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Tim Hortons Vs the intellectual elite of Pakistan

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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

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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

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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?

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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

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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.

Public Sector Reforms: Second Islamabad Policy Exchange

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Public Sector Reforms: Myths and Realities


PRIME (Policy Research Institute of Market Economy) organized the 2nd Islamabad Policy Exchange in Islamabad on 20th of March 2023. The event was attended by policy practitioners from the government and private sector.

The topic of discussions was Public Sector Reforms: Myths and Realities and was organized with the help of German Political foundation Friedrich Naumann Foundation.

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

In the session it was explained that Public sector reform consists of deliberate changes to the structures and processes of public sector organizations with the objective of getting them to perform better. Structural change may include merging or splitting public sector organizations while process change may include redesigning systems, setting quality standards, and focusing on capacity-building.

Pakistan’s public sector is generally considered Cumbersome, inefficient, and corrupt. All reform efforts tend to improve its efficiency, effectiveness, transparency, and accessibility. Public Sector Reforms in Pakistan date back to the 1950’s and reflect different models such as NPM (New Public Management), SAP (Structural Adjustment Programme), and PRP (Poverty Reduction Programme).

The weaknesses of the government emerge from its Monopolistic nature of doing business, an unmanageable large size, managerial inefficiencies, public inaccessibility, economic inertia and Self-serving agenda.

It was revealed that in Pakistan’s low ranking on the World Competitiveness Report, inefficient government bureaucracy is the second most significant cause hampering Pakistani goods and services in international markets. The leading cause is corruption.

It was noted that ever since 2016, SOE’s have consistently incurred significant losses. These losses are compensated by recurring subsidies, concessions, taxation exemptions and bank borrowing. The book value of SOE assets is around PKR 21 Trillion, and account for 40% of the country’s GDP. At independence, Pakistan inherited only 12 SOE’s. This number grew in the 1950’s and 60’s but really exploded in the nationalization policy of the 1970’s under Zulfiqar Ali Bhutto. At present, there are 200 SOE’s and most are loss making institutions.

Tax revenues have been increasing every year despite news of most FBR targets being missed. The real problems are on the expenditures side, where no sincere attempt has been made to curb public spending and balance the budget.

While automation in government processes is viewed as critical to improving sectoral performance, most participants express grave concerns and pessimism on the capacity to reform the public sector soon.

How Pakistan’s Federal Government is Sabotaging Its Own Economy

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How Pakistan's Federal Government is Sabotaging Its Own Economy: 10 Examples of Fiscal Indiscipline

Fiscal indiscipline is a persistent challenge for Pakistan’s federal government, and it is essential to analyze the ways in which it manifests. This article provides an analysis of 10 common ways in which Pakistan’s federal government expresses fiscal indiscipline. 

Detailed suggestions on the resolution of Budgetary policy issues can be found within the Pakistan Charter of Economy.

 

Low Tax Collection

Pakistan’s tax collection is considerably lower than other countries with similar income levels. The Federal Board of Revenue (FBR) reported that Pakistan’s tax-to-GDP ratio was 11.2% in 2020, which is well below the average for middle-income countries. This low tax collection is a significant contributor to fiscal indiscipline, as it limits the government’s ability to fund its expenditures adequately.

Unproductive Spending

Pakistan’s federal government also engages in unproductive spending, which is another contributor to fiscal indiscipline. For example, the government has a history of investing in large, expensive infrastructure projects without proper cost-benefit analysis. These projects often lead to increased debt, which can lead to further financial instability.

Poor Management of Public Sector Enterprises

Pakistan’s public sector enterprises have a history of mismanagement and financial inefficiencies, which can lead to a significant drain on government resources. According to the Pakistan Economic Survey 2020-21, state-owned enterprises’ accumulated losses reached Rs. 2.6 trillion in 2020. This mismanagement leads to increased government spending to keep these enterprises afloat, contributing to fiscal indiscipline.

Lack of Transparency

The government has been criticized for its lack of transparency in awarding contracts and allocating resources, which can lead to increased corruption and inefficiencies.

One example of the lack of transparency is the inadequate public disclosure of information on government spending. The lack of comprehensive and timely information on public spending hinders accountability and makes it difficult to monitor and assess government spending. The Public Financial Management Act of 2019 aims to improve transparency and accountability in public financial management. However, implementation has been slow, and transparency remains a significant challenge.

Another example is the lack of transparency in tax administration. Pakistan’s tax administration has been criticized for its lack of transparency and accountability, leading to low tax compliance and revenue collection. The absence of clear and consistent procedures, as well as limited access to information on tax administration, contribute to this problem.

The lack of transparency in public procurement processes is another area of concern. Public procurement processes are often opaque, leading to mismanagement and corruption. The absence of clear rules and guidelines, coupled with a lack of transparency, often leads to the awarding of contracts to politically connected individuals or firms, which may not be the most qualified for the job. This results in the misallocation of resources and reduced effectiveness of public spending.

Excessive Defense Spending

Pakistan’s defense spending has increased significantly in recent years, which can contribute to fiscal indiscipline. According to the Stockholm International Peace Research Institute (SIPRI), Pakistan’s military expenditure was $10.3 billion in 2020, which represents 4% of the country’s GDP. This excessive defense spending limits the government’s ability to fund other critical areas, such as health and education, contributing to fiscal indiscipline.

Dependence on Loans

Pakistan’s federal government also has a high dependence on loans to finance its expenditures, which can contribute to fiscal indiscipline. According to the Pakistan Economic Survey 2020-21, external debt and liabilities increased to $117.8 billion at the end of March 2021, which is 38.8% of the country’s GDP. This reliance on external financing can lead to increased debt and financial instability.

Lack of Long-Term Planning

Pakistan’s federal government also lacks long-term planning, which can contribute to fiscal indiscipline.

The lack of long-term planning results in poor decision-making and the misallocation of resources. Short-term policies often lead to incomplete projects and the inefficient use of resources, which results in cost overruns and further drains on the budget. This issue is evident in the government’s energy policies, where frequent changes in policies and a lack of long-term planning have resulted in an inadequate and unreliable energy supply system.

Another example of the lack of long-term planning is insufficient investment in infrastructure development. The government’s failure to prioritize infrastructure development has led to inadequate road networks, limited access to clean water and sanitation, and poor quality of public transportation. This hampers economic growth and development, as businesses struggle to transport goods and services efficiently, and individuals face challenges in accessing basic services.

The government’s lack of planning also affects social welfare programs. The government often introduces social welfare programs without adequate planning, which results in poor implementation and inadequate funding. This is evident in the government’s poverty alleviation programs, where a lack of long-term planning has led to inadequate funding, inefficient implementation, and limited impact on poverty reduction.

Weak Revenue Administration

One of the key challenges facing Pakistan’s federal government is the weak revenue administration, which contributes to fiscal indiscipline. The government has struggled to increase its revenue collection and improve tax compliance, resulting in a low tax-to-GDP ratio and an over-reliance on borrowing.

According to the World Bank, Pakistan’s tax-to-GDP ratio stands at around 11%, which is significantly lower than other developing countries in the region. The low tax-to-GDP ratio is due to the government’s failure to effectively implement tax policies, a narrow tax base, and a lack of enforcement.

The government has also struggled to broaden the tax base by including more taxpayers and sectors into the tax net. A significant portion of the economy remains undocumented and operates in the informal sector, which limits the government’s ability to collect taxes effectively. Furthermore, tax exemptions and concessions granted to influential individuals and industries also contribute to a narrow tax base and revenue losses.

The weak revenue administration also results in a high degree of tax evasion and non-compliance. Tax evasion is prevalent in Pakistan, and it contributes to a significant loss of revenue for the government. According to a report by the Federal Board of Revenue (FBR), around 72% of registered taxpayers in Pakistan do not file tax returns. Tax non-compliance not only results in revenue losses but also contributes to a lack of trust in the government and a culture of impunity.

Dependence on External Financing

Pakistan’s dependence on external financing is a significant contributor to fiscal indiscipline. According to the Pakistan Economic Survey 2020-21, the country’s external debt and liabilities increased to $117.8 billion at the end of March 2021, which is 38.8% of the country’s GDP. This indicates that the government is relying heavily on external financing to finance its expenditures.

Simplification of the Pakistani Tax Regime

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Simplification of the Pakistani Tax Regime

Pakistan’s tax system has been faced with several challenges including low tax-to-GDP ratios, a narrow tax base, and high rates of tax evasion. 

 

 

Pakistan’s tax-to-GDP ratio was only 10.4% in 2020, which is significantly lower than the average of 15.3% for countries in the South Asian region (World Bank). Economists and policymakers have proposed that a low rate, flat, broad-based, and predictable tax regime can help Pakistan overcome these challenges and achieve greater economic growth and development. The proposals are reflected in the Pakistan Charter of Economy.

Low Rates

Several reasons support the implementation of a simplified tax system with a low tax rate. First, low tax rates encourage taxpayers to comply with their tax obligations. High tax rates can discourage people from working, investing, or saving, as the cost of these activities may be too high compared to their after-tax returns. Conversely, low tax rates provide individuals and businesses with more financial resources to engage in productive economic activities, which leads to increased economic growth and development.

Furthermore, a one-percentage-point reduction in tax rates can lead to a 0.3% increase in GDP in the short run and a 0.6% increase in the long run, according to a study by the International Monetary Fund (IMF). Tax evasion in Pakistan amounts to about 70% of the total tax revenue (Pakistan Institute of Development Economics).

Lower Administrative Costs and Compliance

A simplified tax system can lead to lower administrative costs, resulting in significant cost savings for the government. According to a World Bank report, Pakistan spends approximately 1.7% of its GDP on tax administration, which is higher than the average for countries in the South Asian region. Streamlining the tax collection process and reducing the need for expensive technology and personnel could lower administrative costs.

The current tax system in Pakistan is characterized by a multitude of tax rates, exemptions, and deductions, making it complex and difficult for taxpayers to understand and comply with. A flat tax rate would simplify the system, reduce the need for tax planning, and promote greater transparency and accountability. A World Bank study found that a flat tax rate could increase compliance by up to 7%, as taxpayers would be less likely to engage in tax evasion or avoidance.

A Broader Base

A broad-based tax system is desirable because it ensures that all individuals and businesses contribute to the tax base. Pakistan’s tax base is narrow, with only a small proportion of the population paying income tax. A broad-based tax system would ensure that all individuals and businesses, regardless of their income or status, contribute to the tax base. This would increase the revenue raised from taxes and promote greater fairness and equality in the tax system. 

Broadening the tax base by just 1% could lead to an additional Rs. 50 billion in revenue, according to a study by the Pakistan Institute of Development Economics. Dr. Ikramul Haq in 2019 estimated that a flat tax rate of 15% could result in a tax revenue increase of up to 0.9% of GDP in Pakistan

 

Predictability and Certainty over the Long Run

A predictable tax system is desirable because it promotes certainty and stability for taxpayers. The current tax system in Pakistan is characterized by frequent changes in tax laws and regulations, leading to uncertainty and instability for taxpayers. A predictable tax system would provide taxpayers with greater certainty and stability, allowing them to plan their finances and investments more effectively. Countries with more stable tax systems tend to have higher rates of economic growth and development, according to a study by the Tax Justice Network.

Limiting Corruption

A simplified tax system can reduce corruption and tax evasion, leading to higher tax revenues for the government. According to the Pakistan Institute of Development Economics, tax evasion in Pakistan amounts to approximately 70% of the total tax revenue. A simplified tax system with lower tax rates and reduced complexity could reduce opportunities for corruption and increase tax compliance, resulting in higher tax revenues for the government.

Economic Efficiency

Simplified tax regimes can allocate resource more efficiently, as individuals and businesses are not deterred from engaging in economic activity due to high taxes or a complex tax system. According to a study by the International Monetary Fund, a simpler tax system can lead to higher investment, greater innovation, and higher levels of economic growth. This is because a simpler tax system reduces the time and resources required to comply with tax regulations, which can be a significant barrier to economic activity.

Low rate, flat, broad-based, and predictable tax regime can bring significant benefits to Pakistan’s economy. Such a tax regime would incentivize taxpayers to comply with their tax obligations, simplify the tax system, broaden the tax base, and promote certainty and stability for taxpayers.

 

Fiscal Indiscipline in Pakistan’s Public Sector

by PRIME Institute PRIME Institute No Comments

Pakistan’s economy has been facing severe financial challenges for several decades, and one of the primary reasons for this is the government’s lack of fiscal discipline. The government’s spending has been increasing rapidly in recent years, leading to a significant surge in the country’s budget deficit. To address these issues and ensure sustainable economic growth, the government needs to exercise fiscal restraint and focus on reducing its expenditures.

In the most recently published Pakistan Charter of Economy by the Policy Research Institute of Market Economy, we try to address some of the issues. Check out the section on spending restraint. 

The government’s high level of spending is the primary reason for the country’s fiscal challenges. Pakistan’s government expenditures have been increasing significantly over the past few years, which has led to a substantial increase in its budget deficit. The government has been borrowing heavily to finance its spending, leading to a significant increase in the country’s debt burden.

Government Employees

  • The government of Pakistan employs 3.2 Million persons, or 5.1% of total labor force, and 1.57% of the total population.
  • The total government expenditure is 22% of GDP, and wages account for 3.6% of GDP and 19% of combined current expenditures of the Federal and Provincial Governments.
  • The provincial government employees constitute half of the bureaucracy while the remaining work with the Federal Government.
  • 35% of Federal employees work in security, 20% in infrastructure, and 18% in the energy sector.
  • At the provincial level, 41% of the government workforce is engaged in the education sector. Together with health and security, constitute 75% of employees, and 72% of wage expenditure.
  • 95% of government employees are in the unskilled (50%) and semi-skilled (45%) categories and constitute 85% of the wage bill.
  • 1.4 million persons are employed by the military.
  • In comparison, the ruling British raj needed no more than 1200 officers to conduct public services.

To address these issues, the government needs to reduce its spending. This can be achieved by cutting down on non-essential expenditures, eliminating all subsidies, and redirecting resources to more critical areas such as health, education, and infrastructure development. The government should prioritize spending on programs and projects that yield the most significant benefits for the country and cut down on expenditures that do not contribute to economic growth.

Curbing Expenditures

The government can also consider implementing austerity measures to reduce spending. These measures can include freezing salaries and benefits for government employees, reducing the number of government employees, and cutting down on travel and entertainment expenses. These measures will help the government save money, reduce the budget deficit, and improve the country’s fiscal health.

Efficiency

Another essential aspect of reducing government expenditures is improving the efficiency of public spending. In recent years, Pakistan’s government spending has been characterized by inefficiencies and waste. The government needs to implement policies that ensure public spending is directed toward projects and programs that yield the greatest benefits for the country. The government can achieve this by implementing a results-based management system that measures the impact of public spending and ensures that resources are allocated to projects that deliver the most significant results

Leakages from Corruption

The government also needs to focus on reducing corruption in public spending. Corruption has been a significant challenge in Pakistan, and it has contributed to the country’s fiscal challenges. The government needs to implement anti-corruption measures that promote transparency and accountability in public spending. This can be achieved by strengthening anti-corruption institutions, increasing transparency in public procurement, and improving oversight and monitoring of public spending.

Pakistan faces 'global embarrassment' trying to repair image of Finance Minister Ishaq Dar

Finally, the government needs to explore opportunities for public-private partnerships to reduce government expenditures. Public-private partnerships can help the government deliver public services more efficiently and cost-effectively by leveraging private sector expertise and resources. The government can partner with private companies to provide services such as healthcare, education, and infrastructure development, which will help reduce government spending and improve the quality of public services.

In conclusion, Pakistan’s government needs to exercise fiscal restraint and focus on reducing its expenditures to address the country’s fiscal challenges. The government should prioritize spending on programs and projects that contribute to economic growth and reduce non-essential expenditures. The government should also implement policies to improve the efficiency of public spending, reduce corruption, and explore opportunities for public-private partnerships. By taking these steps, the government can reduce the budget deficit, improve the country’s fiscal health, and ensure sustainable economic growth in the years to come

Does austerity lead to prosperity?

by PRIME Institute PRIME Institute No Comments

Does austerity lead to prosperity?

Best way to achieve austerity, prosperity is to end govt monopoly over economic resources

 

Ali Salman | March 06, 2023

 The prime minister, while addressing the news conference announcing austerity measures, said “we have to make collective efforts to make the country prosperous.”

The federal cabinet has announced an “austerity package”, that includes steps such as early office opening, early closure of shopping centres, ban on the purchase of luxury vehicles by the government, sale or lease of government-owned properties, ministers to forgo pays and perks, and travel on economy class.

This, if implemented, will lead to annual savings of Rs200 billion, according to the government estimates.

The steps such as 15% reduction in the government expenditure, ban on the import of luxury vehicles at taxpayers’ expense and commercialisation of state property are appreciable. We should appreciate this even for a symbolic value.

However, I ask this question: does austerity lead to prosperity, as the prime minister said?

First, we need to differentiate between austerity by a government and austerity by households and private firms. Almost all households and all private firms, which are going concern, do not spend more than what they earn. They are already austere. If they overspend, they go bankrupt quickly.

However, the governments do that all over the world. They do not go bankrupt due to their political power and monopoly over economic resources.

Second, the prime minister needs to understand that no nation has become prosperous through austerity.

The best way to achieve both government austerity and social prosperity is that we should end government monopoly over any economic resource. This should not be justified only on austerity grounds, rather it should be part of a permanent policy.

If we need any policy at all, we need a prosperity policy. In its Charter of Economy, PRIME has outlined such a policy proposal.

Government ownership and control of primary urban properties, agricultural, commercial and industrial businesses, and trade of commodities should be done away with. According to this charter, “The government may not monopolise any economic resource. PSO’s monopoly over import of most fossil fuels will end.”

If done in a competitive manner, this will usher in an era of prosperity instantly. It will also help the government achieve its objective of austerity. We give away hundreds of billions of rupees each year to the government so that it can wastefully spend on running businesses inefficiently.

Giving up control and ownership is hard. Politicians will feel powerless once we take back their power to give contracts and jobs through government businesses.

These are really the hard decisions which no government or political party is willing to seriously consider. Instead, we are asking the businesses and citizens to “do more”. Increasing the GST is a tool for the same.

Shutting down businesses at 8pm is another futile idea which seems to have gained a lot of traction. Energy conservation through administrative measures is a bad idea. Let me give one example.

Everyone is aware how we waste water in our farms, houses and factories. The reason is very simple. We are not willing to price the water.

When I was an independent director of Punjab Saaf Pani Company during 2014-2016, I proposed that the government should adopt the Changa Pani model, which is a community-managed project of drinking water supply through a pipeline in Bhalwal.

Water is priced through meters and households pay as per their consumption. Results are amazing. Not only people pay, but the system is maintained while the government-run water supply schemes become dysfunctional.

Then chief minister rejected this proposal. Instead, the governments keep wasting billions of rupees in installing tube wells. By changing the incentive system, we can save these billions and encourage people to conserve as a result of pricing.

Talking about austerity, our favourite bogeyman is import. Curbing imports, as every finance minister from Tarin to Miftah to Dar, and most of the economists, would like us to believe, is the key to managing our accounts.

Miftah started it and it has continued till today in practice. Little did anyone realise that we were tinkering with the very basic nerve of our economy. Once we started stopping imports, even on the fallacy of luxury/ non-luxury distinction, we strangulated the trade flow.

Recently, soap manufacturers released an ad, demanding that the government include it in “essential industries”. Government thinks washing hands is a luxury. We did not stop there.

Import restrictions led to the rationing of dollars and in fact creation of a parallel exchange market. That brought us on the verge of default.

Economics is a tricky subject and sometimes we are caught by the intended consequences following intentions only.

As Bastiat observed centuries ago, we need to differentiate between the seen and the unseen. We need to bring in consequences in our thinking. While people who are talking about austerity are good people and they have noble intentions, their solutions are inconsequential.

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

This article was originally published in The Express Tribune on March 6, 2023

 

Calling all writers! Join PRIME Fellowship and share your ideas for a prosperous Pakistan

by PRIME Institute PRIME Institute No Comments

Guidelines for Writers

Primarily policy research articles but also any other policy research media outputs produced by PRIME Associate Fellows can be topics relating to the economy of Pakistan, and on the following:

1. Policy realms
2. Economics
3. Energy
4. Agriculture
5. Water
6. Climate
7. Education
8. Healthcare

The standard structure of an output from a PRIME Fellow must be based on

1. Explaining a problem
2. Contextualizing the debate by referring to existing solutions
3. Offering or endorsing a solution consistent with the classical liberal/libertarian perspective

As these articles are designed as a direct contribution to public policy, it is important that the reference to debate should be linked with policy on the ground.

Here’s an example of a Problem – Literature – Solution structure.

Problem: Most Pakistanis do not have access to clean drinking water in their homes

Existing Solutions: For the last many years, various federal and provincial governments have invested billions of rupees in clean drinking water projects centered around provision of water filtration plants, from where citizens can collect water free of cost.
Proposed Solution: will be based on the principles of subsidiarity (local solutions) and cost recovery (user fee) along with necessary investment from the government.
As this example hopefully suggests, these articles should not be empty rhetoric, but based on sound reasoning backed up with argument and evidence.

This opportunity is for the professional development of Young people, and candidates within the age of 21 to 29 years of age are eligible to apply.

PRIME Sales Tax Proposal For Federal Budget 2023-24

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PRIME Sales Tax Proposal For Federal Budget 2023-24

The Policy Research Institute of Market Economy (PRIME) has proposed a sales tax plan for the Federal Budget 2023-24. The proposal aims to address the regressive taxation system that results from keeping sales tax rates on the higher side. The plan suggests that a maximum sales tax rate of 5% should be fixed with no input/output adjustment, which would be ideal for sustainable long-term growth.

The proposal also focuses on broadening the tax base through a simple withholding sales tax (SWHT) regime. The current Eleventh Schedule of the Sales Tax Act, 1990 has ambiguity with regard to active tax payer suppliers, and separate SWHT rates on some supplies and supplier categories are not just justified. PRIME recommends simplifying the SWHT regime to achieve broad, predictable, low-rate taxes.

For more details on the PRIME Sales Tax Proposal for federal Budget 2023-24, please refer to the attached document link