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Govt. Policy Scorecard

Prime Note: Federal Budget 2022-23

by PRIME Institute PRIME Institute No Comments

Prime Note: Federal Budget 2022-23

By Tuaha Adil 

 

  1. Federal budget highlights the adoption of a contractionary fiscal policy for sustainable growth. The priority of the government is to stabilize the economy and control inflation as countries around the world are experiencing rising commodity and petroleum prices. The stabilization of the economy is imperative for sustainable growth because country experienced higher fiscal and current account deficits in the last fiscal year. The relief package announced in February deteriorated the sustainability of the economy; contributed to a significant burden on the national exchequer, a rise in fiscal deficit and current account deficits, and currency devaluation.  The federal government expenditures for FY 2023 are kept at the level of FY 2022 i.e. Rs. 9,502 billion. However, the budgeted government expenditures for FY 2022 were Rs. 8,487 billion and actual spending increased by Rs. 1,015 billion to Rs. 9,502 billion. Therefore, the government needs to ensure it does not spend more than the budgeted amount.

 

  1. The government believes that controlling public expenditures will help in reducing the aggregate demand and inflation. Inflation remains a challenge for the government, which requires a prudent mix of fiscal and monetary policies. In May 2022, the State bank of Pakistan increased the policy rate by 150 basis points to an ever high of 13.75 percent to discourage extravagance and reduce the mounting pressure on the domestic currency. However, raising the policy rate alone remained futile to control inflation and contributed to an increase in the domestic debt liabilities. The average inflation in FY 2022 remained at 11.2 percent and the government has set a target of 11.5 percent for FY 2023, which highlights the fact that the reversal of relief package and passing on the prices of electricity and petroleum products will result in a significant increase in inflation in the short term until the people alter their spending behaviors.

 

  1. The budget maintains a significant allocation of funds for subsidies. In FY 2022, the government allocated Rs. 682 billion for subsidies but actual spending was 122 percent higher amounting to Rs. 1,514 billion. In FY 2023, the government has allocated Rs. 699 billion in terms of subsidies, which is higher than the budget for running a civil government. The power sector will receive a major proportion of subsidies amounting to Rs. 570 billion and allocation for the petroleum sector is Rs. 71 billion. The continuity of subsidies without any analysis of the outcome of subsidies poses a serious threat to the financial stability of the country.

 

  1. The government has set an ambitious target of collecting Rs. 7,004 billion as FBR revenues on the back of adjustment in the rates of taxes. The share of direct taxes is 37 percent while the share of indirect taxes is 63 percent, whose incidence is more among people in lower-income groups. Income tax constitutes a major proportion of the direct tax and its share in total FBR revenue is 39 percent.  The government envisages an18 percent increase in income tax revenues compared to the last fiscal year.  Sales tax constitutes a major proportion of indirect taxes and total tax revenues with a share of 44 percent.  The government estimates indicate an increase of 23 percent in sales tax compared to the previous fiscal year. With an expected rise in inflation, there is a possibility of a slowdown in aggregate demand and a subsequent fall in expected sales tax revenues. The tax to GDP ratio proposed in FY 2023 is 9.2 percent, which is a manifestation of a dismal performance of our tax administration. The government should strive for bringing more people into the tax net and restrict tax evasion through an overhaul of the country’s taxation system.

 

  1. The government has introduced changes in the taxation system to protect lower-income groups and put the burden on higher-income groups. The threshold income exempted from income tax for salaried individuals has been increased from Rs. 0.6 million to Rs. 1.2 million. Furthermore, the threshold income exempted from tax for business individuals and AOPs has been increased from Rs. 0.4 million to Rs. 0.6 million. The government has proposed a fixed tax regime for small retailers where Rs. 3,000 to Rs. 10,000 will be collected along with electricity bills. The government has proposed a capital gain tax of 15 percent on the transaction of immovable property in the first year, the advance tax rate on the purchase and sale of property for filers is proposed to be enhanced to 2 percent from the 1 percent and for non-filers, increased from 2 percent to 5 percent.

  1. Government’s reliance on customs duties for revenue collection continues to distort trade and manufacturing. The use of tariffs for revenue purposes affects the performance of local industries. For FY 2023, the government has anticipated a 17 percent growth in revenue collection from tariffs compared to an actual collection in the previous year. The government has rationalized 400 tariff lines related to the manufacturing sector, and extended exemptions on agricultural inputs and machinery. Although tariff rationalization is a good initiative, the country’s tariff structure is still complex. Moreover, the government continues to protect domestic industries from international competition thereby eliminating incentives for them to improve, restricting the transfer of knowledge and technology, and enforcing consumers to buy low-quality domestic products at higher prices.

 

  1. Privatization of loss making state-owned enterprises is included in the budget with expected revenue of Rs. 96 billion. Every year government includes the privatization of loss making enterprises but remains unable to carry them out. Resultantly, the government had to provide funds to bleeding enterprises to keep them afloat. The total loss of SOEs in 2019 was Rs. 143 billion. It is imperative to cut loose loss making enterprises to ease the burden on the government and put public resources to efficient use.

 

  1. External financing head in the budget brief does not indicate any inflow from IMF and China’s safe deposits. Pakistan has been struggling to fulfill the requirements to resume the IMF program for which subsidy on petroleum products and electricity was removed and prices were raised. This contradicts the previous efforts of the government to convince China to lend money to Pakistan as safe deposits and also negates the struggle to resume the IMF program. However, the government is going to borrow money from both sources. This is an effort by the government to hide external borrowing and deflate the overall debt and liabilities of the government. Therefore, the ability of the government to accurately assess the debt liabilities will be affected, which will lead to mismanagement in the debt servicing.

 

  1. Collection of Rs. 750 billion as petroleum development levy (PDL) seems difficult in the current environment of high petroleum prices. The government intended to collect Rs. 610 billion PDL in the FY 2022 but was able to collect Rs. 135 billion. Currently, a significant jump in global demand for petroleum products from ease in pandemic enforced restrictions and the start of the Russia-Ukraine War have resulted in a tremendous increase in the petroleum prices thereby making it impossible to collect intended revenues. For FY 2023, the government intends to collect a PDL of Rs. 750 billion from oil and PDL of Rs. 8 billion from gas, which will be impossible as it will contribute significantly to already unfettered inflation. The government will not be able to levy PDL as it will deteriorate the political capital of the coalition government and result in a higher than anticipated fiscal deficit.

 

  1. Government allocates Rs. 360 billion for the protection of unprivileged people under the Benazir Income Support Program. The government has increased the allocation for social protection by Rs. 114 billion to Rs. 360 billion for FY2023. This is a good initiative on behalf of the government to help the deprived segments of society who are struggling to survive when inflation remains unabated. In May 2022, food inflation cloaked at 15.5 percent in urban areas and 19 percent in rural areas.  Therefore targeted support for the needy people is appreciable.

 

  1. PRIME finds the proposed budget to be lacking insight and unrealistic to achieve the sustainable growth. PRIME proposes the adoption of broad-based flat tax rates to promote compliance and voluntary registration as higher tax rates, which the current budget proposed, only contribute to higher tax evasion and avoidance. The tariff and non-tariff barriers create anti- export bias, disincentivize the industry to ameliorate, narrow their focus to domestic demand, prevent the industry to become a part of global value chains and compel citizens to pay a higher price for substandard goods. Therefore, rationalization of the entire tariff structure is inevitable for the sustainable growth of the country. The government remains incapable to cut losses by privatizing bleeding SOEs just for political aspirations but business as usual is not possible now; therefore, the government needs to set aside political motivations and ease the unnecessary financial burden. The exclusion of credit inflow from China and IMF makes the efficacy of the entire budget questionable. The dependence on higher petroleum revenues at the time of rising global prices and soaring inflation at home is also not a wise strategy for fiscal sustainability.

 

Download the full PDF of the budget note here: Prime Note Federal Budget 2022-23

EAG concurs with interest rate hike, cautions on price control

by PRIME Institute PRIME Institute No Comments

EAG concurs with interest rate hike, cautions on price control

The independent Economic Advisory Group (EAG) convened a meeting to assess the latest economic developments and concurred with the government’s decision to raise the policy rate and allow markets to determine the exchange rate. However, it noted that a prudent mix of monetary and fiscal policies is needed to keep prices in check. Furthermore, distortionary regulatory policies should be avoided to enable market forces to operate in a sustainable manner.

The government has pursued an expansionary policy in the wake of the pandemic to keep businesses afloat, and to expedite the economic recovery by decreasing the policy rate, which has resulted in a fairly rapid recovery and surge in domestic demand. The rise in domestic demand and subsequent rapid increase in imports, as well as imported inflation, is indicative of an overheating economy.

Among other measures, the government has indicated that it plans to regulate prices through price controls. The EAG believes that there is ample empirical evidence that such administrative measures are rarely successful, and also lead to supply side distortions, such as hoarding and subsequent shortages, smuggling and price discrimination. The EAG also views the government’s decision to raise tariffs in order to reduce imports of what it considers as ‘luxury goods’ as counterproductive as it is difficult to define ‘luxury goods’.

The underlying cause of inflation is an output gap, which should be addressed by fiscal policies to dampen excessive aggregate demand, and long term growth should be catered for by augmenting supply instead of state intervention in the market price signalling mechanism. The market determined exchange rate policy and policy rate hike are sufficient to signal market players to adjust their business policies without the creation of any distortion. Furthermore, an indication has been given in the monetary policy statement that”the MPC expects monetary policy to remain accommodative in the near term, with possible further gradual tapering of stimulus to achieve mildly positive real interest rates over time.”

The monetary policy statement highlighted the disbursement of 44 percent of the total PSDP funds in just two and half months, which indicates that the fiscal stimulus is contributing to the surge in domestic inflation. The government spending pattern needs revision to keep fiscal deficit in check; otherwise, higher government spending will translate into higher government borrowing from the commercial banks, and lead to private sector crowding-out.

In conclusion, the EAG agreed with the adoption of a market determined exchange rate, and the gradual move towards positive real interest rate to keep the growth momentum sustainable. But it expressed serious reservations on the distortionary price control mechanism adopted by the government, and expressed concern that it will prove to be futile like in the past.

The Economic Advisory Group is an independent group of individuals from economics, policy and the private sector that deliberates regularly on economic developments and shares its views with the government and the public. It is supported by PRIME, an independent think tank.

For media inquiries, please contact Afzal Khan at afzal@primeinstitute.org or 0333-0588885.

Liberalize and Integrate: EAG outlines its vision of a new auto policy

by PRIME Institute PRIME Institute No Comments

Liberalize and integrate:
EAG outlines its vision of a new auto policy

Transformation of the Auto Industry needed from protection and indigenization to liberalization and integration

The independent Economic Advisory Group (EAG) convened detailed deliberations to assay the outcome of contemporary automotive development policy, and the initiatives proposed in the Finance Bill 2021-22. It observed that prevalent policies do not present a path for transformation for the sector to either meet the needs of the domestic consumer or become globally competitive. Specifically, these fall short at both providing a mechanism to bring down prices on sustainable basis and ensuring development of Pakistan’s industrial capabilities necessary for competing in international markets.

EAG observes that the incentive structure in place is not designed to leverage the country’s latent comparative advantage. This is precisely the reason why, despite decades of protection, the industry has failed to become competitive internationally. Instead, a more efficacious policy would focus on exploiting Pakistan’s inherent latent comparative advantage, which would incentivise greater concentration of resources in segments of auto-industry supply chain where Pakistan has necessary capabilities to compete globally. For example, although by no means guaranteed, an auto-policy which moves away from specializing in the end-product (e.g. assembly) and, instead, focuses on subsectors where comparative advantage is more probable is better suited for achieving policymakers’ objectives – consumer welfare and increase in industrial capabilities.

The auto industry has received protection from government for more than three decades without robust analysis of requisite pre-conditions, which has been standard practice in most trading blocs (e.g. EU) for several decades. For instance, researchers use empirical efficiency tests like the Mill test and Bastable test, and analyse of the welfare implications of the incentive structure to objectively measure the impact of protectionist measures in place. On both these measures, the auto industry and, implicitly, auto-policies fail. This relaxed approach to providing incentives at the expense of consumer explains why the industry continues to struggle at achieving the economies of scale necessary for competing globally.

The efficacy of any policy is contingent upon prudent allocation of resources. EAG argues that the prevailing policies have allocated country’s resources in production activities where Pakistan has an inherent disadvantage. The 1.8 million people currently employed throughout the supply chain could be reemployed across activities where Pakistan enjoys a latent comparative advantage. The misuse of resources remains the least appreciated point and EAG wishes to bring it to policymakers’ attention.

The evolution of trade has prompted countries to realize comparative advantage, cars made in Germany compete with cars made in Japan, and specialize in the stages of supply chain, it is impossible to say where a car is manufactured. Data shows we are likely to have a comparative advantage in auto-parts and two/three wheel automobiles, and for which, there are significant primary/secondary markets in Africa and Asia.

The EAG proposes that the upcoming auto policy should promote integration of domestic parts manufacturers with global value chains through two actions. First, liberalization of trade regime to give market access to international automobile manufacturers in exchange for integrating domestic parts manufacturers in their value chains. Second, identify and engage with key auto markets across the world with the aim to reduce frictions to cross border trade and provide certainty to international auto players vis-a-vis operating their supply chains from Pakistan.

Policy should focus on securing access to African and Asian markets to expand exports to primary/secondary markets, which can be accomplished through actively seeking FTAs with African Union, RCEP, and Central Asian countries.

Investment in the enhancement of domestic capabilities for the expansion of potential areas of comparative advantage should be the central stage of transformation. First, businesses need to be incentivized to invest in research and development and produce new products. Second, coordination between relevant business associations, domestic manufacturers, and global players is needed for the standardization of both products and production processes.

Furthermore, it is imperative to identify emerging skills’ requirements and liaise with engineering universities and NAVTTC to ensure appropriate intervention at the earlier stage.

EAG has also made available a presentation on auto-sector reforms on PRIME’s website with the aim to present an alternate set of policies than what is being currently proposed.

The Economic Advisory Group is an independent group of individuals from economics, policy and the private sector that deliberates regularly on economic developments and shares its views with the government and the public. It is supported by PRIME, an independent think tank.

Click below to read the complete presentation:

Auto-Industry-Presentation.pdf

For media inquiries, please contact Afzal Khan at afzal@primeinstitute.org or 0333-0588885.

A Case Study of Auto Industry in Pakistan (Draft Note for Discussion)

by PRIME Institute PRIME Institute No Comments

A Case Study of Auto Industry in Pakistan (Draft Note for Discussion)

Vision for Economic Transformation

This is a Draft Note for Discussion authored by PRIME’s Research Economist Mr. Tuaha Adil. The policy note comprises valuable inputs from the members of the Economic Advisory Group.

The transformation of an economy is contingent upon the utilization of resources in the most productive manner. Sectors of the economy will operate at maximum potential when business conducive ambiance is created through favorable and ease promoting government policies. The economic transformation policy based on the identification and resolution of contemporary structural and sectoral inefficiencies and futile economic policies is inevitable for the prosperity of the country. The performance of the auto sector is analyzed as a case study to evaluate the efficiency of government industrial policies. The government’s policies and initiatives to expand the auto industry are based on the assumption of latent comparative advantage. Therefore, domestic auto companies are protected from international competition through tariffs and tax cuts. However, the outcome of policies and performance of the sector have been unsatisfactory due to confinement to assembly of vehicles and nonexistent localization of products. The policies adopted by countries having developed automobile industries have also been discussed to evaluate shortcomings of the policies adopted in Pakistan.

Click below to read the full report;

Auto-Policy-Note-10.8.21.pdf

Light at the End of the Tunnel (2018)

by PRIME Institute PRIME Institute No Comments

PML-N Economic Performance: Light at the End of the Tunnel is the 10th and final federal tracking report under the Government Policy Scorecard project which reviews Pakistan’s economic performance by tracking the progress made on the implementation of the economic manifesto announced by the party in power in Islamabad, Pakistan Muslim League-Nawaz (PML-N). The purpose is to initiate and inform policy dialogue and public debate on the progress made on the economic agenda of PML-N. This tracking directly serves the basic principle of a functioning democracy: accountability. Current report covers progress made during July-December 2017

The report picks two distinct sections of the PML-N manifesto: Economic Revival and Energy Security, which it terms as ȃEconomic AgendaȄ. These two ȃAreasȄ are then divided into ȃComponentsȄ and ȃSub-componentsȄ. In most cases, these are based on a simple reproduction of text of the manifesto, and in some cases, some editing has been carried out for clarification and structure, but without altering the meaning of the authors of the manifesto. Under the area of Economic Revival, 10 components and 57 sub-components (or targets) have been identified. Energy Security includes 15 components (out of which 10 are targets) and 22 sub-components, making a total of 32 targets. In sum, the report tracks 89 targets. In its 10th and final instalment, the report assigns scores on 84 targets, subject to information availability, based on the progress recorded. On 5 targets, no score is awarded.

To read more, download the file:

Light at the End of the Tunnel (2018)

January-2018-Ali-Salman-_-Shehryar-Aziz-PML-N-Economic-Performance-Light-at-the-End-of-the-Tunnel-10th-Tracking-Report

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Between promises and performance (2018)

by PRIME Institute PRIME Institute No Comments

Between promises and performance (2018)

The objective of the report titled “PML-N Economic Agenda: between Promises and Performance” is to analyze the economic performance of PML-N over the past five years, based on a series of 10 reports under PRIME’s Government Policy Scorecard Project. The scope of this report is mostly confined to the performance over the governments’ tenure, based on the agenda targets, wherever applicable.

The performance analysis is further broken down to five major categories, namely: Tax Administration, International Trade, Public Debt, Energy, and State Owned Enterprises. This report has analyzed these five categories with respect to agenda targets, reforms or the lack thereof, and any other key issues surrounding the sector.

The annexure at the end of the report aims at critically evaluating and commenting on specific agenda targets, in the light of PRIME’s tracking scores. Each category is covered as a different chapter, entailing performance overview, major achievements, bottlenecks and recommendations for reforms’ sake.

To read more, download the file:

Between promises and performance (2018)

Between-promises-and-performance-2018

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First Hundred Days Reform Agenda Report: Outcomes and Expectations

by PRIME Institute PRIME Institute No Comments

First Hundred Days Reform Agenda Report: Outcomes and Expectations

PRIME Institute launched “100 Days Agenda: Tracking Performance” on Tuesday, 20th November. This report examines PTI’s performance within the first 100 days of taking charge of the Federal Government based on the six pillars identified by the party itself.

In Pakistan, where majority of the people lack literacy and are poor, identification of basic issues becomes necessary for the sustenance of livelihood of the average Pakistani. Signifying economic empowerment with provision of decent housing, clean drinking water, and basic consumer amenities such as internet, mobile phone, television, nutrition, education, health and insurance of safety.

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