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Without structural reforms, SIFC will not succeed

by PRIME Institute PRIME Institute No Comments

Without structural reforms, SIFC will not succeed

The mandate of Special Investment Facilitation Council (SIFC) neither include institutional reforms nor simplification of procedures despite the acknowledgement that complexity of business regulations and bureaucratic hurdles are the reasons behind dismal state of economy.

Reforms should start from the government departments to create ease for the Pakistani entrepreneurs and improve provision of public services instead of creating new councils and adding more complexities. Creation of a parallel body to expedite the decision making process and requisite approvals may not be a sustainable solution until the concerned government departments are reformed. 

PRIME has published its quarterly assessment report, PRIME Plus October 2023, which analyzes the efficacy of the Special Investment Facilitation Council (SIFC), the macroeconomic performance of the country in Q1- FY2024, and potential challenges.

The report scrutinizes the establishment of SIFC which the government has proclaimed as its “Plan B” to overcome the recurring balance of payment (BoP) crises by attracting foreign investment in the country. SIFC has identified projects in 4 sectors: Agriculture, Mining and Minerals, I.T., and Energy. The establishment of SIFC under the umbrella of the BOI with separate management and objectives highlights the acknowledgment of the failure of BOI by the government and the need to have an alternative body. 

The report “Prime Plus” concludes that the efficacy of SIFC as a “Plan B” needs to be evaluated meticulously. The inefficiency of BOI has failed to prompt the government towards carrying out institutional and regulatory reforms that have been responsible for the reluctance of foreign investors. The establishment of SIFC indicates that the government has neglected to address the bureaucratic hurdles and associated inefficiencies.

The report highlights that the policy environment of the country is unconducive for business growth. The
frequent changes and the repetition of ineffective policies have weakened the interest
of foreign investors. 

The local business community is excluded from the decision-making process and no effort has been made to mobilize domestic resources. The structure and objectives of SIFC are unclear. Moreover, higher involvement of the military in decision-making and implementation will not be help to restore investment climate, which require deregulation and tax reforms.

The country’s economic performance has remained unsatisfactory while external financial obligations continue to mount. Against the target of 3.2 percent GDP set by the government, international financial institutions have downgraded their forecasts to around 2 percent. On the external front, the financial obligations in FY 2024 are around $28 billion. On the domestic front, the government faces a significant financial burden as 79 percent of the expected FBR revenues will be spent on debt servicing while leaving little space to carry out other expenditures.

Inflation continues to remain a challenge and people have experienced an exponential fall in their purchasing power. The CPI inflation stood at 31.4 percent in September 2023 while average CPI inflation in Q1 FY 2024 cloaked at 29 percent. The government’s decision to pass on the cost of utilities to the consumers without addressing policy and institutional inefficiencies may prove to be futile and keep inflation unanchored.

The political environment in the country remains uncertain as the schedule of elections is still not announced by the Election Commission and rumors about delays continue to prevail. Political stability is likely to improve when elections are announced. The crackdown started by the government against deviants in the currency and gold markets to curtail smuggling will not bear fruit unless policy uncertainties are addressed. 

For inquiries, please contact farhan@primeinstitute.org or call 0331-5226825

Tax Payers Alliance Pakistan (TPAP) submits Proposals to Task Force on Tax & FBR Reforms

by PRIME Institute PRIME Institute No Comments

Tax Payers Alliance Pakistan (TPAP) submits Proposals to Task Force on Tax and
FBR Reforms

TPAP| October 24, 2023

Federal Board of Revenue (FBR) constituted a Task Force on Tax & FBR Reforms vide notification dated 27th September, 2023. The purpose of this Task Force is to suggest measures regarding the improvement of FBR efficiency. As per TORs of the Task Force, it will review FBR & tax collection data, performance indicators, and access to data. It will also address tax evasion, smuggling, and corruption, propose structural reforms for the tax administration, and suggest technology-based measures to enhance tax collection. It will analyze tax policy, examine tax expenditures, and recommend the use of information technology for better compliance and transparency. The Task Force will submit a comprehensive report to the Government, outlining revenue and policy reform measures, including potential changes in tax administration and laws.

Tax Payers Alliance Pakistan (TPAP) – an initiative of economic think tank PRIME, in order to discuss and deliberate on related issues called a meeting of its members on 6th October 2023, who participated actively to share their ideas to be presented to the Task Force. On the basis of said meeting, TPAP
finalized proposals and submitted to the Task Force on 19th October, 2023. Proposals submitted by TPAP aim at reforming the taxation system in Pakistan to promote simplicity, transparency, and compliance; to eliminate taxes that are unjustified, discriminatory and have become redundant; and to create a fairer and more efficient tax system in Pakistan that can provide sustainable funding for public expenditures.

TPAP, the brainchild of PRIME, developed these proposals in consultation with its members, comprising of tax experts, development consultants, researchers, scholars, people from business community and salaried individuals from across Pakistan. The meeting was led by Mr. Ali Salman, Executive Director PRIME, Mr. Anas Farhan, Convener TPAP Secretariat Islamabad and Mr. Usman Azmat, Convener TPAP Lahore Chapter.

[pdf-embedder url=”https://primeinstitute.org/wp-content/uploads/2023/10/TPAP-proposals-submitted-to-Task-Force-on-Tax-FBR-Reforms.pdf” title=”TPAP proposals submitted to Task Force on Tax & FBR Reforms”]

Incredible things happen when taxpayers come together and raise their voice to bring betterment in the taxation system. 
Click below to get the full meeting rundown.

Think Tank says Federal Budget Lacks in imagination and realism

by PRIME Institute PRIME Institute No Comments

Think Tank says Federal Budget Lacks in imagination and realism

Islamabad: In its quarterly assessment report, PRIME Plus, the Islamabad based think tank Policy Research Institute of Market Economy – PRIME, emphasized on the need for regulatory, structural and public sector reform, and said that the budget does not offer much in those terms.

PRIME states that The federal budget lacks any imagination apart from unrealistic and overambitious revenue collection targets.

The think tank noted that Taxes on salaried individuals as well as businesses and companies were raised and the tax burden on existing taxpayers has increased; while the government is failing at broadening the tax base.

PRIME judged this budget to be more complex than its predecessor. The budget is full of new tax exemptions, and not many previous exemptions have been removed. Tax enforcement will become more challenging, and the collections process will be costly and inefficient.

PRIME suggested that higher Taxes on existing base will hamper compliance, and will discourage new tax filers to enter the system. Companies are now more incentivized to find ways to minimize their tax liability

The report predicts that the privatization agenda has again been sidelined, and there does not seem to be much hope for SOE reform over the next 12 months. Efforts related to foreign direct investment seem to suggest that the government is interested in privatization after election year, but not much will feasible in the short run.

On a positive note, the think tank highlighted that the government has incorporated expenditure cuts into the budget, after insistence from IMF. The budget has a primary surplus. Process to decouple pensions from the budget has also been initiated.

Government has made major efforts to keep itself afloat. Help from friendly countries and IMF will help country get through election season and till the appointment of the new government. Pakistani Rupee should stabilize in the short to medium term.

Global and domestic Inflationary pressures persist, but are now slowing down. Further decline in macro-economic indicators might be stemmed. 

For inquiries, please contact farhan@primeinstitute.org or call 0331-5226825

Unrealistic and expansionary budget falls short to boost confidence

by PRIME Institute PRIME Institute No Comments

Unrealistic and expansionary budget falls short to boost confidence

Policy Research Institute of Market Economy (PRIME) acknowledges that the coalition government has presented the budget for FY 2024 amidst insurmountable challenges with stalled IMF program on one end and upcoming elections on the other end. Though the government claims that budget coincides with IMF framework, yet the reality is in contrast and effort has been made to restore political capital to win elections.

PRIME believes that the budget presented by the Finance Minister Ishq Dar is void of any mechanism to promote stability and sustainability. The budget is based on overly ambitious revenue targets with 23 percent increase in FBR tax revenues from Rs. 7,470 billion to Rs. 9,200 billion and 53 percent increase in nontax revenues from Rs. 1,935 billion to Rs. 2,963 billion. However, in the outgoing fiscal year, neither the government was able to achieve tax revenue target nor the nontax revenue target. Therefore, such an increase without any initiative to broaden the tax base is likely to result in higher than anticipated fiscal deficit.

In the outgoing year, on the tax revenue side, the target is likely to be missed by more than Rs. 500 billion due to administrative restrictions on the imports as the government collects more than 50 percent of tax revenues at the import stage. FBR was able to collect Rs. 6,210 billion till May 2023. On the nontax revenue side, the government is likely to miss the target by more than Rs. 200 billion as the government collected Rs. 362 billion as petroleum development levy till March against the target of Rs. 855 billion due to fall in sale of petroleum products by more than 20 percent.

Pakistan being downgraded by three international rating agencies cannot borrow money from international financial markets and with reserves only sufficient for one month of imports and IMF program in limbo, government will excessively borrow from domestic commercial banks thereby not only crowd out the private sector but also increase the public debt exponentially.

PRIME also believes that the expenditure side of the budget manifests business as usual and skewed towards restoring political capital for upcoming elections. The budget is expansionary in nature with an increase of 52 percent in total expenditures from budgeted Rs. 9,520 billion in FY 2023 to Rs. 14,460 billion in FY 2024. The budget unveils lack of prudence of the government to improve allocation of public tax money where Rs. 1,074 billion will be spent as subsidies, which is a cover for government’s failure to minimize losses and inefficiencies.

The budget also unveils a crisis in the making completely ignored by the successive governments. The pension liability has surpassed the federal government expenditures. The pension expenditure is Rs. 761 billion and expenditure to run federal government is Rs. 714 billion. While the Finance Minister proclaimed the raise in salaries and pensions of the government employees, no effort is being made to improve the public service delivery. The payment of pension liabilities out of budget is unsustainable and likely to result in the collapse of public finance if remain neglected for several years.   

The proposed budget is inconsistent with the IMF framework and it is highly expected that the current IMF program will end without completion. The budget manifests that the government fails to acknowledge that successive huge fiscal deficits are underlying cause of recurring economic crises. Excessive spending to achieve high growth on the back of domestic and external borrowing has not only resulted in accumulation of debt and colossal debt servicing liabilities but also contributed to exploitation of citizens in the form of continuous increase in taxes and inflation through increase in money supply.

For inquiries, please contact farhan@primeinstitute.org or call 0331-5226825. 

European Union’s GSP+ highlighted as a critical arrangement for Trade and Good Governance

by PRIME Institute PRIME Institute No Comments

 

European Union’s GSP+ highlighted as a critical arrangement for Trade and Good Governance

Policy Research Institute of Market Economy (PRIME) has organized a roundtable conference on the launch of its report “Pakistan and the European Union (EU) under GSP+” in collaboration with Friedrich Naumann Foundation for Freedom (FNF) Pakistan. The report provides an update and analysis of the EU’s GSP+ status of Pakistan while also reviewing the current trade outlook of Pakistan in the world.

Pakistan was awarded EU’s Generalized System of Preferences (GSP+) status on 1st of January 2014 that aimed at promoting economic stability and good governance in the country. The status, which expires in December 2023, provides full removal of duties on most of the European Union’s tariff lines and is subject to compliance with 27 International Conventions.

Keeping in view the importance of Pakistan’s trade with EU i.e., a major export destination, representatives from the government, international community, private sector and think tanks actively took part in the consultative session.

Ms. Sarah Javaid, Research Economist at PRIME and author of the report highlighted the importance of the EU’s GSP+ for Pakistan while stating key findings from the report such that Pakistan’s exports to the EU have increased from an aggregate USD 37 billion (2007-13) to an aggregate USD 66 billion (2014-2022) and currently stand at USD 7.6 billion (10 months) in 2022. Referring to the report she added that Pakistan needs to sustain the GSP+ status post-2023 since in the absence of this arrangement, Pakistan would be subject to a maximum MFN tariff of 12% on the most traded tariff lines falling under this status. Moreover, the biggest beneficiary sector of GSP+ i.e. the textile sector, would have to bear a loss of exports worth USD 1.5 billion in form of exports.

Keeping in view the current status of the GSP+ for Pakistan, Mr. Thomas Seiler, Charge d’Affaires, European Union, appreciated the report and added that if the GSP+ continues given that Pakistan improves its compliance with the 27 UN Conventions, Pakistan would see a greater impact of modernization in the country as this status will improve the lives of its citizens. He added, exports from Pakistan to EU have increased due to GSP+ but growth should not be restricted to textile sector only. Furthermore, an assessment report that would be finalized in October 2022 would set the grounds for Pakistan’s readmission for GSP+ 2024-33’. Shedding some light on the new GSP+ regime, Mr. Thomas Seiler added to the discussion that Pakistan would have to re-apply for the next GSP+ status for which the European Parliament has approved a draft regulation where one of the requirements include abolishment of death penalty in Pakistan. Moreover, the new GSP+ of the EU would be subject to effective compliance with new conventions in addition to previous 27. He added that the work is still on going and the discussions are under progress.

Mr. Atif Aziz, Joint Secretary, Ministry of Commerce, stated that the Government of Pakistan is actively participating in ensuring the compliance with the 27 UN Conventions. The fourth and final Monitoring Mission by the EU has been recently concluded and the new scheme is in the discussion phase which would be officially notified by the Government of Pakistan once it is finalized.

Ms. Saleha Asif, CEO of Pakistan Textile Council (PTC) said that EU’s GSP+ is an emerging success story that has created better jobs and reduced poverty in many sectors of Pakistan. Stressing upon the importance of this arrangement for textile sector of Pakistan, Ms. Saleha said that apparel sector being supported by GSP+ employees more than 33% women. Moreover, the program does not just support Pakistan’s trade but also tends to improve working conditions especially in the export-oriented sectors and also benefits EU’s market with competitive supply of textiles.

Dr. Vaqar Ahmed, Joint Executive Director, Sustainable Development Policy Institute (SDPI), exchanged his thoughts on the GSP+ status and added that its more of a political process rather bureaucratic. Focusing upon challenges being faced by the exporters in Pakistan, Dr. Vaqar said that firms in the vulnerable regions of Pakistan do not have trade finance.  He was of the view that there is a need for an analysis on how the Pakistan’s trade policy and sectoral policy have assisted EU’s GSP+ while also keeping in view current schemes such as the tariff board, DTRE, and Manufacturing Bond.

Dr. Manzoor Ahmad, Pakistan’s former Ambassador at the WTO/Senior Fellow PIDE, argued that trade arrangements like the EU’s GSP+ are no doubt beneficial but there is a need to take bigger and smarter steps. Pakistan needs to have more Free Trade Agreements (FTAs) and not restrict its trade policy to the short term. In addition to that, he informed the audience that Pakistan has been losing its international market share by 1.5% for the last couple of years and that there is a dire need for empirical studies before formulating such arrangements to understand where the country needs to go.

Ms. Birgit Lamm, Head of the Country Office Pakistan, Friedrich Naumann Foundation for Freedom (FNF) said that GSP+ is not only a trade facilitation tool, but an opportunity for modernization in socio-economic, good governance & sustainability aspects for Pakistan and that it should strive to validate this status after 2023 in the interest of inclusive development.

Mr. Ali Salman, Founder and ED PRIME, concluded the event while saying that Pakistan should carefully evaluate all options for the future trade policy including joining regional partnerships like Regional Comprehensive Economic Partnership (RCEP). He also emphasized that Pakistan’s constitution guarantees necessary personal, civil, and religious freedoms that are required by GSP+.

 

This consultative event was organized by PRIME in collaboration with FNF.

For inquiries, please contact saad@primeinstitute.org or call at 03345397644.

Find some of the glimpses from the said event, below:

 

Trade connectivity highlighted as engine of sustainable growth

by PRIME Institute PRIME Institute No Comments

July 6th, 2022

PRESS RELEASE

Trade connectivity highlighted as engine of sustainable growth

The Economic Advisory Group (EAG) and Policy Research Institute of Market Economy (PRIME) organized an event to launch “Trade Connectivity” Book with the support of Friedrich Naumann Foundation (FNF) Pakistan. The event was attended by dignitaries from the government, private sector, academia, IMF and the Ambassador of the Republic of Indonesia to Pakistan. The participants stressed on the importance of trade and regional connectivity in promoting economic prosperity.

Syed Naveed Qamar, Federal Minister for Commerce, acknowledged the importance of free markets and their role in promoting growth. He was of the view that export led growth is the real aim of Pakistan and free trade will be imperative in this regard. The recent import ban was aimed at temporary restraint of imports.
EAG is of the view that the recent import ban by the government was not a well thought initiative. Moreover, the uncertain political environment in the country has further slowed down the economic activity. The promotion of exports by tapping into new markets, increasing the exports basket by reducing the trade barriers is the ultimate way forward.

Ms. Birgit Lamm, Head of Country Office FNF Pakistan, enunciated that “Pakistan has a huge market with enormous potential for economic growth, but it’s time to translate this potential to action in creating wealth for the country & its citizens”.

Syed Javed Hassan, Chairman EAG expressed his views as “The EAG Book ‘Trade Connectivity’ looks at the practical aspects of trade and why Pakistan urgently needs to enhance connectivity and thereby intra-regional trade, and also become a trading hub for trade beyond the region. Economic growth of nation states is linked to their ability to exploit connectivity and interdependencies within strong regional blocs. EAG Trade Connectivity supports this view with contemporary trade theories by focusing on internal and external economies of scale, and also suggests practical policy measure that maybe taken to bring the ideas into fruition”.

Dr. Ali Hasanain, Associate Professor of Economics at LUMS said “Creating and expanding gains from trade are at the heart of how economies grow. EAG’s “Trade Connectivity” book and today’s event are attempts to focus attention on these issues, and provide a compact overview of major issues currently holding Pakistan’s international trade down amongst the least trading nations of the world”.

Dr. Aadil Nakhoda, Assistant Professor of Economics at IBA, articulated that “Pakistan needs to make significant strides in participating in global value chains. The current situation is dire. However, there are opportunities if Pakistan undertakes regional trade agreements, reduces tariffs, focuses on improving quality of products through technical non-tariff measures (NTMs) and attract FDI in the manufacturing sectors. The government needs to ensure greater competition to foster innovation and improvement in productivity levels. Trade connectivity is an important vehicle for Pakistan’s progress”.

Mr. Adam Mulawarman Tugio said that “Trade connectivity” Book is very insightful and comprise pertinent recommendations. Trade between ASEAN and Pakistan is very small as compared to trade of China with ASEAN i.e. $200 billion. There is a lot of potential to be explored through FTAs.

Ms. Esther Perez Ruiz, Resident Representative IMF Pakistan, added to the discussion that tariff and non-tariff trade barriers impose serious constraints on growth and sustainability. Spain’s integration with the EUs in 80s and 90s was a political aspiration for the country, which led to a massive economic transformation. However, Pakistan’s exports to GDP reduced from 14% in 1990 to 10% in 2000s. Also Pakistan’s per capita GDP growth is very slow compared with its regional competitors. To realize export potential, Pakistan needs proactive policies: exchange rate flexibility, efficient allocation of resources, elimination of subsidies and creating business conducive environment in the country”.

Mr. Ali Salman, Executive Director PRIME expressed his views as “Most of the trade liberalization coming out of trade is from unilateral trade agreements and Pakistan needs to liberalize its trade policies by reducing taxes and tariffs. Only then the country would be able to integrate into the global value chains and promote exports”.

To access the full book, please click the link ahead: Trade Connectivity Ebook PDF

For media inquiries, please contact M. Saad at saad@primeinstitute.org or 03345397644.

Post Budget Roundtable cautions on Budget credibility

by PRIME Institute PRIME Institute No Comments

  PRIME Logo IconPost Budget Roundtable cautions on Budget credibility

 

(Islamabad | 13th June 2022) – Budget 2022-23 has come under challenging circumstances when the country is facing both internal and external pressure in the form of fiscal, current account deficits, and rising international commodity prices. Policy Research Institute of Market Economy (PRIME) and Economic Advisory Group (EAG) have arranged an interactive Post Budget Roundtable where representatives from government, think tanks, academia, private sector, and media participated and contributed to the discussion on Budget 2022-23 which the government presented on the 10th of June 2022. The discussion started with Executive Director PRIME, Ali Salman’s initial views regarding the budget where he supported the government’s initiative on the reversal of tax and subsidy-related incentives to the construction and real estate sector. There has been a long discussion on unproductive investments in the real estate sector, taxing them can encourage entrepreneurship and investments. Referring to the tax regime proposed in the new budget, he added that the government has intentions of broadening the tax net but it needs to follow a different policy approach.

Discussion followed by remarks made by Chairman EAG, Javed Hassan who posed questions on the credibility of the new budget while acknowledging that the job of the Finance Minister in the formulation of the budget was most unenviable given the multiple challenges the country was facing. With reference to the new budget during the government’s ongoing negotiations with the IMF, he was of the view that Pakistan could face extremely onerous conditions where much of the growth is funded through external borrowing. Furthermore, the government must set priorities and allocate the budget efficiently, especially with respect to PSDP. He also sought clarity on how the budget targets of provincial surplus, petroleum levy and GIDC will be achieved. He felt in a democracy such as Pakistan, the public must be made aware of the reality of financial constraints and be prepared to sacrifice growth in the short term to ensure stability and structural reform. He emphasized that if Pakistan were to not revive the IMF program, the government could face greater public outrage than if it were to implement the budgetary measures necessary for reviving the program.

Dr. Vaqar Ahmed, Joint Executive Director at Sustainable Development Policy Institute (SDPI) added to the discussion that a budget under a coalition government is always a difficult task. However, the assumptions used during the budget preparation need some realism, and the indicators including projected growth and projected inflation required more work in order to avoid mini budgets in the coming months. The debt procurement strategy in the budget is unclear and there are limitations on how much the fiscal policy in the new budget can address the issues. Despite these ambiguities in the new budget, seven industries have managed to benefit including the pharmaceutical and chemicals.

Dr. Idrees Khawaja, Chief of Research, Pakistan Institute of Development Economics (PIDE) commented on the new budget while calling it a ‘price pass on to the consumer’ budget. There is a need for sensitivity analysis during preparation and before formulation of the budget. Drastic expenditure cuts could have been proposed by the government rather than passing burden to the consumer.

While talking about the sensitive macro-economic outlook of the country, Aniqa Arshad, Project Manager at the Friedrich Naumann Foundation (FNF) highlighted the significant increase in the government employees’ salaries on the cost of common people in the new budget. Like the previous budgets, the government has not come up with better solutions for the loss-making SOEs except for financing them. An increase in the Petroleum Levy has proven that the new budget is a pro-IMF budget and not in the interests of a common man.

Former Senator, Osman Saifullah agreed with the fact that none of the issues in this budget are new to us. Considering the current situation of the economy, to expect a government to come up with long term solutions in a budget is unrealistic. However, the budget should not be sector-specific rather the government should focus on benefiting the masses. He supported new tax measures to impose a tax on real estate income and super tax on banking companies.

Other participants expressed their fears that time was running out and if necessary corrective amendments were not made to the proposed budget, it might fail to win back credulity with the IMF and revive the Extended Fund Facility (EFF) program. Should that come to pass, Pakistan faces the prospect of default, which none of the stakeholders would want.

A few of the members of Economic Advisory Group – From left to right; Mueen Batlay, Ali Salman, Javed Hassan, Vaqar Ahmed

Post-Budget Roundtable was organized by PRIME in collaboration with FNF.

For inquiries, please contact saad@primeinstitute.org or call at 03345397644.

The Bill for Autonomy of State Bank of Pakistan

by PRIME Institute PRIME Institute No Comments

The Bill for Autonomy of State Bank of Pakistan

It will help in curtailing government expenditures and ensuring sound money, but changes needed to restore institutional check & balance

The key features of the SBP Autonomy Independent Bill 2021 are: (1) policy and institutional autonomy, which implies that the Bank will determine and implement monetary and exchange rate policies, manage currency and international reserves of Pakistan, and carry out these functions free from the influence of the Ministry of Finance yet under the overall target set by the federal government; (2) primary objective of SBP is to maintain inflation and achieve government’s set target; (3) it will be prohibited to lend money to the government for budgetary needs and or invest in government securities rolled out in primary markets; (4) SBP will submit performance report to the parliament and; (5) Bank’s employees are protected against any action in a court of law.

The policy autonomy of SBP will help in better management of exchange rate which has been historically kept overvalued. An estimate by PIDE (2020), suggests that the country has lost more than $100 billion of foreign exchange reserves since the inception of the country to fix the exchange rate and keep the currency overvalued. The autonomy of SBP will improve soundness of money, which means currency will not be prone to artificial controls, sudden shocks, and frequent erosion in purchasing power. The PTI government has effectively taken this government already in 2018.

The main reason for continuous dependence on bail-out packages is current account deficit however, this is a symptom, and not the cause itself. The cause is a historical failure of successive governments to reform and lack of clear thinking. We have evolved our taxation system around exemptions instead of a low-rate and uniform system. We have created anti-export biases in our trade policy. These problems have led to fiscal and current account deficits which continue to force governments to seek bail-out. An external limit on borrowing will hopefully increase the pressure on the governments to reform.

Currently, the country is experiencing continuously soaring commodity prices and a drop in the purchasing power of the masses, more felt by the lower income tier. The autonomy will equip SBP to manage inflation in correspondence to the government’s set target in the medium and long term through the use of monetary policy tools, most commonly the interest rate. The real interest rate in the country has been negative for quite some time to restrict the cost of borrowing and promote growth, which delayed the required interest rate hike and elongated the inflationary pressures.

It needs to be highlighted that the monetary policy tools will not completely resolve the issue of inflation as it only addresses the demand side factors. Whereas, the supply side issues require fiscal tools as country has a significant proportion of undocumented economy, which has no access to formal financial credit.

The inability of successive governments to control or reduce wasteful expenditures and its failure for wide ranging taxation reforms have led to continuous borrowing from SBP though it has been stopped in last couple of years. The Autonomy Bill envisages the prohibition on the government to seek SBP lending or investment in government securities in primary markets. This will force the government to cut unnecessary expenditures to achieve fiscal discipline. The government can continue to borrow money from commercial banks by selling securities, but it will further crowd out the private sector.

In our view, this bill is largely a step in the right direction as it will help in right sizing the government and achieving monetary stability but some amendments to the current bill are necessary to restore institutional check and balance. This can be ensured by giving a right to vote to the Secretary Finance who will be a member of the Board of Directors. Further, blanket indemnification of SBP employees against a court of law should be reconsidered in the interest of establishing rule of law. There should be a term limit for the governor and the current option of renewal for another five years should be withdrawn. The fact that the appointment of the governor will be made by the President in consultation with the federal government is a re-assuring feature of the bill and similar powers can be provided to the Parliament for removal of the governor in case of failure to achieve targets.

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.

Think Tank cautiously welcomes Sino-Pak FTA-II

by PRIME Institute PRIME Institute No Comments

New Year, New Agreement: The long-awaited Phase-II of the Pak-China Free Trade Agreement (FTA) has officially come into effect on January 1, 2020. The agreement is expected to enhance bilateral trade between the two countries. It primarily focuses on five major areas including market access, safeguards measures, electronic data exchange, protected tariff lines and balance of payment. Under the agreement, China will liberalize 3767 tariff lines over the next decade while Pakistan will liberalize 5237 tariff lines over the next 15 years. Out of the total tariff lines, China has immediately liberalized 1471 new tariff lines for Pakistan. These lines include the highest priority 313 tariff lines for Pakistan which cover over $8.7 billion worth of our global exports and over $64 billion worth of Chinese global imports. In contrast, Pakistan has immediately liberalized 685 new tariff lines for China.

The new FTA will benefit Pakistan’s economy by increasing market access of key export commodities such as textiles and garments, leather, seafood, footwear, chemicals, oilseeds, and some engineering goods. Pakistan imports a major chunk of its raw materials, intermediary products, and machineries from China. Liberalization of these tariff lines would imply cheap input prices and lower production cost for the domestic industries which would enhance the price competitiveness of Pakistan’s exports. Moreover, under this phase, Pakistan is allowed to impose safeguard measures if the surge in imports threatens to hurt its domestic industry. Underinvoicing and misreporting have been a major issue under Phase-I. The use of electronic data exchange under Phase-II will tackle under-invoicing and misreporting which will assist in curbing the black market and will increase FBR’s revenue. Further, the country is allowed to raise tariffs in order to reduce imports amidst a balance of payment crisis. In any event, the agreement is staggered over the next 15 years. For several products, duties will be eliminated from 2022 to 2029 while for some others, duties will be gradually reduced from 2023 onwards and the process will be completed in 2035.

On the flip side, the export gains from FTA remain limited due to Pakistan’s narrow basket and lack of value-addition. As Pakistan will be lowering its tariffs for China on 5237 items over time, there is a possibility of an increased import bill given the nature of those items (high valued products). If Pakistan does not quickly establish export processing zones for the manufacturing of value-added products and diversify its export basket, the expected gains of $4-5 billion over the next five years may not materialize. Akin to prior agreement, this FTA does not cater to non-tariff barriers that also restrict Pakistan’s exports to the Chinese market. It is important that Pakistan examines the impact of reduced tariffs on each product and correspondingly rationalizes its import tariff to avoid trade diversion as happened earlier. Despite all the concessions in the FTA, until the government reduces the cost of doing business and improves the regulatory environment, exports may not increase as envisioned.

The writer is associated with PRIME Institute, an independent think tank based in Islamabad. For media inquiries, please contact beenish@primeinstitute.org.

EAG calls for Fair and Just Taxation

by PRIME Institute PRIME Institute No Comments

EAG calls for Fair and Just Taxation

The Economic Advisory Group (EAG) held its second meeting yesterday to deliberate on proposals pertaining to the tax policy. Members were briefed by Dr. Vaqar Ahmad and Dr. Ahmed Jamal Pirzada on the objectives and the outline of the tax policy document currently under works by the EAG.  At a broader level, EAG calls for ‘Fair and Just Taxation.’ Read more