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Author: PRIME Institute

Short termism of Tola commission

by PRIME Institute PRIME Institute No Comments

Short termism of Tola commission

RRMC proposals only reflect immediate needs of a govt in crisis, not much else
Ali Salman/Syed Ali Ehsan | May 29, 2023

In December 2022, Finance Minister Ishaq Dar established the Reforms and Resource Mobilisation Commission (RRMC) comprising 11 members and tasked with suggesting tax and economic reforms to the government.

This commission is being led by Ashfaq Tola, and some of the recommendations making their way into the media are very unnerving for policy specialists and the private sector alike.

First, it should be mentioned that just like the previous Tax Reforms Commission, the report of this body has not been made public. The commission itself seems to be working in relative isolation, avoiding any invitation to public forum to speak about their proposals.

We found six proposals from the RRMC, unofficially leaked to news periodicals. The proposals only reflect the short-term needs of a government in crisis, and not much else.

This is an election year, and we really cannot expect much in terms of meaningful tax reforms. Of the six RRMC proposals, three had to do with increasing withholding taxes.

Withholding taxes add an unwelcome compliance burden on businesses and increase complexity of the system. Tax complexity is perhaps the biggest problem facing Pakistan’s economy.

Withholding taxes also eat up working capital and have a detrimental effect on the growth potential and risk preparedness of enterprises. There are also other problematic ideas like advance taxes on long-term reserves of companies.

Tax revenue shortage is not an economy-wide problem, but it is one contained within the organisation, that is our government.

Such proposals, the ones made by RRMC, will work at most for one year, because after that, taxpayers will take counter-measures to reduce their tax burden, even if it means moving into the domain of black and grey economies.

This is something well established by Dr Arthur Laffer through his Laffer Curve, which shows the inverse relationship between high tax rates and tax revenues. These proposals will only serve to lower trust level between taxpayers and the tax collector.

It is highly doubtful that for this specific financial year, the government is as interested in enhancing trust with taxpayers than it is in avoiding default.

For people like us studying these issues in civil society, the biggest threat lies in the fact that a government crisis is being engineered into an economic crisis in front of our very eyes. And it may be so that short-term measures may only work to spread the disease across the whole economy.

Undoubtedly, Pakistan needs a major overhaul of the tax system. That said, less needs to be done and more needs to be undone.

It is just not possible for government machinery to gauge an economy with such precision that it can prioritise or discriminate correctly. That combined with a complex tax system makes such calculations very much irrelevant to any discussions concerning the future of the economy.

In the end, such an approach amounts to guesswork, even when backed by numbers, and complexity without fail leads to unintended consequences.

It is essential that tax exemptions and subsidies are completely done away with. They distort the market and put undue pressure on the government kitty.

The level of progressivity in the present tax regime greatly diminishes the ability of an enterprise to create more productive jobs.

Complexity in taxation may create a few jobs in compliance departments, but it more than proportionately hampers new job creation. In this way, putting a higher tax burden on job creators only works against broadening the tax base.

Government revenues must be restricted to three sources only. These are income tax, sales tax, and customs duty. Tax rates must be harmonised, and these should be fixed for the next five to 10 years.

Predictability in tax policy and stability in tax rates are two key components enabling growth, and hence higher tax revenues in the long run.

It is very important that policy practitioners in the government think long and hard about what needs to be done. We know that the government is worried about short-term revenues, but that is a conversation that brings us back to the root cause of the problem.

Because in the short run, it makes more sense to work on something which is within government’s control, namely the expenditure side of things.

To balance budget, expenditures must be decreased. To balance trade deficit, exports, remittances, and foreign direct investment must replace government liability.

For both things to happen, the government must decrease in size, and it must allow greater freedom for foreign direct investment to flow in. It also needs to significantly reduce import taxation, which is in effect export taxation.

The government must consider the privatisation of commercial SOEs, and unused public land. It must also consider relaxing restrictions and limitations on private international citizens investing in the country.

This Article was Originally Published In Express Tribune, on May 29th, 2023.

Concerns and Implications of Proposed Restoration of Withholding Tax on Cash Withdrawal and Banking Transactions

by PRIME Institute PRIME Institute No Comments

Concerns and Implications of Proposed Restoration of Withholding Tax on Cash Withdrawal and Banking Transactions

Authors: Mr. Usman Azmat (Advocate High Court) and Mr. Muhammad Anas Farhan (Vice President, Tax Department, ZTBL)

The Annual Federal budget is scheduled to be presented to the National Assembly on the 9th of June. Recent news regarding potential tax proposals from the Ashfaq Tola-led Revenue and Resource Mobilization Commission has been generating headlines for the past two weeks.

One of these proposals is the reinstatement of withholding tax on cash withdrawal, banking instruments, and other banking transactions. This reinstatement involves the revival of sections 231A, 231AA, and 236P of the Income Tax Ordinance 2001, which were abolished two years ago in the Finance Act of 2021.

The withholding tax on banking transactions was initially introduced in the Finance Act 2005 through the inclusion of section 231A in the Income Tax Ordinance 2001. It served as a significant source of revenue according to the Revenue Division’s Year Books.

The primary objectives of imposing withholding tax on cash withdrawal were: a) discouraging the cash economy, b) improving documentation, and c) broadening the tax base.

The rate of withholding tax on cash withdrawals started at 0.1% and, before its removal in 2021, stood at 0.6% for non-filers.

FBR’s Circular No. 02 of 2021-22 dated 1st July 2021 explained the rationale behind removing the withholding tax on banking transactions: “There were 38 withholding tax provisions in the Income Tax Ordinance 2001. This high number of provisions adds to complexity and creates undue burden of compliance on different withholding agents. It also impacts the country’s rating on the ease of doing business index.”

FBR’s overall tax revenue experienced significant growth of 30% during FY2021-22, surpassing Rs. 6 trillion for the first time in Pakistan’s history. This growth can be largely attributed to the elimination of withholding tax on cash withdrawal, banking instruments, and banking transactions.

Cash flowed freely within businesses, leading to flourishing economic activities, and withholding tax on business activities became a significant revenue driver. People’s confidence in the banking system improved, prompting those who were hesitant to keep their money in banks to start utilizing them.

Overall, there was a boost in economic activities, resulting in increased earnings for taxpayers and naturally leading to an increase in tax revenue. Bank deposits also saw an extraordinary surge (Rs. 23.4 trillion as of April 2023, as reported by SBP), and bank earnings found their way into the Government Exchequer in the form of corporate income tax.

However, an analysis of FBR’s revenue collection from withholding tax on cash withdrawals reveals a dismal performance and negative growth in recent years. The compound annual growth rate (CAGR) of this tax remained at only 2%, which is an unhealthy sign.

Table 1: Collection of withholding tax on cash withdrawal

FY

Rs in Million

Growth YoY

2007-08

4,098

 

2008-09

11,338

176.7%

2009-10

12,863

13.5%

2010-11

10,630

-17.4%

2011-12

12,538

17.9%

2012-13

12,440

-0.8%

2013-14

19,063

53.2%

2014-15

23,276

22.1%

2015-16

28,619

23.0%

2016-17

30,487

6.5%

2017-18

34,003

11.5%

2018-19

31,756

-6.6%

2019-20

15,169

-52.2%

2020-21

15,137

-0.2%

CAGR

 

2%

(Source: Revenue Division’s Year Books 2007-08 to 2020-21)

 


 

The State Bank of Pakistan (SBP) findings on the imposition of withholding tax on cash withdrawal, banking instruments, and banking transactions are not encouraging. According to SBP’s Annual Report 2016-17: “… the imposition of withholding tax on banking transactions apparently defeated the very purpose for which it was imposed, that is, to discourage the cash economy,” and “… the economic cost of imposing withholding tax on non-cash banking transactions needs rethinking.”

The forthcoming withholding tax on cash withdrawal, banking instruments, and banking transactions is justified on the basis that it will only apply to non-filers. However, being a non-filer does not necessarily mean being a tax evader. Instead of imposing taxes on non-filers, mechanisms should be devised to penalize tax evasion.

If someone files their tax return with nil income and the government receives no tax revenue from their return, or if the reported figures are manipulated, what benefit can be expected from converting their status from non-filer to filer?

Section 115 of the Income Tax Ordinance 2001 lists individuals who are not required to furnish their annual income tax returns. When the law itself designates them as non-filers, it is unfair for the government to label them as such solely based on the actual non-filing of their returns. The provision allowing individuals not to file their tax returns already categorizes them as “deemed filers.” Other means should be explored to include individuals from both categories in the Active Taxpayers’ List (ATL) and at least provide them with the benefits of withholding tax provisions—those who file their annual income tax returns and those who are not required to file their annual income tax returns.

If the government plans to reinstate provisions regarding withholding tax on cash withdrawal, banking instruments, and banking transactions solely to broaden the tax base, it may prove ineffective in the current economic environment. People may once again resort to keeping their cash outside of the banking system. To broaden the tax base, the FBR can explore alternative measures and make informed policy decisions while maintaining taxpayers’ confidence by excluding withholding tax on cash withdrawal, banking instruments, and other banking transactions.

There are other means to identify taxpayers engaging in cash transactions. Banks are also required to file statements under section 165A of the Income Tax Ordinance 2001, where Form-C entails reporting cash withdrawal transactions to the FBR if the aggregate monthly volume of cash withdrawal exceeds Rs. 1 million. This can serve as a useful tool to monitor cash transactions carried out by taxpayers.

Additionally, the concept of SWAPS (Synchronized Withholding Administration and Payment System), introduced in the Finance Act 2022, is part of the same series and, once fully implemented, will facilitate real-time reporting of such transactions through banks’ synchronized/integrated systems with the FBR, further contributing to the broadening of the tax base.

Reintroducing withholding tax on cash withdrawal can have negative repercussions on the economy, financial inclusion, and could potentially lead to the emergence of a parallel banking system. When withholding tax is imposed on cash withdrawals, individuals may seek alternative methods to evade the tax, leading to an increase in parallel banking activities.

Policymakers should focus on alternative measures that can achieve the desired objectives of curbing corruption, tackling black money, and reducing tax evasion while also promoting digital transactions to curb the shadow economy. Measures like the demonetization of high-denomination currency notes, such as the Rupees five thousand note, can be considered. Although this may cause temporary disruptions and have a slight impact on the GDP growth rate in the short term, it can lay the foundation for long-term economic sustainability.

To strike a balance between revenue generation and the long-term goals of financial inclusion and stability, it is crucial to strengthen existing tax frameworks, promote digital payments and banking, and enhance financial literacy. Effective policies and collaborations among stakeholders can contribute to a robust financial ecosystem that minimizes risks and encourages sustainable economic development.

PRIME has always advocated for progressive, equitable, and fair taxation. In the Federal Budget 2023-24, PRIME has strongly recommended and proposed to the FBR to simplify the existing withholding tax regime and introduce measures that can reduce the compliance burden on withholding agents. The institute is also in the process of publishing a working paper titled “Withholding Tax Regime: Doing Business Perspective,” which highlights the problems associated with the existing withholding tax regime and proposes measures to effectively address these issues.

SOE policy is bound to fail

by PRIME Institute PRIME Institute No Comments

SOE policy is bound to fail

Idea of reforming state-owned units has taken precedence over will to privatise
Ali Salman/Syed Ali Ehsan | May 24, 2023

Since the Supreme Court’s rejection of Pakistan Steel Mills’ privatisation in 2006, the privatisation programme has practically come to a halt.

While each government included privatisation proceeds in its non-tax revenues, the realisation of proceeds has been zilch.

It seems that in bureaucratic circles, the idea of privatisation has lost its appeal. This is partly because of parallel developments in trade liberalisation and technological advancements, and partly due to political factors.

The idea of reforming state-owned enterprises (SOEs) has taken precedence over the will to privatise, and it comes in various forms. SOE reforms also provide multilateral agencies with an excuse to loan out “technical assistance” to the government.

In a bid to sidestep the challenging process of privatisation, the PTI government embarked on the Malaysian-inspired Sarmaya Pakistan Limited, with the aim of reforming and restructuring the government of Pakistan’s SOEs.

As of now, there are around 212 SOEs (including subsidiaries, trusts, and funds) incorporated by the federal government.

Over the last 10 years, SOEs of a commercial nature (84 out of the total 212 SOEs) have collectively inflicted a loss of over Rs1 trillion on the national exchequer.

While there are certain functions of national importance being performed by some SOEs, by and large SOEs are a burden on the state, and the need to be either deeply restructured, privatised, or liquidated.

In 2021, the government published State-Owned Enterprises Triage: Reforms & Way Forward, led by Dr Ishrat Husain. The SOE triage provides a roadmap for retention, privatisation, or liquidation while laying out a criterion justified on the basis of “national economic interest”, “strategic importance” and commercial significance.

The triage foresaw the SOE Act 2023 and now the draft SOE policy. A central monitoring unit will now be established to assist the process of reforms and restructuring.

The draft SOE policy might be well-meaning. Like other policies, it is built on the assumption that there exists efficient government machinery with the capacity to run complex business operations. It is bound to fail on these grounds alone.

A careful reading of the policy unveils several lacunas, some of which are described here for public knowledge.

Section 7 of the draft policy explains that the SOEs identified specifically in the SOE Triage report would be retained.

Para 7 also refers to monopoly service providers as strategic in nature but fails to clarify whether a monopoly is defined as a 100%, 50%, or 25% of market share.

Instead, a commercial loss-making monopoly should be treated under anti-trust laws, and the federal government should consider disintegrating the functions of large SOEs into separate smaller entities during the course of privatisation.

Para 8 of the policy lays out the conditions for the creation of new state enterprises. It says that an SOE can be created when no private firm is operating in a particular sector, regardless of whether the sector is of strategic significance.

It does not clarify whether the government should consider an international private enterprise as part of the relevant sector.

It states that an SOE can be created when the government is trying to establish a market, but its ambiguity leaves room for the bureaucracy’s authority to define new sectors and markets in a self-serving manner.

Para 8 also appears inconsistent with the limitations put forth by the policy itself, when it states that the government will only retain “strategic” SOEs.

By allowing the creation of a commercial SOE, specifically in a non-monopolistic market context with private sector players, the policy leaves loophole for government expansion into the private sector yet again.

Despite the completion of the SOE Triage, para 10 of the policy appears to create space for each division of the federal government to contest the categories set forth in the triage.

Para 11 vests the initiative of transformation of SOEs to line ministries. This process would be an unnecessary burden and experiment with taxpayer funds.

There is also no guarantee, nor track record of private sector reform under a public sector setting. We propose that privatisation must occur first and restructuring later when new owners can lead that process.

The draft SOE policy does not spell out transformation or reform in the area of human resources.

One of the greatest barriers to privatisation is the judicially, and legislatively protected status of permanent government employees. Downsizing will play a major role in successful SOE reform but no provision in the policy exists to streamline it.

Para 12 is all about rescuing the SOEs facing financial and operational problems. This entire passage creates ambiguity about the privatisation of commercial SOEs.

It indicates that the government does not intend to even privatise sick commercial units. The emphasis of the policy remains on repeated rehabilitation, reconstruction, and reorganisation of sick commercial SOEs.

The threat of delay in privatisation due to the strategic interest of political governments, most notably union appeasement and the middle-class vote, will limit the transformation potential.

The proposed CCoSOE (Cabinet Committee on SOEs) implies that the mandate of the Privatisation Commission may be in danger of being violated eventually.

The entire proposed process under the policy is highly centralised. CCoSOE will continue to rescue sick SOEs until political mileage from SOEs can be curtailed.

The idea of creating a central monitoring unit to oversee the SOE reforms process is a non-starter.

The triage report itself acknowledges the complexity of markets in which SOEs perform and a centralised unit can never have the capacity to advise these SOEs, which are operating in distinct market and bureaucratic conditions.

The federal government would be well advised to privatise highly indebted loss-making commercial SOEs at market offers without going into a transformation phase. All other roads lead to more losses, more corruption, and more uncompetitive markets.

This Article was Originally Published In Express Tribune, on May 8, 2023.

PRIME’s Position Paper on Tax Reforms

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PRIME's Position Paper on Tax Reforms

In December 2022, the Finance Minister, Senator Ishaq Dar, established the Reforms and Resource Mobilization Commission (RRMC), comprising of 11 members tasked with suggesting tax and economic reforms to the government. According to reports from the media, the RRMC has presented an interim report to the Finance Minister detailing proposed reforms. However, it appears that some of the suggested reforms, particularly those with progressive taxation, require concerning and require reconsideration.
Click Below to Access the Paper
Click here

Third Islamabad Policy Exchange

by PRIME Institute PRIME Institute No Comments

Third Islamabad Policy Exchange

PRIME (Policy Research Institute of Market Economy) organized the 3rd Islamabad Policy Exchange on 4th of May 2023. The event was attended by policy practitioners from the government and private sector.

The discussion revolved around tax reforms with special focus on Pakistan Raises Revenue Program (PRRP),Withholding tax proposal on simplification of procedures and suggestions put forth by Revenue and Resource Mobilization Commission.

The Islamabad Policy Exchange is a forum for candid discussions for policy stakeholders, held under Chatham House rules.

The audience was informed about the progress government has made so far in the PRRP. The project is of $400 million supported by World Bank with the objective to increase the revenue collection from broadening of tax base and promotion of compliance through simple and transparent tax system, compliance facilitation and institutional development.

The program has 10 disbursement linked indicators where a tranche is released after completion of pre-defined targets. In the program, the scope of withholding tax regime is contracted due to its distortionary impact and the Federal Board of Revenue (FBR) is promoting transparency by publishing tax expenditure and tax gap reports regularly.  Moreover, the effectiveness and transparency of FBR is evaluated with development of key performance indicators and annual reports.

The audience was informed that the Track and Trace system has been implemented in 10 sectors in Pakistan which has contributed to curtailment of smuggling. However, the problem continues to prevail but with lesser impact. Moreover, coordination of FBR with provincial revenue boards is gradually improved for better data sharing aimed at harmonization of taxes.

The hurdles encountered in the overhaul of the taxation system comprise undocumented supply chain, leakages in withholding taxes, mis-invoicing and smuggling.

The experts highlighted the requisite principles for undertaking tax reforms in the country starting with promoting simplicity in legislation and procedures to digitization of processes to evaluate broad based impact of the taxes.

The withholding taxation system has gradually gained momentum where its share in direct taxes has increased from 44 percent in 1985 to 67 percent in 2022. The current withholding tax regime is complex which often contributes to double or even multiple taxation. The regime is distortionary in nature due to multiplicity of rates for filers and non-filers. It is used as a revenue generating tool but falls short to broaden the tax base.

The withholding tax regime needs simplification both at the federal and provincial levels. The multiplicity of rates creates distortion disincentives, which can only be addressed by uniformity of rates. The documentation and reporting should be simplified and minimized.

The reforms proposed by Revenue and Resource Mobilization Commission were also discussed in the event. The proposed reforms by commission are distortionary due the fact that they envisages increase in the rates of advance taxes in different categories. Moreover, different rates are suggested for filers and non-filers thus providing acknowledgement to non-filers as a legal entity.

The participants unanimously agreed that current taxation system is complex and is also lacking to build trust between the government and the citizens, which leads to fall in compliance and more tax evasion. In addition, the high rates of taxes encourages people to stay out of the taxation system as the cost of compliance is high. Therefore, it is recommended to reduce the rates and number of taxes to promote broadening of tax base. It was also considered imperative to promote research and impact analysis within the FBR to evaluate the utility of any tax reform.

 

 

Why do we need Charter of Economic Stability?

by PRIME Institute PRIME Institute No Comments

Why do we need Charter of Economic Stability?

If political parties want to win trust of private sector then they will have to agree on rules of economic governance
Ali Salman | April 25, 2023

In his recent public speech, Pakistan’s prominent economist and institutional reforms advocate Dr Ishrat Husain claimed that all major political parties have broadly similar economic manifestos, and they already agree on economic policies such as progressive taxation, open trade and privatization.

The implication is that there is no need for a formal Charter of Economy to be signed by political parties and therefore all they need to do is to focus on implementation. While this is an appealing argument in the first look, there is a basic problem.

Before they signed the Charter of Democracy, Pakistan Peoples Party (PPP) and Pakistan Muslim League-Nawaz (PML-N) also had written commitment to democratic principles and people’s right to choose their government. However, in practice, they were actively engaged in dislodging the other party by unconstitutional moves throughout the 1990s culminating in the Martial Law in the end.

Once they developed an agreement on democratic practices, by signing the Charter of Democracy in 2006, they actually changed their behaviour. Both parties remained firm to this commitment from 2008 to 2018.

Even though their prime ministers were not allowed to complete their terms, it was a result of judicial intervention, which is now widely believed to be politically motivated and backed up by the military establishment.

These parties also developed consensus on transformative constitutional changes such as the 18th amendment. They also fought, successfully, the menace of terrorism.

While all major political parties today may have siilar economic manifestos, in practice, their policies have differed a great deal. This is the root cause of economic instability, which has fed into deepening economic woes for the public and businesses at large.

We can always debate on the merits and demerits of these policies, but clearly major changes were made in short periods of time, causing distress and uncertainty.

This variability, whether driven by good motives or political gains, needs to be significantly reduced, if Pakistan wants any shot at the prospects of economic development. We need to reduce the discretionary powers and develop rules of governance.

A Charter of Economy, narrowly focused on economic governance, provides the platform for developing consensus among political parties to ensure certainty.

If political parties want to win the trust of private sector, which everyone agrees is the primary source of job creation, then they will have to agree on rules of economic governance.

In the absence of this agreement, there is a real chance of erosion of general confidence in the entire political process. Recently statements like boycott of general elections – sans a charter – have been made by prominent business associations of the country.

The basic components for bringing agreement on economic governance should include: public spending, taxation system, monetary policy, state-owned enterprises, and trade policy.

We can’t afford changes in these policies every year. There is no way a country can attract a serious level of investment if major changes are brought in these policies.

PML-N successfully doubled the electricity generation capacity through the IPPs. The Pakistan Tehreek-e-Insaf (PTI) government practically sabotaged this instead of finding ways to improve it and take benefit.

The PTI government launched a new mobile phone assembly policy, which resulted in setting up of 30-plus plants and job creation. Import restrictions by the PML-N shattered the industry.

The PML-N government, in 2017-18, brought down tax rates significantly, which were reversed the very next year by the PTI government. These are just a few examples.

When India started its journey of economic liberalisation in 1989, it never looked back despite sweeping changes in its political landscape over the last three decades. It is now bearing fruit of this certainty.

In the last nine years, India has received close to $500 billion in foreign direct investment (FDI), which is greater than the FDI it received since its independence.

We do need Charter of Economy and develop minimum consensus on rules around public spending, taxation rates and monetary stability. It is in the interest of all major political parties which have stakes in Islamabad to sit down and develop an agreement on these policies.

Then they can go to the electorate and contest in the democratic space based on their leadership credibility. People ultimately vote for credibility and not by reading manifestos.

The Charter of Economy should be developed with debate amongst the academia, think tanks, private sector and politicians, which is not taking place.

Politicians hardly come to deliberations organised publicly for serious debate except for ceremonial addresses. Think tanks and academia remain confined to their comfort zones and talking to each other. Media is driven by either state priorities or corporate interests of the owners.

The space of a structured debate is simply non-existent. A first step can be to organise these debates and create this space. Probably standing committees in the Senate and National Assembly can provide a starting point.

Also, just like political parties are forming committees to deliberate on the election schedule, they should also form such committees to deliberate on Pakistan’s Charter of Economy.

This Article was Originally Published In Express Tribune, on April 25, 2023.
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Tim Hortons Vs the intellectual elite of Pakistan

by PRIME Institute PRIME Institute No Comments

Tim Hortons Vs Pakistan's intellectual elite

Most recently, Ms. Iqra Munawar, an associate of the Pakistan Institute of Development Economics (PIDE) wrote an article criticizing the culture of our people, basing it upon the long queues in front of Tim Horton in its opening week.

In her article, and keep in mind that this is written by a member of an elite economic policy institute, Ms. Iqra observes that Pakistanis are not as poor as we might think because they line up in queues when a new food franchise opens. She refers to this as Slavery to Western brands and a colonial syndrome.

She says that on one hand, people are dying due to lack of necessities, while other people are enjoying what may be considered expensive coffee. She goes on to say that the unequal distribution of wealth in the country is the cause of suffering and distribution for the poverty-stricken masses. She says that the rich are getting richer, and the poor are getting poorer, and Tim Horton is to blame.

Not so fast.

Banana Republic, Coffee Republic, Waghera, Waghera

Blaming bad culture, loose morals, and weak ethics have been a staple of economic thinkers from the Left. The scarcity of empiricism in an argument is usually dealt with through excessive emotion and the raising of one strawman after the other. Economists should keep to economics instead of becoming pseudo phycologists parading around in
the guise of an economist.

This country has a history of producing bad economists; economists who want to nationalize private industry, and those who wish to impose the countless taxes on income and wealth. When an economist does their job, the emergent systems are elegant and functional, not falling apart in their complexity.

Pakistan is not in the IMF program not because of the bad spending habits of the so-called elites. This credit goes to the bad fiscal management of the government of Pakistan. And while the government of Pakistan may not have a choice other than to pass on its burdens to its people, Ms. Iqra is under no such obligation.

My line is better than yours

Is a queue on the opening day of Tim Horton’s better, worse or the same as a queue in front of the Pakistan brand Khaddi in every seasonal sale? Or is the queue in front of Tim Horton’s better, worse, or the same as the queue in front of NADRA or the Passport office?

Any economist worth their salt would not equate inequality to poverty. That relationship simply does not exist. While a politically popular point, our economists (at least a vast majority of them) can be seen insisting that this is real economics. This is the same rhetoric that caused the rise and fall of so many socialist nations of the past.

There is no doubt that at present many people are struggling with inflationary pressures. But let us not forget that the source of this inflationary pressure is our expensive imports, and no one is to blame for this than our own government’s misguided economic policies. Many people have lost their jobs during this time, and previously during COVID because their employers have lost their businesses or have had to scale down. As best as I can tell, everyone is getting poorer.

To be fair, Tim Horton’s makes reasonably good coffee, an affordable option for most of the rest of the world. Now even if one puts aside the fact that the Lahore franchise of Tim Horton’s is owned by a Pakistani, it would be great if our economists can shed some light on local alternatives, substitutes, or replacements for it. I mean, we don’t grow coffee in Pakistan, we don’t have any significant domestic brands, and why would we when there is barely any mass culture for drinking it here?

The country is going bankrupt and kids are drinking Coffee

All the criticism over Tim Horton’s issue is basically directed toward youngsters and young adults from middle or upper-middle income families because these were most represented in those legendary queues.

These people are not the capitalist elite of this country. In a country where it is virtually impossible to do business, the only elite possible here is the political elite, and their close cousins, the intellectual elite. And trust me when I say that the halls of PIDE, and other government institutions including Aitchison, and IBA are full of the latter. And guess what, people stand in lines to get access to these institutions as well.

I wonder which line is superior and which is inferior. I wonder in what ways Pakistan’s bureaucratic culture or the culture of the socialist left offers better judgment than the many linguistic, regional, religious, and nationalistic cultures of our motherland.

Such rhetoric is offensive to the people of Pakistan, and outrightly dangerous social/ drawing room talking point.

The writer Syed Ali Ehsan is Program Director at PRIME

Pakistan’s oily disposition

by PRIME Institute PRIME Institute No Comments

Pakistan’s oily disposition

It’s real reason of potential default as govt needs dollars for oil imports
Ali Salman/Syed Ali Ehsan | April 03, 2023

Only last year when everyone was worried about the current account deficit, the Policy Research Institute of Market Economy noted that the root of the problem lay within the fiscal deficit and not the import of luxury items as usually blamed.​​

Hardly 10% of Pakistan’s imports can be considered non-essential from a public perspective.

At present, several scholars have come to agree that the fiscal deficit is exerting pressure on the current account. It was never the entire economy of the country, which was running out of dollars, it was just the government. And why would the government of Pakistan need dollars, you may ask?

Everyone likes to blame the economic pressure on the government on military spending or high interest payments on external debt. But the real answer is Pakistan State Oil (PSO). PSO is going bankrupt. It does not have money to import oil.

On March 21, the Economic Coordination Committee (ECC) of the cabinet approved a grant of $100 million to help PSO through its financial crunch. This was in response to a formal “SOS call” after a technical default.

The grant is meant to abate the repercussions, but for how long? A few days prior to this, PSO had asked the Finance Division to introduce a new petroleum levy of Rs10 per litre to help it through the financial mess.

In addition, in order to enable PSO to remain afloat in its payment obligations to LNG suppliers and to continue the LNG supply chain, the ECC has allowed a sovereign guarantee in favour of SNGPL for commercial borrowing of Rs50 billion on an immediate basis.

PSO’s receivables have now reached the level of Rs762 billion since June 30, 2022. Receivables from SNGPL currently stand at Rs494 billion.

SNGPL is another state-owned enterprise which has failed to function sustainably despite timely payments by its residential, commercial and industrial consumers. This is despite the fact that when the government must prioritise the opening of LCs, PSO comes first and then everyone else. It all falls upon the consumer, as usual.

PSO had a monopoly over oil imports all the way from 1974 till 2000. Since then, from a share of 100% of imports, PSO now imports approximately 65% of the total.

Its share in consumer markets has been constantly falling despite having the largest marketing and distribution network in the industry.

So what happens when I want to buy oil? I go to someone who has it. Where do they get their oil from? They buy it in the international oil market using their own dollar reserves.

So what happens when I want to buy oil in Pakistan? I go to someone who has it 65% of the time, that someone will be PSO.

PSO imports oil using dollars from the government of Pakistan. And then we are surprised when the government runs out of dollars. Despite reducing the current account deficit by banning or discouraging most types of imports, the country is still at risk of default.

There is more to it. Oil is the government’s leading source of indigenous revenue. This is basically how the government converts a portion of its foreign exchange reserves into tax revenues in PKR. What happens here?

While this may not be corruption in the traditional sense, it signals that the rules governing this industry have become corrupted. The state and state-run corporations are running a mutually rewarding scheme at the cost of general welfare.

The public sector is a bottomless pit, as it can consume all resources put into it. We must understand that organisations without a profit motive will never be geared towards efficiency, and they will always waste their money.

If there is excess cash, the government will hire temporary employees that the court will never allow to become redundant. If there is a large amount of time to perform a simple task, the government will increase the complexity of the task to fill the time.

Governments with so much involvement in economics would go bankrupt from sustainability issues.

You see, Pakistan’s biggest threat from default has nothing to do with us running out of food. We grow basic food crops which can help us sustain ourselves on our own.

But if we can’t import oil, we won’t be able to run our transportation, industrial, energy or household sectors. The whole economy will come to a grinding halt. And we would have to say goodbye to our modern way of living.

We would still survive, but the point is, is this any way to live? And more importantly, is this any way to run a government?​

The writers are affiliated with Policy Research Institute of Market Economy (PRIME), an independent economic think tank

This Article was Originally Published in The Express Tribune, on April 4th, 2023.

5 Ways Government of Pakistan Hampers Free Trade

by PRIME Institute PRIME Institute No Comments

5 Ways Government Hampers Free Trade

Pakistan is a country that has traditionally struggled to achieve economic growth, and international trade has often been seen as a key driver of development. However, despite the potential benefits of trade, the Pakistani government has been criticized for placing restrictions on trade, hindering economic growth and development.

If you are more interested in solutions, check out the section on Free Markets, Trade and Price Controls in the Pakistan Charter of Economy. 

Import Tariffs

Pakistan imposes high import tariffs on a wide range of goods, including raw materials, capital goods, and consumer goods. These high tariffs make imported goods less competitive in the local market and increase their cost, leading to reduced consumer choices and decreased international trade. According to the World Bank’s 2021 report on “Trading Across Borders,” Pakistan ranked 167th out of 190 countries in terms of ease of importing goods. This poor ranking reflects the country’s high import tariffs and complex regulatory procedures, which can be a significant barrier to trade.

Non-Tariff Barriers

In addition to import tariffs, the Pakistani government also places non-tariff barriers on imports. These barriers include quotas, licensing requirements, and technical regulations that can be difficult for foreign exporters to navigate. According to the United States Trade Representative’s 2021 report on “Foreign Trade Barriers,” Pakistan has a number of non-tariff barriers in place that hinder trade, particularly in the agriculture and services sectors. These barriers can be particularly problematic for small and medium-sized enterprises (SMEs) that may not have the resources to navigate complex regulatory frameworks.

State-Owned Enterprises

Pakistan has a large number of State-Owned Enterprises (SOEs) operating in various industries such as energy, transportation, and telecommunications. The government owns and controls these SOEs, which can lead to inefficiencies, lack of competition, and reduced economic growth. According to a report by the International Monetary Fund (IMF), SOEs in Pakistan have been plagued by governance issues, leading to poor financial performance and a lack of transparency. This can be a significant barrier to foreign investment and trade, as foreign investors may be hesitant to invest in a market dominated by government-owned enterprises.

Energy Subsidies

The Pakistani government provides subsidies on energy products such as electricity, gas, and oil to keep prices low for consumers. While these subsidies benefit low-income consumers, they also lead to inefficiencies and market distortions. According to the IMF, energy subsidies in Pakistan amounted to 1.7% of GDP in 2019, with a significant portion of these subsidies going to the power sector. These subsidies can lead to the overconsumption of energy products and a lack of investment in more efficient energy sources, hindering economic growth and development.

Political Instability

Finally, political instability in Pakistan can be a significant barrier to trade. The country has experienced periods of political turmoil, including military coups, protests, and terrorist attacks, which can disrupt trade and deter foreign investment. According to the World Bank, political instability is a significant obstacle to economic growth and development in Pakistan, as it can lead to reduced investment and increased risk for businesses operating in the country.

In conclusion, the Pakistani government has placed a number of restrictions on trade that can hinder economic growth and development. These restrictions include high import tariffs, non-tariff barriers, state-owned enterprises, energy subsidies, and political instability. While some of these restrictions may be well-intentioned, such as energy subsidies to benefit low-income consumers, they can have negative effects on the overall economy. In order to promote economic growth and development, the Pakistani government should work to reduce trade barriers and improve the business environment for both domestic and foreign investors. This can include measures such as simplifying regulatory frameworks, reducing import tariffs, and improving governance

Should SBP consider a Fiat Based CBDC UBI for social security?

by PRIME Institute PRIME Institute No Comments

Should SBP consider a Fiat Based CBDC UBI for social security?

A replacement for all social security programs?

A central bank digital currency (CBDC) is a digital form of a country’s fiat currency that is issued and backed by the central bank. It is a new form of currency that is gaining traction globally, with many central banks exploring the possibility of issuing a CBDC.

The Islamic Republic of Pakistan presently introduces new money into the economy through a process in which the State Bank of Pakistan purchases government securities through open market operations. This process is called quantitative easing. One potential application of CBDCs is to support a universal basic income (UBI) system and replace open market operations as the primary means of quantitative easing by the State Bank of Pakistan.

What is UBI?

A universal basic income is a policy proposal that seeks to provide a basic income to all citizens, regardless of their income level or employment status. The purpose of a UBI is to provide a safety net that ensures all citizens have access to a minimum level of income to meet their basic needs. A UBI could help reduce poverty, promote equality, and provide financial security to those who are unable to work or unable to find a job.

According to the World Bank, as of 2020, the poverty rate in Pakistan was estimated to be around 24.3%. A UBI system can provide a minimum income to every citizen, ensuring that no one falls below the poverty line. This can be especially beneficial for marginalized and vulnerable populations, such as women, children, and the elderly.

The implementation of a fiat-based CBDC UBI system in Pakistan could have numerous benefits. First and foremost, it would help reduce poverty and inequality. Pakistan is a developing country with a large population living in poverty. A UBI system could provide a safety net for those living in poverty and ensure that everyone has access to a basic standard of living.

Liquidity in Phases of Economic Shock

A CBDC-based UBI system can provide a safety net during times of economic hardship or crises. For example, during the COVID-19 pandemic, the government of Pakistan provided cash transfers to vulnerable households to help them cope with the economic fallout. A CBDC-based UBI system can provide a more efficient way of helping those in need during times of crisis.

A fiat-based CBDC UBI system could also be an effective way to stimulate the economy. By providing a basic income to all citizens, the government could boost consumption and demand. This would increase economic activity, leading to job creation and higher economic growth. In addition, a CBDC UBI system could reduce income inequality, which has been shown to hinder economic growth.

A CBDC-based UBI system can also provide a significant boost to economic growth. When people have a guaranteed basic income, they are more likely to invest in education and training, start their own businesses, or take risks that they would not have otherwise taken. This can lead to an increase in productivity and innovation, which can help drive economic growth and create more job opportunities.

Eliminating Corruption Leakages

Another potential benefit of a fiat-based CBDC UBI system is that it could help reduce corruption. In Pakistan, corruption is a major problem that has been difficult to eradicate. A UBI is simpler to administer than a means-tested program. A UBI does not have any eligibility requirements, which reduces the administrative burden and associated costs.

A UBI system that is based on a CBDC could help reduce corruption by ensuring that payments are made directly to citizens and are not subject to intermediaries. This could reduce the opportunities for corruption and ensure that payments are made fairly and transparently.

Cost Effective

Moreover, a fiat-based CBDC UBI system could be a more efficient way to distribute social welfare payments. Currently, the government distributes social welfare payments through a variety of channels, including cash, vouchers, and bank transfers. These channels are often inefficient and prone to errors and fraud. A CBDC UBI system could streamline the distribution process, making it more efficient and cost-effective.

Banking the Unbanked

Additionally, a fiat based CBDC UBI system could help improve financial inclusion in Pakistan. Pakistan has a large unbanked population, with many people lacking access to formal financial services. By providing a CBDC UBI system, the government could ensure that all citizens have access to a digital payment system.

According to the World Bank, as of 2017, only 21% of adults in Pakistan had a bank account. A CBDC-based UBI system can help promote financial literacy and encourage more people to participate in the formal financial system. This can also help reduce the reliance on cash transactions, which can help reduce corruption and money laundering.

Gender Outcomes

A fiat-based CBDC UBI system can also have a positive impact on gender equality. According to the Pakistan Bureau of Statistics, as of 2020, the female labor force participation rate in Pakistan was only 22.8%. A UBI system can provide women with a guaranteed income, which can help reduce financial dependence on men and encourage more women to enter the workforce. This can also help reduce gender-based income inequality.

Concerns

there are also some potential harms associated with a CBDC-based UBI system. One of the biggest concerns is the potential for inflation. The creation of new money to fund a UBI system can lead to an increase in the money supply, which can lead to inflation. However, this can be mitigated by proper management of the money supply and ensuring that the UBI payments are not excessive.

Then there is the potential for a negative impact on work incentives. Some critics argue that providing a guaranteed income to everyone can lead to a disincentive to work. However, studies have shown that UBI systems do not necessarily lead to a reduction in work incentives, and in fact, can provide people with the opportunity to pursue work that they are truly passionate about, leading to greater productivity and job satisfaction.

Finally, there are concerns about the potential for fraud and abuse in a CBDC-based UBI system. However, this can be addressed by implementing strong security measures and incorporating technologies such as biometrics and blockchain to ensure that the system is secure and transparent.

In conclusion, a fiat-based CBDC UBI system has the potential to provide numerous benefits for the economy and society, including reducing poverty and income inequality, promoting economic growth, encouraging financial inclusion, and promoting gender equality. If implemented properly, a fiat-based CBDC UBI system could have significant benefits for the people of Pakistan and could serve as a model for other countries looking to increase financial inclusion and reduce poverty.

Social Security issues in Pakistan and Solutions in the Charter of Economy

by PRIME Institute PRIME Institute No Comments
Charter of Economy Social Protection

Charter of Economy: Social Security

Pakistan’s social security programs have been facing significant challenges for years. Pakistan has a high poverty rate, with approximately 24.3% of the population living below the poverty line. The country also has one of the highest rates of income inequality in the world, with the top 10% of the population holding 67% of the wealth.

According to the World Bank, Pakistan has one of the lowest social safety net coverages in the world. The country’s existing social security programs have been unable to provide adequate protection to the vulnerable population, including low-income households, women, and children.

Pakistan’s social security programs only cover a small proportion of the population. According to the Pakistan Economic Survey 2020-21, only 4% of the country’s population has access to social security.

The country’s social security system is fragmented, with multiple programs running simultaneously. There is a lack of coordination and integration among these programs, which leads to duplication and inefficiencies.

Pakistan’s social security programs have limited funding, which restricts their ability to reach a larger population. According to a report by the International Labour Organization, Pakistan’s social security expenditure was only 0.3% of GDP in 2017.

There are reports of corruption in the distribution of social security benefits. This has led to the exclusion of deserving beneficiaries and has increased the cost of providing social protection.

There is a lack of transparency in the administration of social security programs, which has eroded public trust in the system.

The failures of Pakistan’s social security programs have been evident in multiple instances. Here are some recent examples:

In 2019, the Supreme Court of Pakistan took notice of the exclusion of deserving beneficiaries from the BISP, which led to protests and public outcry.

In 2020, the government faced criticism for excluding transgender people from the Ehsaas Emergency Cash Programme.

In 2021, the government faced criticism for the delays in the distribution of cash grants under the Ehsaas Emergency Cash Program, which was launched to help the poor during the COVID-19 pandemic. The program was plagued by a lack of transparency, bureaucratic hurdles, and technical glitches, which resulted in delays and discrepancies in the disbursement of funds.

By merging various social protection programs and centralizing zakat collection, the government could eliminate duplication and improve coordination. PRIME (Policy Research Institute of Market Economy) has created a Pakistan Charter of Economy to address issues in public finance management.

There are three proposals (Proposals 24, 25, and 26) that specifically address long-term outcomes in the social security sector. As follows:

Proposal 24 in the Charter suggests the merger of various social protection programs to eliminate duplication and reform the zakat collection system.

The government has been running multiple social protection programs, such as the Benazir Income Support Programme (BISP) and the Ehsaas Emergency Cash Programme, among others. Merging these programs can eliminate duplication and create a more efficient and effective system. Furthermore, the reformation and centralization of zakat collection can create a more reliable funding source for social protection programs.

According to the State Bank of Pakistan, zakat collection reached PKR 87.6 billion in FY 2021. Redirecting 80% of zakat receipts to be spent on recipients can significantly increase the coverage of social protection programs. Additionally, independently auditing zakat accounts every year can increase transparency and accountability.

Proposal 25 suggests that the government should not incur any debt to fund social security programs and should only rely on taxation and private charities.

This can help create a more sustainable funding source for social protection programs. According to the Pakistan Economic Survey 2020-21, the total revenue collection of the Federal Board of Revenue was PKR 4,691 billion.

The government can allocate a portion of this revenue for social protection programs. Furthermore, private charities can also play a significant role in providing social protection. In 2021, Pakistan was ranked 26th in the World Giving Index, which indicates that the country has a strong tradition of giving.

Proposal 26 suggests the use of Negative Income Tax to target households earning below the income tax threshold.

Negative Income Tax can create a more targeted and efficient system of providing social protection. The NIT is a system where the government provides financial assistance to households whose income falls below a certain threshold. According to a report by the World Bank, Negative Income Tax has been successfully implemented in countries such as the United States and Canada.

The current social security programs in Pakistan have numerous weaknesses and have failed to adequately address poverty and inequality. The fundamental principle to a diverse and effective social security program is sustainable funding. Unfortunately, previous social security programs in Pakistan were not designed for sustainability. Social security has become a political tool, and its present usage is not conducive for saving lives, feeding hungry mouths, or providing sustainability and recovery outcomes for those struggling in hard times.