates) with millions near home getting jobs for secretarial support, achieving the much-desired target for employment.
Tax reforms undertaken to date, have mainly been patchwork, and proven to be an exercise in futility. Tax reform commissions and consultative committees, constituted for reforming the system, have proven to be unsuccessful as they have been suggesting remedies for curing the incurable or otherwise curing symptoms rather than addressing the causes.
The reforms, including World Bank-funded six-year-long Tax Administration Reforms Project (TARP), have failed to encourage people towards voluntary tax compliance. The number of tax filers has fallen since 2003 (excluding those filing income below taxable limit of paying negligible amount to become part of Active Taxpayers List to avoid higher incidence of withholding taxes).
In 2020, the Federal Government obtained loan of US$400 million for Pakistan Raises Revenue (PRR) Project. It may be mentioned that the total cost of Pakistan Raises Revenue (PRR) Project is estimated at US $1.6 billion, of which counterpart contribution is $1.2 billion and IDA financing is US$400 million. Following in the footsteps of the Federal Government, the Punjab Government also decided to borrow US$304 million from the World Bank for tax reforms and it was approved by Planning Commission on September 16, 2020. Like earlier programmes, these are also bound to fail as the consultants of lenders/donors have not idea of our constitutional framework and mundane realities.
The only viable option for meaningful change is to replace the existing tax system with lower, flat and a predictable tax system that is simple, pragmatic, growth-oriented, and broad-based. With such a system in place, those who are not into the tax net or who avoid true disclosures would be induced to pay their taxes voluntarily. This should be coupled with transparent and quality spending of taxpayers’ money for welfare of society as a whole and incentivizing growth and economic well-being of every individual.
The study, Towards Flat, Low-rate, Broad and Predictable Taxes, suggests not only we have s single tax agency, the same should also administer various social and economic benefits and incentive programmes, otherwise tax compliance will remain a distant dream. People must get free education, quality healthcare, decent housing/transport plus social security schemes, such as, disability allowance, old age benefits, income support, child support, pension, just to mention a few, in lieu of paying fair taxes.
The existing four-tier tax appellate system has also failed to deliver. The problems faced by taxpayers in appeals/references speak volumes of the ineffectiveness of various judicial forums that have been assigned the statutory obligations to safeguard them against unjust imposition of taxes. The revenue authorities are also unhappy with the tax appellate system as litigations take years for settlement of tax disputes. Therefore, in order to make the appellate system more responsive, the existing tax tribunals dealing with direct and indirect taxes need to be restructured.
The above study proposes a two-tier tax appellate system where first appeal goes to National Tax Tribunal with the right of another appeal in the form of intra court appeal. Subsequently, if any substantial question of law needs consideration, it can be referred to the Supreme Court by way of leave to appeal. This will help in achieving uniformity of decisions since at present High Courts in different provinces sometimes differ on identical questions of law and it takes years for final authoritative pronouncement by the Supreme Court. The two-tier tax justice system can ensure expeditious settlement of tax disputes, preferably within a year’s time of first order.
Income taxation at the moment is highly complex and fragmented. There is classical taxation under various heads of income, while many transactional taxes, presumptive and minimum, alternate corporate tax have been added to distort the entire concept of personal income taxation.
Towards Flat, Low-rate, Broad and Predictable Taxes also suggests simple and flat rate taxation of 10 percent or 2.5% of net wealth exceeding Rs. 10 million, for all individuals and for AOPs and companies, 20 percent. It proposes single-stage, single-digit sales tax on goods by federal government at the rate of 8 percent across the board with no exemption, albeit exporters shall have zero-rated regime. The only exemption shall be on food, life-saving drugs, books, children’s garments and educational equipment. Provinces can also consider imposing harmonised sales tax (HST) at the same rate on services, details of which requires a separate study. Alternately, we should move towards a unified sales tax on goods and services through national consensus whereby provinces give right under Article 144 to the National Assembly.
Under the current Customs Act, 1969, exemptions/concessions are granted to goods in three categories under Pakistan Tariff: (i) Fifth Schedule of the Customs Act and Statutory Regulatory Orders (SROs), (ii) Chapter 99 of Pakistan Customs Tariff and (iii) export promotion schemes announced time to time. There are over 5,000 effectively traded tariff lines and 2448 tariff lines (33% are under 20% slab). Heavy taxation at import stage (50% of FBR revenue is collected at import stage) encourages smuggling, undervaluation, misreporting, misdeclarations and tax evasion.
The SRO-based customs policy has rendered the actual tariff different from the standard tariff. As a result of this, customs tariff has multiple rates and several exemptions, and various “conditions and requirements” are to be fulfilled to avail those exemptions. This creates opportunities for the discretionary use of powers by officials, raising the cost of doing business and incentivising malpractices and misdeclarations for evading duties. Recognizing these problems, this paper proposes that there should be a single slab of for all imports to end these undesirable practices.
The traditional approach adopted for decades in Pakistan for balancing the books, levying more taxes, containing fiscal deficit and other number games will have to be reconsidered in totality under the prevalent exceptional circumstances. The only viable option for meaningful change is to replace the existing tax system with simple, low-rated tax on a broad-base, pragmatic and growth-inducive. With such a system in place, those who are not into the tax net or who avoid true disclosures would be encouraged to pay their taxes voluntarily, honestly and diligently.
It will create incentives for better compliance and lead to accelerated economic growth. A paradigm shift is required to restructure the entire tax system to induce more investment, accelerate growth and ensure economic prosperity for the country benefitting all members of society. This should be coupled with transparent and quality spending of taxpayers’ money for welfare of society as a whole and incentivizing growth and economic well-being of every individual.
The nation should demand that all political parties evolve consensus on areas of reforms highlighted by PIDE and many other institutions and individuals. There should be pre-election agreement on one point: We all want to make Pakistan a true egalitarian state as envisaged under the Constitution. For achieving this goal, political parties must debate for comprehensive reforms in all areas pointed out by PIDE with the aim to move towards the cherished goal of self-reliance and becoming a welfare state. It is not possible to make Pakistan a welfare state unless we undertake structural reforms in the prevailing politico-economic system that favours the minority elites against the majority that is less-privileged.
This article was originally published on "The Scoop" on December 19, 2023.
Third Pakistan Prosperity Forum
THIRD PAKISTAN PROSPERITY FORUM
Policy Research Institute of Market Economy (PRIME) hosted Third Pakistan Prosperity Forum, The conference brought together government representatives, IMF officials, business leaders, academics, and media professionals.
The event fostered discussions on Pakistan’s economic challenges and proposed strategic reforms for sustainable growth. Speakers included Mr. Fawad Hasan Fawad (Federal Minister for Privatization), Ms. Birgit Lamm (Director, Friedrich Naumann Foundation Pakistan office), Mr. Shahid Hafeez Kardar (Former Governor State Bank), Mr. Rizwan Rawji (Economist, Phlianthropist)i, Dr. Nadia Tahir, (Economist), Mr. Wahaj Siraj (CEO Nayatel), Ms. Zehra Shallwani (CEO Dastan Tours), Mr. Imtiaz Rastgar, and session chairs including Dr. Ikram ul Haq (Advocate Supreme Court), Dr. Manzoor Ahmad (Pakistan’s Former Ambassador to WTO) and Mr. Mohammed A. Rajpar offering valuable insights to shape a prosperous future.
Third Pakistan Prosperity Forum 2023
Marriott Hotel, Islamabad, 27 th November 2023
AGENDA
Discussion notes from the conference can be accessed by clicking below.
Access the full presentation on “Prospects for Debt Relief” by clicking below.
Access the full presentation on “Rediscovering And Opening Up Pakistan A Case of Tourism sector” by clicking below.
Press Release
Highlights:
Revamping taxation system and privatizing SOEs are crucial for economic prosperity
Revamping taxation system and privatizing SOEs are crucial for economic prosperity
The taxation system of Pakistan not only incentivizes people to stay out of the tax system but also contributes to decorporatization, said Mr. Fawad Hasan Fawad – Federal Minister for Privatization, while speaking at the 3rd “Pakistan Prosperity Forum” organized by the Policy Research Institute of Market Economy (PRIME).
In the keynote address, Mr. Shahid Hafeez Kardar- Former Governor State Bank of Pakistan, highlighted that rationalization of public expenditures is crucial for the sustainability of public finances. Dr. Nadia Tahir stressed upon the importance of fiscal prudence by sharing that fiscal spending has not resulted in economic growth in Pakistan.
The Forum was attended by the representatives of the government, IMF, business community, academia, and media.
Speakers presented the diagnosis of the economic challenges by focusing on the debt crisis caused by unrestrained spending and suggested reforms to build an agenda for sustained economic growth.
Mr. Fawad Hasan Fawad informed the audience that the current state of the public sector is unsustainable and contributes to the deterioration in the business environment in the country. In 3 years from 2018-2021, the government spent Rs. 2.54 trillion in terms of subsidies, grants, and loans to keep commercial SOEs operational. The size of the government has increased by more than three times in the last couple of decades.
Mr. Fawad highlighted the flaws in the country’s taxation system by informing that around 93 percent of the collected tax revenue is either voluntary or withholding; whereas, only 7 percent is actually collected by FBR. Moreover, FBR sends recovery notices to individuals worth billions of rupees while the actual collection is a mere few hundred million. Since 2016, the tax burden on corporate taxpayers has increased by more than 40 percent on average. Such a burden has not only contributed to encouraging people to stay out of the tax system but also decorporatization.
The public sector reforms should include bureaucratic reforms and taxation system reforms. These two areas are crucial for improving performance of the state. He stressed that the reform should not increase in the size of the federal and provincial governments, and the power of state functionaries. The reforms also need to focus on building the capacity of the state to regulate markets from where the government exists and the private sector takes over.
Mr. Shahid Hafeez Kardar highlighted that the wasteful expenditures on low-priority, and poorly designed projects have made the debt unsustainable. While addressing the Forum, Mr. Kardar said that borrowing is not harmful if utilized in productive activities and generating assets. He informed that Pakistan’s Gross Public Debt is 667 percent of revenues, and external debt is 232 percent of exports.
The overhaul of the economy requires rationalization of government expenditures, moving towards a contributory pension system, reducing the footprint of the government in the economy, rationalizing tariff structure by phasing out protection of industries and revamping the taxation system by reducing the rates and number of taxes.
Mr. Rizwan Rawji – Businessmen, presented the Charter of Economy prepared by PRIME and highlighted that political stability and strong political will hold critical importance in promoting economic prosperity. The economic woes such as the balance of payment crisis, unsustainable debt, and inflation are only due to misaligned fiscal policies of the governments. Currently, out of 5 million tax filers, less than 3 million pay tax, and a significant portion of sales tax is collected from a mere 400 entities. Mr. Rawji suggested that reforms envisaged in the Charter of Economy are based on the pillars of economic prosperity, which are: low and broad-based tax rates, spending restraints, low footprint of the government in the economy, privatization of loss-making SOEs, tariff rationalization, and sound money.
Mr. Ali Salman – Executive Director PRIME, remarked that the size of the government and its presence in the economy need to be reduced to improve fiscal sustainability and create an enabling business environment in the country.
The speakers had a consensus that reforms should start from the restructuring and resizing of the government to reduce its presence in the economy. The reforms should be complemented by restricting the public spending and focusing on revamping the taxation system by reducing the number and rates of taxes to broaden the tax base.
For inquiries, please contact farhan@primeinstitute.org or call +92 (51) 8 31 43 38
Upcoming Event: Third Pakistan Prosperity Forum
Third Pakistan Prosperity Forum
Restructure, Reform, Growth
We are excited to announce the upcoming 3rd Pakistan Prosperity Forum: Re-structure, Reform, Growth, organized by the Policy Research Institute of Market Economy (PRIME) in collaboration with the Friedrich Naumann Foundation for Freedom Pakistan.
Event Details:
Date: Monday, 27th November 2023
Time: 09:30 AM to 4:00 PM
Location: Islamabad. Pakistan.
The objectives of Third Pakistan Prosperity Forum are:
1. To present a diagnosis of economic challenges faced by Pakistan with a focus
on public debt crisis, underpinned by unrestrained public spending.
2. To disseminate clear, specific and practical policy messages for economic
reforms, structural reforms and institutional reforms.
3. To bring together stakeholders from the community of economists, policy
makers, entrepreneurs, think tanks, and politicians and to build a consensus
on an agenda for sustained economic growth and better governance.
Speakers include economists, business leaders, policy makers and policy experts.
Program Agenda:
For inquiries or more information, please feel free to reach out to events@primeinstitute.org.
To secure your place, please register by visiting the link below:
Rethinking Pakistan’s export strategy
Rethinking Pakistan’s export strategy
Asking the right questions, focusing on productivity, global competitiveness is key
Ali Salman | 07, November, 2023
Everyone agrees that the only way out of the abyss that Pakistan's economy finds itself every few years is to increase our dollar income substantially. These non-debt creating inflows can only materialise through an increase in exports, investment or remittance. In this article, I will focus on the export part of this equation.
From my perspective, an increased reliance on remittance serves as a disincentive to produce and facilitates only consumption with inflationary impact. Similarly, foreign investment flows are accompanied with liabilities, particularly when they are directed towards infrastructure, such as power and highways. The China-Pakistan Economic Corridor (CPEC) is a case in point.
Over the decades, Pakistan has used various policies, incentives and schemes to enhance exports. The fact that the exports-to-GDP ratio has fallen over time dramatically is a sufficient indicator of the failure of our export paradigm. We touched a maximum of 17% exports to GDP ratio in early 1990s- an era of trade liberalisation and economic reforms, as well as positive trade balance. This ratio today is hardly 10% with a widening trade account gap, where other regional economies have managed to increase this ratio.
We extended all kinds of incentives to the private sector and developed export processing zones in the 1980s. Despite this, to date, their contribution in total exports is less than 3%, compared with Bangladesh where it is above 15%. To determine the causes, the government recently commissioned a study to our institute, and a report has been submitted to the government which offers recommendations on improvements.
The government offered export finance schemes like TERF and LTTF with credit supply at a discount. Additionally, they offered duty drawback incentives to our exporters. These schemes helped to some extent and have proven advantageous for incumbents. Moreover, our product complexity has not improved implying low value that our products get in the international markets. The example set by the veteran Industrialist Imtiaz Rastgar whose products are exported to 130 countries is inspiring but exceptional.
Pakistan has persistently used import substitution policies, even with evidence of their failure. One compelling example is our auto industry, which has not developed any export markets for various reasons and prices remained very high. However, our motorbike industry has become far more competitive and as a result, has offered products at reasonable prices.
In 2013, Pakistan received GSP Plus status from the EU, a trade deal with duty free or minimum tariff barrier access for textile and other products. In her paper, Economist Sarah Javaid concluded that Pakistan took maximum advantage of the scheme, with 97% of the utilisation. However, it did not help in product diversification or supply chain development. Some can argue that it might have created an opposite effect by limiting product diversification.
A new study authored by Aadil Nakhoda and published at the PRIME, an independent economic policy think tank, estimated that the possible trade loss in case of revocation of GSP Plus is over $3 billion per year, though there are some estimates which put this possible loss closer to $6 billion. Roughly around 30% of our exports fall under GSP Plus. In comparison, the Philippines, which is another GSP Plus country with overall exports of above $115 billion, has only $2.5 billion exports under GSP Plus, which means that hardly 2% of its exports are dependent on GSP Plus.
When it comes to exports, there is one major policy omission that Pakistan has made, free trade and regional trade blocks. Pakistan has seven PTA/FTAs, though they lack depth, an FTA implies zero duties on 90% of tariff lines, as argued by the former WTO Ambassador Manzoor Ahmad. Therefore, they have not created results which other countries such as Turkey and Vietnam have experienced. Both the countries with more or less similar export level as that of Pakistan hardly thirty years ago shunned protectionism. Since then, they have become export power houses, with Vietnam crossing $350 billion and Turkey above $250 billion.
While there are other factors which have impeded our export potential, I will not discuss them here.
Pakistan requires a new export paradigm. However, for that we have to change the questions we are asking. Instead of asking how we can increase our exports, we should ask ourselves how we can increase our productive capabilities, product quality and competitiveness at the firm level. An isolated focus on exports, through all well-intentioned incentives, is the most important cause of our failure. Once we realise that exports are a part of a greater economic landscape, and can only be enhanced by starting transformation, as we argued in the EAG vision document, we can begin to find answers.
This article was originally published on The Express Tribune on November 6, 2023.
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