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CCP ruling on sugar industry: the second opinion

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CCP ruling on sugar industry: the second opinion

Ali Salman

ECC’s role in granting permissions for import, export of sugar should be discontinued

ISLAMABAD: Adam Smith noted centuries ago, “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”

He was probably right here and may have rightly predicted the tendency of business associations towards collusive practices.

This is the main message of the ruling of the Competition Commission of Pakistan (CCP) in the case of Pakistan Sugar Mills Association (PSMA) and its members, finding them guilty of collusive practices and imposing the biggest-ever fine of Rs44 billion.

The CCP has found that the PSMA has deliberately facilitated the formation of a cartel on behalf of its members, which has resulted in welfare loss.

The CCP has also found that real-time stock tallying by the firms was carried out to manipulate the availability of sugar in the market, influence export decision and thus influence pricing.

The CCP has classified the stock sharing as “commercially sensitive information” and has almost entirely relied on this assertion for reaching the conclusion.

A rare event in this case is that the commission, comprising four members, was split into half and the chairperson cast her second vote to endorse the decision. While this legal point will be challenged, we need to understand the economics of it.

The authors of the “second opinion” have differed with the judgement on Issue I (sharing of sensitive commercial stock information), Issue II (collective decision to export), Issue III (effect of collective decision of export on price), Issue IV (zonal divisions in Punjab to coordinate sales) and Issue V (collective bargaining practice in USC tenders).

It will be instructive to read the “second opinion” – as published on pages 135-173 of the 186-page decision that the CCP has issued. These pages contain a deep analysis of the sugar market dynamics in Pakistan as well as some legal arguments leading to dissent.

The dissenting members of the commission found that the allegation of market manipulation against PSMA needed further analysis.

Concurring with this, the sugar industry being a heavily regulated sector is a peculiar case where rent-seeking on the one hand by the firms and excessive intervention by the government on the other hand have resulted in the “worst of both worlds”.

Consumers get expensive sugar whereas farmers and industrial units remain inefficient. The net winner may be the government which reaps more revenue in the form of taxes than the profit earned by the firms.

Here is my theory. The CCP is unanimous that no single firm is in a dominant position to influence the market, however, collectively they do.

What is the one factor which brings these competing firms to become one voice? It is the collective formed by the Sugar Advisory Board, cane commissioners and the Economic Coordination Committee (ECC).

By actively deciding the input price, time of harvest, time of crushing and controlling import and export, these collectivist institutions create a uniform condition for market players, kill competition and encourage them to form a cartel.

In the instant case, by constantly asking the PSMA and sugar mills to provide their stock data, the government has effectively made price levels insensitive to the stock position. As noted in the second opinion, the supply and demand forces are no more at work.

Which laws can be used to indict the government for encouraging the collusive behaviour?

Unfortunately, the Competition Act 2010 bars the CCP from indicting the government itself if it is found guilty. That is why we see that the CCP seems to be overly concerned with price control, which is not its mandate.

It has recommended the government to make efforts to collect information about stocks independently. Instead, it should have recommended the government to exit this sector.

The moment the government exits, the sugar firms will lose the platform where they can directly negotiate commercial decisions with the government. They will continue, perhaps, their own “merriment and diversion”. Let them be.

The government should allow free market forces to play their role. If domestic players collectively decide to raise the price, a competitive trader, while pursuing self-interest, will import sugar, thus keeping prices in check.

If prices go up in the international market, local producers will be free to sell in the external market. The increased price of sugar will finally dictate the consumer behaviour. But we have killed this cycle of free competition in the name of welfare.

This goes beyond the CCP but the role of ECC in granting permissions for import or export of sugar should be discontinued.

All archaic laws (the Sugarcane Act 1934, Sugar Product Control Order 1948, Sugar Factories Control Act 1950 and Control on Industries Establishment & Enlargement Ordinance 1963) along with concomitant institutions need to be phased out and abolished.

The CCP decision may be received positively by the public and the government, as it confirms the “mafia” image of sugar industry.

But it falls short of understanding a centrally controlled market, where supply and demand are irrelevant. Without understanding the market, the law itself cannot prevail.

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

Published in The Express Tribune, August 30th, 2021.

Moving to new industrial policy

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Moving to new industrial policy

Ali Salman

Policy should be based on open trade, export orientation, value addition and innovation

ISLAMABAD: The debate on premature de-industrialisation in developing economies hinges on the premise that open trade, elimination of protective tariffs and withdrawal of subsidies are harmful for local industries.

In the case of auto policy, the proponents of this debate devised import substitution policies, which led to the deletion programme. Thus, while it helped local auto parts industry to develop, it gave rise to a protected auto industry, which has continued to flourish on the back of tariffs and other incentives. The government and automobile industries are the main beneficiaries as this has led to a stable flow of income for both at the cost of consumers, who have been forced to pay more for less.

Furthermore, the rising demand for cars on the back of income and improved infrastructure has created opportunities for the market to arbitrage the lag in production, resulting in the unique phenomenon of “on money”. This policy has not only caused harm to the consumers, but it has also proven to be a bad industrial policy. Pakistan has not been able to produce a single car which is competitive regionally or internationally.

As Pakistan has not achieved economies of scale, there is hardly any incentive in innovation and product development. The benchmark of economies of scale for the auto sector is 500,000 units (cars, vans and jeeps) in a year, whereas the government target was to achieve production of 350,000 units. The country’s production has barely crossed 100,000 units. Thus, the high tariffs have led to expensive assembled vehicles, suppressing demand and hence production.

This has resulted in an oligopolistic structure where some players have benefitted hand in hand with the government, which has benefitted from the high level of excise duties, which in turn has made cars more expensive. This is the double jeopardy that the country’s old industrial policy has visited upon us. As the government is revisiting the industrial policy, and in particular the automobile policy, there is an opportunity to evolve a new industrial policy.

“The past and contemporary policies have been focused on merely establishing assembly units, instead of developing manufacturing capacity, which is the real driver of growth in an economy; consequently, the inflow of FDI has been limited compared to profits earned and repatriated out of the country,” observed recently the independent Economic Advisory Group.

The timing is critical. Pakistan is stuck at a low level of exports and there is no way to jump on this ladder while relying on the existing product mix, which has been maintained for the last 20 odd years. Pakistan’s commodity basket including textile, rice, leather, etc is highly unlikely to help achieve the ambitious export targets. While the country may see a gradual rise in total exports, thanks to IT services, the manufactured exports will not be contributing to this rise. Thus, we may be seeing de-industrialisation even more rapidly.

Government measures are only contributing to the de-industrialisation. In the context of the upcoming auto policy, the decrease in tariffs on completely knocked down (CKD) kits, as envisaged in the Finance Bill 2021, which will be imported into the country and then assembled, in reality, discourages the domestic auto parts makers because imported items are being subsidised against domestic production. This implies that relative profits will be higher in the assembly business as compared to the auto parts manufacturing business, which will gradually reduce the linkage between the auto assemblers and the domestic auto parts makers.

In the context of expected foreign direct investment (FDI) in the telecom sector, if mobile phones are assembled without value addition arising from some intrinsic latent advantage but only as a result of some fiscal incentive, then the industry will remain dependent on protection from the government and manufacturing will not become a profitable avenue for companies. Such investment will be market-seeking instead of efficiency-seeking.

The new mobile phone manufacturing policy is also regressive as tariffs are more than 70% on lower-end mobiles and hover around 40% on higher-end phones. The policy also fails to incentivise the inflow of new technology and latest devices to the country as consumers will be paying higher prices for old-generation phones just to enable companies to set up assembly units in the country.

What needs to be done?

As envisioned in the Vision for Economic Transformation, Pakistan needs to alter the existing incentive structure dramatically.

As a corollary, we propose a new industrial policy. The main parameters of the new industrial policy should be open trade, universal reduction of tariffs instead of selective reduction, integration with the global value chains, export orientation, value addition, product development and innovation. The government should play an active role through the new industrial policy.

It should use its democratic power to counter the influence of powerful lobbies and ill-informed bureaucrats. An incremental approach will not work and will only provide more time for protective lobbies as well as arbitragedriven investors to maximise profits at the cost of the country’s manufacturing capability and consumer choice, which is the ultimate arbiter of market.

THE WRITER IS THE FOUNDER AND EXECUTIVE DIRECTOR OF PRIME, AN INDEPENDENT ECONOMIC POLICY THINK TANK IN ISLAMABAD

Published in The Express Tribune, August 09th, 2021.

Financing private sector growth

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Financing private sector growth

Ali Salman / Beenish Javed

Increasing private sector credit is imperative to improve business confidence

ISLAMABAD: Over the last two decades, Pakistani banks have experienced structural reforms and a phenomenal growth.

Their profitability has multiplied several times and they have played an important role in job creation as well. But it remains debatable whether the privatisation of banks has contributed meaningfully to financing the private-sector growth.

In this backdrop and in light of a new study by PRIME, this article assesses the trend of banking credit for the government and private sector in the post-reform period.

In the 1990s, banking reforms were introduced to reduce government’s footprint in the industry, increase private sector credit, minimise the ratio of non-performing loans, and improve banks’ efficiency and profitability.

Despite improvements in technical efficiency and profitability, the banking sector post-privatisation has not delivered necessary dividends for the private sector, as also noted by former chief economist Pervez Tahir.

It has been inefficient in performing its core function of channeling depositors’ savings into loans for private businesses. Instead, these funds are being increasingly geared towards government debt instruments to earn easy and secure profits.

Consequently, a large proportion of private businesses, particularly the small and medium enterprises (SMEs), remains financially excluded and faces difficulty in accessing finance.

Pakistan continues to lag behind regional economies with respect to penetration of bank credit and private investment.

According to the study, the ratio of private sector credit-to-gross domestic product (GDP) declined from 27.7% in 1985 to 18% in 2019, indicating a low bank credit penetration into the economy post-reform. This ratio remains significantly higher in Bangladesh (45%) and India (50%).

Furthermore, private sector’s participation in fixed investment remains lacklustre at 11% while the same stands at 23% in Bangladesh and 21% in India.

Several demand- and supply-side factors have contributed to the post-reform decline in private sector credit.

Starting with the supply-side factors, the first and foremost has been the rising government footprint in credit market in the form of increased borrowing from commercial banks, supported by the rise in interest rates.

In 2011, the suspension of Standby Agreement with the International Monetary Fund (IMF) forced the government to increasingly rely on local banks to meet its budgetary requirements, resulting in crowding out of the private sector.

Between 2015 and 2018, the focus of government borrowing shifted from scheduled banks to the State Bank of Pakistan (SBP), resulting in a decelerated pace of scheduled banks’ investment in government securities.

Over the last two years, banks’ investment in government securities has surged again on account of IMF condition restricting government borrowing from the SBP.

The large federal footprint in the credit market has thus suppressed private credit offtake by reducing the funds available for private credit. Moreover, the lucrative mark-up on government securities has provided an impetus to the banks to increasingly invest in them.

As of December 2020, credit to the government stood at Rs15.2 trillion as against private sector credit of Rs6.5 trillion.

Second, the decline in private sector credit can partially be attributed to the shrinking footprint of development finance institutions (DFIs).

Post-reform, these institutions gradually faded due to the broad restructuring of the financial sector, leaving a void in terms of institutions that could provide long-term financing for the development of key industries.

Third, loans and advances given to the private sector generally entail the risk of default. This risk, however, is more pronounced in case of Pakistan due to non-existence of bankruptcy laws and imperfect information.

Given that there is an alternative of risk-free investment available and credit demand from the government continues to increase on the back of rising budgetary requirements, the post-reform banking sector has little incentive to extend credit to the risky private sector, especially the SMEs that are often subject to credit rationing.

Fourth, the red tape or cumbersome procedures to access finance through formal channels have repercussions for the private sector credit.

Post-reform banks have devised procedures and systems keeping in mind the blue-chip corporations. The higher collateral requirements and legal costs in case of default increase the compliance cost and put SMEs at a significant disadvantage.

Fifth, the restructuring of financial sector has been detrimental from the inclusion standpoint as banks’ disbursements are heavily skewed towards blue-chip corporations, while SMEs remain financially deprived.

The share of large-sized borrowers in total loans of the banking sector stands at 87% in Pakistan relative to 72.5% in Bangladesh while such borrowers account for only 1.6% of the total borrowers in Pakistan.

There are demand-side constraints to private sector credit as well including poor financial awareness and attitude towards formal finance as well as sluggish demand for long-term investment.

Moreover, the high mark-up on long-term loans has undermined the financial incentives and failed to stimulate demand for long-term investment. Therefore, most borrowing by the private sector centres around working capital, which is cheaper to avail.

During these unprecedented times, increasing private sector credit and ensuring financial inclusion is imperative to improve the business confidence and propel private sector activity.

This needs all parties – banks, private sector and the government – to alter their course and take a different direction. The government must roll back and the banks must make an advance.

The writers are affiliated with the PRIME Institute, an independent economic policy think tank based in Islamabad

Published in The Express Tribune, July 19th, 2021.

Tale of two nations: How Pakistan can learn from Greece’s turnaround?

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A Reuters file photo of Athens.

ISLAMABAD: Pakistan and Greece may not have many things in common. They are located on different continents and the population of Greece is about one-20th of Pakistan. Pakistan is a low middle-income developing country while Greece is a high-income developed country.

But there are many similarities as well.

Both countries have been living much beyond their means and have to seek bailouts from the International Monetary Fund (IMF) as well as from other friendly countries. In fact, during the last 10 years, each of them took three bailouts.

Both countries have been facing serious problems with tax evasion. A study by Chicago University concluded that tax evasion in 2009 by self-employed professionals (accountants, dentists, lawyers, doctors and other service providers) alone in Greece was €28 billion.

Pakistan is facing the same problem. IMF estimates that tax capacity of Pakistan is 22.3% of gross domestic product (GDP), which implies a tax revenue gap of at least 10% of GDP or about the same as of Greece.

Another common factor is that both countries have seen several military governments. Both have been involved in long-standing and intractable territorial disputes with neighbors. Both countries spend heavily on defense compared to their GDP.

However, Greece is now turning the corner. Its new prime minister, Kyriakos Mitsotakis, has embarked on a series of bold reforms. As a result, Greece has become the fastest-growing eurozone economy with consumer confidence rising to a 19-year high. Its 10-year bond yield has dropped to 1.59%, enabling Greece to repay the expensive IMF loan of 3.7 billion euros much earlier than the deadline.

On the other hand, Pakistan’s economy is still not stabilized. The annual fiscal deficit has risen to the highest level of 8.9%, not seen in the last three decades. Foreign direct investment (FDI) has continued to fall and this year it is down by over 50% compared to last year.

How has Greece finally managed to change things for the better while Pakistan’s economic situation seems to be worsening?

First, the new Greek government embarked on bold taxation and other reforms including cutting the corporate tax from 28% to 24% in 2020. Banking restrictions on the transfer of money have been removed to restore confidence.

Second, it is going for quick gains and focus on those areas where it already enjoys a preferential advantage. In 2018, there were 32 million overseas visitors, which were more than double the number in 2010.

It has introduced a golden visa scheme, which grants five-year residency rights for third-country nationals. Greece has become a top destination for China’s middle class.

Third, it has been working on improving its balance of trade through an export-led growth strategy rather than import substitution. This is despite a recurring substantial trade deficit, with exports of $30.2 billion versus imports of $52.8 billion, resulting in a trade deficit of $22.5 billion. This year, its exports are expected to exceed $33-34 billion, which is the highest ever. It has modernized trade procedures and explored new markets and new products.

If Pakistan wants to halt its falling growth rate, it has to start freeing the economy of most of the restrictions. Liberalisation of telecom, financial and construction sectors during 2002-04 was the main driving force behind the fast GDP growth during the Musharraf era.

Due to recent adverse changes in taxation and other recent regulatory restrictions, business activities in all these areas have slowed down considerably.

Second, the government has to embark on an export-led strategy rather than trying to stick with the outdated import substitution policy. Its mild tariff reforms during the last budget have boosted local production and exports to some extent but to reach a tipping point, it needs to speed up the reform process.

Furthermore, it is high time Pakistan brings interest rate to a more reasonable level to stimulate growth. It has also to be more practical about its accountability drive, which has had a rather dampening impact on economic growth and new investments.

If Pakistan is to get out of its economic woes, it will have to embark on bold reforms. It has to open up its economy and cut red tape so that it can also attract some of the industries now being relocated from China to Vietnam, Bangladesh and other developing countries.

The writer served as Pakistan’s ambassador to the WTO from 2002 to 2008

Published in The Express Tribune, September 23rd, 2019.

Think Tank cautiously welcomes Sino-Pak FTA-II

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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 [email protected]

Warning: “Safe Mineral Water” won’t be Safe for the Economy

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By Syed Talha Hassan Kazmi

The government of Pakistan has announced to intervene in the market of bottled water by launching a state-owned mineral water brand. Mr. Fawad Chaudary, Federal Minister for Science and Technology claimed that the bottled water costs Rs 1 per liter and it will be introduced in two phases. In the first phase, it will be used at government offices and in the second phase it will be made available to the general public.

Mr. Chaudary also said that it would be a cheaper alternative to other mineral water brands available in the market. In simple words, the government has decided to launch a SOE to compete with private market players. This article explains why such decisions are bound to fail. It also recommends some basic solutions to fix financial woes of the State Owned Enterprises.

Existence of a SOE can be justified only in that segment of the economy in which private sector is not willing to participate. Launching of “Safe Mineral water” cannot be justified in the presence of multiple private enterprises in this sector. In Lahore and other cities, one can find several privately-owned water shops providing quality water to the consumers at their door step at a price of around Rs. 5 per liter. Does the government really want to compete with them?

Ironically, we have many other sectors of economy in which loss making SOEs are unfairly contesting with private enterprises. For instance, despite having multiple privately-owned steel mills, Pakistan Steel Mills (PSM) is haunting the economy with total losses and liabilities of over Rs 480 billion. PSM was closed down in 2015 but government is bearing an expenditure of Rs 370 million every month in terms of employees’ salaries.

SOEs are generally established to provide certain goodsat a lower price. These goods are not normally provided by the market as they are usually non-rivalrous and non-excludable. Provision of a good at an economical price requires efficiency at each and every stage of business process. However, most of the SOEs in Pakistan have lost their financial viability stemming from bad governance, over staffing andpolitical interference. Most of them are so inefficient that they cannot even meet their operating costs.

There is no economic or even moral justification behind the existence of SOEs in those sectors of economy in which private sector is participating actively. Every year government injects huge sums of tax payers’ money to keep them alive. We the taxpayers are facing consequences of the crimes which we haven’t committed but the white elephants still exist and incurring huge loses.

A report prepared by the Ministry of Finance reflects that the net losses of SOEs have surged by 330 percent in FY17 and reached to Rs191.5 billion. Among the top ten loss making SOEs, National Highway Authority sealed top position with net losses of around Rs 133 billion, followed by Pakistan Railways Rs 40.7 billion, PIAC Rs 39.6 billion and losses of PSM jumped up to Rs 14.9 billion. This is the price of government intervention in the markets.

Explaining why SOEs fail

The answer to this question lies in looking at the end result of government programs. The owners of private enterprises and the people who are involved in running SOEs have the same incentive: to serve their own interest. However, the bottom line is different in the private sphere than in the public sphere. Under a well -functioning market mechanism if an enterprise fails it will go out of the market and owners will lose their investments. So, they have a strong incentive to make it efficient to avoid losses. However, if same people run a government program and it fails, they know that can get a bailout package from the government. They have no incentive to make it efficient.

After coming to power, the PTI government has given two bailout packages worth Rs 38 billion to keep the national flag carrier in the skies. The first bailout package of Rs 17 billion was approved in November 2018 and the second “dose of oxygen”was provided in February 2019. In August 2019, PIA management has demanded another injection of nearly Rs10bn to remain afloat. The fresh assistance was demanded to pay off foreign loans and for repair and maintenance of aircrafts. The government however, showed its reluctance to inject more money due to IMF restrictions.

As of June 2019, SOEs domestic debt peaked to Rs 1.4 trillion (3.6 percent of GDP). The financial black holes are also borrowing from commercial banks which is fast crowding out private sector. SOEs have borrowed Rs 228 billion from banks for commodity operations.

What needs to be done?

The government of Pakistan must privatize all the loss-making SOEs as revamping of these loss-making entities is not an easy option. Many governments have tried first to revamp these entities before putting them on the privatization list. PTI government also wasted one year to realize that the privatization of loss-making entities is the only solution to avoid further losses.

However, before privatization, the government of Pakistan must formulate a sound privatization policy and create an enabling business environment. The policy should explain the prerequisites for privatization, its process, and criteria. The government of Pakistan must also reduce the regulatory burden and liberalize the economy to incentivize private investment. 

It is highly appreciated that the PTI government has selected 17 SOEs for privatization. It is recommended that the government must ensure transparency in the whole process and rules should not be violated to give any SOE to a particular group or individual.

In those sectors of the economy where the private sector is not participating, corporate structure can be introduced to minimize the losses. Pakistan introduced corporate governance rules in 2013 but these rules were practically ignored by the government of PMLN. World Bank has recently launched the “Report on Observance of Standards and Rules”. The report highlighted serious flaws in the affairs of SOEs, such as lack of performance management system, fragmented ownership structure and lack of staff with financial and commercial expertise.

Many countries have implemented corporate governance rules to ensure accountability, transparency, and clarity in the mandate of all the stakeholders. Independent central boards in the form of holding companies, specific boards, and monitoring authorities are established to enhance the efficiency of the SOEs. Examples include Tamasak Holding of Singapore; Department of Public Enterprises in India and New Zealand’s crown monitoring authority. The PTI government has also decided to set up a holding company named Surmaya e Pakistan Holding Limited (SPHL) for the management of SOEs. Under this initiative all the entities will become subsidiaries of PSHL and shares of the federal government in all the SOEs will be transferred to holding company. The initiative will not only be helpful in improving coordination among different public entities, but it will also help them in focusing on their core matters and non-core issues such as legal services can be outsourced to PSHL.

SOEs lack capital due to which the entities face problems in the development of new assets and in maintaining the existing ones. This issue can be resolved through public-private partnerships. For instance, private investment can be mobilized into the aviation sector of Pakistan. The aviation policy of 2015 provides a business-friendly framework that can be helpful in attracting private investment in the airline. Private investment can also be mobilized to minimize budget constraints faced by Pakistan Railway. For instance, trains can be outsourced to the private sector and the receipts generated through this initiative can be utilized to maintain railway tracks. Also, redundant real estate assets owned by Pakistan Railways can also be utilized to attract funds.

Conclusion

Most of the SOEs in Pakistan are facing severe financial crises. Custodians of Naya Pakistan have to realize that bailout packages have done more harm than good.

It is recommended that all loss-making enterprises which are unfairly competing with private enterprises must be privatized. But, before privatization, the government should formulate a sound privatization policy. The government should also minimize regulatory constraints and reduce its control over market forces to incentivize private investment.

Public Private Partnership and corporate governance may also help in revamping the SOEs which are operating in those segments where private sector is not willing to invest.

The PTI government must understand that government intervention in an efficiently functioning market mechanism is always destructive and Pakistanis have already paid enough price of such misadventures.

Author is a Research Fellow at PRIME Institute and holds an MPhil in Economics.

Policy Steps: COVID-19 & Pakistan

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1.Do not control prices, work on supply

The government should resist the temptation on controlling prices, as this provides wrong signals to both producers and consumers. Consumers go on panic buying and producers stop investing in supply. The government should still regulate, focus on supply, and take measures against cartelization and hoarding especially when it comes to food and medicines.

2.  Remove trade barriers

As we have advocated in the past, open trade helps in free flow of medicines and medical equipment, and government should withdraw such tariff and non-tariff barriers at least till the time the crisis is over. If Pakistan was a signatory to the Information Technology Agreement, as we recommended many times, import of medical machinery would be possible duty-free. Allow the free import of 3-D printer to help boost innovators.

3. Re-allocate resources to invest in critical manufacturing

Government should further reduce the interest rate and induce commercial banks to reallocate capital to the industries with plans to boost production in critical medical equipment such as ventilators and hospital beds..

4. Protect daily wage workers in the industries

Government should announce a new regulation to ensure that the workers on daily wages employed by the industry should continue to be paid during the factories closure.

5. Re-prioritize Zakat spending

Government should re-prioritize Zakat spending and should also encourage private companies and foundations to create a pool of funds to provide cash to informal workers in the industrial, agricultural and services sector during the crisis.

Domino Effect of Pakistan’s Wheat Crisis

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The supply of wheat – one of the major food crops of Pakistan – has faced another crisis, perhaps more severe than ever.

Over the course of a few months, wheat stocks plunged to approximately 4.2 million tonnes – barely enough to meet consumer demand for the next two months. In this article, we will unfold the domino effect of the current wheat scarcity.

The wheat scarcity should not come as a surprise. Mismanagement and uncalled-for state intervention have long been responsible for the dismal performance of various sectors including agriculture.

The government’s agricultural subsidies and procurement schemes have sent wrong signals to the producers. The unnecessary market intervention has opened avenues for hoarders and the black market.

It is pertinent to note that despite the ban on wheat export imposed in July 2019, the government allowed exports of 48,000 tons, which fueled price hike in the country.

Decisions like this are the reasons why such crises continue to emerge every now and then.

That said, the wheat deficit is likely to have certain repercussions for Pakistan’s economy and food security:

1) Increased fiscal deficit: Uncalled-for government intervention is followed by financing of these follies, which will further increase the fiscal deficit, and since imports are involved, the current account deficit will also widen.

2) Hurting farmers: Wheat import is likely to hurt the domestic wheat growers as a shipment of 300,000 tonnes is expected to reach Pakistan by mid-March, which is also the season when the crop gets ready in Sindh.

3) Altering cropping patterns: The wheat crisis, which was imminent from quite some time, is likely to spark a domino effect in other food crops by altering the cropping patterns.

In the face of water scarcity and in the hope of greater profits, the farmers are likely to substitute sugarcane production with wheat cultivation, thereby leading to its shortfall and a subsequent increase in its price. The recent surge in sugar price by Rs9 per kg is partially due to the substitution effect.

4) Sparking food inflation: Keeping in view the hike in prices of eatables, the food inflation is expected to rise further.

The Sensitive Price Indicator (SPI) recorded an increase of 19.69% over a year ago. After the wheat and sugar crisis, the Pakistan Cattle Feed Association and Dairy and Cattle Farmers Association are also demanding an increase in prices of milk to Rs150 per litre.

Since wheat flour, sugar and milk are among the 51 essential items included in the basket of goods and services used for calculating the SPI, an increase in their prices will further inflate the indicator and adversely affect the lower income segments.

Ostensibly, the government intervenes in the agriculture sector in the name of food security. This intervention in the form of support prices for various agricultural commodities has so far been a source of distress for Pakistan’s food security.

Each day a new association or union is demanding a price increase, which will further the case of another government intervention.

It is high time for the policymakers to dig deeper into the root causes of the past and current wheat flour (and other) crises, learn lessons and spell out clearly for all stakeholders as to what precautionary measures need to be taken to avert similar anomalies in the future.

The most important lesson perhaps here is trust the market and allow it to deliver, however, make sure that markets are not distorted by bureaucratic and political influences.

The writers are affiliated with PRIME Institute, an independent economic think tank based in Islamabad.

COVID-19: Food market constraints threaten social fabric

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By Ali Salman and  BEENISH JAVED

Pakistan has recently experienced flour, wheat and sugar crisis which is a result of bad policy, poor regulation and low private-sector capacity.

The Covid-19 pandemic has badly exposed constraints in Pakistan’s food commodity markets and supply chains. It threatens the very nature of social and political fabric of Pakistan.

Despite government’s assurance of consistent food and medicine supplies, there is shortage of essential commodities such as wheat, rice, sugar and medicines due to panic buying as well as supply-side constraints.

The response of the government also remains sluggish. In Sindh, for instance, factories have not received wheat from the government for the last 8 to 10 days, thus resulting in flour crisis.

At present, no rules have been enacted to halt cartelisation and hoarding of the said commodities.

In these rather straightforward economic transactions, bureaucrats should not be playing any role once a policy is defined. They cannot make quick decisions, especially when decision-making is likely to face penalties due to excessive outreach of accountability agencies in the country.

Tariff and non-tariff barriers to medical equipment and medicines are undermining efforts to treat the affectees and contain the spread of the virus. It should be recalled Pakistan has implemented an effective price control system for medicines in the past 20 years. The policy was relaxed a couple of years ago only to be resisted or reversed on the pressure of different quarters. Already, the worst losers of price control of medicines are the consumers.

The knee-jerk reaction of the government facing dual crisis of both constrained supply and excessive demand is to place price control and opt for rationing of supply.

It is certain to cause more harm than good. Very soon, we will see stocks vanish. We have seen it many times. It is high time for the government to reconsider its economic policies for mitigating adverse economic effects of the pandemic. In this regard, there are a few policy suggestions.

First, the government should resist the temptation of controlling prices as this provides wrong signals to both producers and consumers. When prices are controlled, consumers go for panic buying and producers stop investing in supply.

The government should still regulate, focus on supply and take measures against cartelisation and hoarding, especially when it comes to essential commodities such as food and medicines.

Second, as we have advocated in the past, open trade helps in a free flow of medicines and medical equipment, therefore, the government should withdraw tariff and non-tariff barriers at least till the time the crisis is over.

To provide a small example, if Pakistan was a signatory to the Information Technology Agreement (ITA), as we have recommended many a time, duty-free import of medical machinery would be possible today. However, it is noted that the government has relaxed import conditions given the crisis.

Third, the government should re-allocate its resources and should induce commercial banks to re-allocate capital to industries with plans to boost production of critical medical equipment such as testing kits, ventilators and hospital beds on a war footing.

Fourth, the government should announce a new regulation to ensure that the workers on daily wages, employed by the industry, continue to be paid during the closure of factories.

It is something that the government has already declared and it is hoped that the employers implement this, though it will not be sustainable without bringing any fiscal stimulus.

Lastly, the government should re-prioritise Zakat spending and should also encourage private foundations to create a pool of funds to provide cash to informal workers in industrial, agriculture and services sectors during the crisis.

The crisis like this provides a short window of policy reforms. In Indonesia, where strict controls on imports have been placed for the last many decades, the government has been forced to relax these controls, albeit temporarily.

One hopes that Pakistan’s government also learns some lessons. Whereas more investment is certainly needed in the healthcare system, we need to see lesser role of the government in food commodity markets.

For a population of 220 million, with a huge number living in poverty, a lack of access to food items can have the potential of threatening the political fabric of society, risking anarchy.

The writers are affiliated with PRIME, an independent economic policy think tank based in Islamabad

Published in The Express Tribune, April 6th, 2020.

Budgetary policies in times of virus

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Pakistan’s policymakers are in an unenviable position while formulating the upcoming fiscal year’s budget

Everyone from small and medium enterprises to large-scale manufacturing industries is looking for relief measures to cope with the Covid-19 crisis. Even without the pandemic, many would expect some relief in the existing taxation regime as the government is reaching the halfway point of its tenure.

Unfortunately, there may not be much room for any major tax reductions. Already this year, the country would be fortunate even to achieve 70% of the original tax collection target of Rs5.5 trillion (which has been revised downwards several times).

While some blame lies with Covid-19, it was apparent from the beginning that the original target was almost impossible. One key lesson is that there should be some realism in setting the revenue target as that is the foundation of the whole budgetary exercise.

It should not be too difficult to estimate a ballpark revenue figure as the size of gross domestic product (GDP) and the growth rate are relatively better estimated, and the tax-to-GDP ratio does not change much.

Given historical trends, expenses almost always surpass estimates, while revenues are often much lower than the set objective. Notwithstanding these realities, according to press speculations, the IMF is pushing for a significant rise of 34% in overall revenues next year.

As the economy is likely to contract into negative territory, any tax increases will be self-defeating and not likely yield any additional revenues. It would be in everyone’s interest to have a realistic tax target – say about 15% higher than the anticipated receipt this year.

Having an achievable revenue target will result in more credibility on the expenditure side. Also, major stakeholders on the expenditure side will realise the seriousness of the situation and limit their demands.

Next fiscal year’s priority should be to curtail non-development expenditure and focus on such budgetary expenses, which can create employment. Thus, keeping a reasonable level of Public Sector Development Programme (PSDP) would be valuable.

At the same time, tax reforms can facilitate the business environment and often bring more revenues. It is particularly vital that the industry, especially the small and medium enterprises, can restore its activity so that some of the job losses could be recovered.

Tariff board

The budgetary measures, which are also the main channel for determining the trade policy, will be the first test of the new Tariff Policy Board, headed by the prime minister’s adviser on commerce. The initial milestone will be whether the new tariff policy can change the direction to support Pakistan’s industrial growth, international trade and other public interests.

Even if the tariff rates cannot be seriously rationalised to give much-needed relief to the local industry with cheaper inputs and reduce rampant smuggling, at the very least, the Tariff Policy Board can simplify the tariff.

Every government intended to provide a level playing field for various industries by reducing the number of Statutory Regulatory Orders (SROs) and tariff slabs to reduce tariff dispersions. Still, for more than a decade, it had been mostly lip service with no real reforms.

The Tariff Policy Board can change it. In addition to the simplification of tariff, there is an urgent need for budgetary measures to cope with the Covid-19 health emergency.

The minimum concessions for coping with Covid-19 should include an extension of the temporary exemption for medical and other healthcare equipment from import taxes till the pandemic is over.

A recent study by World Bank economists, giving the comparison of applied tariffs in 20 developing countries, showed that Pakistan is one of the three countries which have the highest import taxes on Covid-19 products. It is unfair to not prefer people’s health and welfare for the sake of minor revenue.

Malnutrition

Another linked issue is that of malnutrition, which is already affecting almost half of the Pakistani children and women but will become worse with the impact of Covid-19.

Prime Minister Imran Khan highlighted stunting in his inaugural address. According to a recent study, the consequences of malnutrition cost Pakistan’s economy $7.6 billion every year.

With the help of the World Food Programme, the government has been working on increasing access to food supplements for the vulnerable section of society. But the high incidence of import taxes on the ingredients of food supplements makes it difficult to manufacture them locally. In this Covid-19 period, malnutrition must not increase.

The budget may not be able to set any lofty goals but it should at least save common people from further economic losses and protect the poor from falling into destitution.

The writer is a senior fellow with the Pakistan Institute of Development Economics and has served as Pakistan’s ambassador to WTO

Published in The Express Tribune, May 18th, 2020.

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