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4th Pakistan Prosperity Forum 2024

by PRIME Institute PRIME Institute No Comments

4th Pakistan Prosperity Forum

The Dangers of Tax Progressivity and Super Tax

What is this year's theme?

The 4th Pakistan Prosperity Forum is designed as a pivotal event bringing together influential leaders from various sectors. It facilitates meaningful dialogue and innovation aimed at tackling economic challenges. This year, our focus is on the Tax regime. Join us to engage in transformative discussions!

How can I participate?

Participation is straightforward! You can request an invitation by writing to saad@primeinstitute.org. Be sure to secure your spot early as spaces are limited! This event is an invaluable platform for networking and enriching your understanding of Pakistan’s socio-economic landscape.

What topics will be covered?

The forum will cover a wide range of topics, including the problems with progressive taxation, the benefits of flat taxation, the trade taxation regime, and a critique of the present income and sales taxation regime, including most notably the Super Tax.

Who are the key speakers?

This year on the speaker’s roster, we have: 

  1. Mr Alexi Aleksishvili, Former Finance Minister of Georgia
  2. Rizwan Rawji, Belgian Supply Side Economist 
  3. Dr Ali Salman, Economist PRIME
  4. Dr Mahmood Khalid, Economist PIDE

What is the forum's impact?

The forum strives to make a significant contribution towards fostering innovation and collaborative approaches among stakeholders. Insights gained help shape policies and strategies that drive policy improvement, and sustainable growth across various sectors of Pakistan’s economy.

Are there networking opportunities?

Absolutely! The forum is meticulously structured to include various opportunities allowing attendees ample opportunity to network with like-minded individuals, professionals and key decision-makers. It’s a powerful chance to establish valuable connections and collaborations.

What resources are available?

A wealth of resources will be made available, including expert papers, guidelines, and case studies focused on the issues at hand. These materials can greatly aid participants in their understanding of the topics discussed at the forum, and beyond.

When and where does the forum take place?

Mark your calendars! The forum will take place on November 14th 2024, at the prestigious Marriott Hotel, Islamabad. Don’t miss this incredible opportunity to engage in impactful discussions about our beloved Pakistan!

Need further assistance?

If you have any more questions or require additional information, please don’t hesitate to contact us. We’re here to help you!

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Join ECONOMIC N-GEN Fellowship

by PRIME Institute PRIME Institute No Comments

ECONOMIC N-GEN Fellowships at PRIME

The Policy Research Institute of Market Economy is now accepting candidates for the Economic N-Gen Fellowship Program.

The Economic N-Gen Fellowship is exactly what it sounds like; it is a program designed to prep the next generation of Pakistanis to become the economic engine which drives Pakistan toward a future of economic openness, freedom, and prosperity.

Ideal candidates must be enrolled for a Master’s Degree in Economics at their University, and must demonstrate a will and enthusiasm for solving Pakistan’s economic problems through the improvement of public policy outcomes. Candidates will be selected based on their knowledge and understanding of competitive markets, private property, productive efficiency, and the fundamentals of capitalism.

Through the course of the 2-month Fellowship period, candidates will be familiarized with the work of think tanks and governments, be provided with educational lectures on contemporary economic policy issues, policy philosophy, and be required to write multiple short policy papers.

Candidates who will be able to successfully complete the program will have their work published by PRIME, and will be inducted into the Economic N-Gen Policy Fellows panel, after which they may be engaged for future assignments upon the completion of their Master’s degree.
This is a hybrid opportunity with about 70 percent of remote work, and 30 percent on site at PRIME HQ, Blue Area, Islamabad.
Send your resume to saad@primeinstitute.org, along with a cover letter explaining how you may be a suitable fit for the Economic N-Gen Fellowship. Please use the subject line “N-Gen Application-<Your University Name>-<Your Full Name>"

Illicit Trade in Pakistan: The Twin Task of Combating Illicit Trade and Boosting Economic Growth

by PRIME Institute PRIME Institute No Comments

Illicit Trade in Pakistan: The Twin Task of Combating Illicit Trade and Boosting Economic Growth

The report investigates the situation of illicit trade across sectors in Pakistan. The convergence of various structural weaknesses in Pakistan’s economy challenges its ability to sustain recent gains in poverty reduction and undermines objectives for long-term growth in GDP. Since these factors also create fertile ground for illicit markets to strengthen, this report investigates the associated impacts and suggests remedies for consideration by Pakistan’s policy leaders. The report highlights that high levels of inflation and tax evasion compound the problems, and urgently calls for a comprehensive and coordinated approach to address them. The report contends that effectively tackling illicit trade will be a crucial ingredient in achieving Pakistan's economic prospect

The report has been published by TRACIT. To access the report, kindly click on the link provided below.

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Pakistan Economic Freedom Audit: Sound Money as a Case Study

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Pakistan Economic Freedom Audit: Sound Money as a Case Study

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Author: Dr Wasim Shahid Malik

This study presents an economic freedom audit of Pakistan, focusing on sound money as a case study. The success of free market capitalism is contingent upon protecting individual property rights. The Fraser Institute's Annual Report on Economic Freedom of the World assesses countries based on their economic freedom index, which comprises five areas, including sound money. This economic freedom audit report aims to evaluate Pakistan's monetary stability and analyze the macroeconomic policies that have shaped its current state. Furthermore, the report critically evaluates the methodology of the sound money sub-index to determine its efficacy in measuring economic freedom.

Pakistan's rating for monetary stability has been consistently low for the past two decades and has further declined in 2023. Historically, Pakistan has had a sound money rating of less than seven due to restrictions on residents having foreign currency accounts and monetary expansion exceeding real GDP growth. Fluctuations in the sound money rating were driven by recent inflation, its volatility, and monetary growth in the near past, as the score on foreign currency accounts remained stable. Pakistan's historical data reveals that sound money rating has typically risen during economic recessions caused by demand contraction but has fallen during periods of cost-push inflation. Recent assessments reveal that Pakistan's sound money rating for 2023 is 4.60, which is the lowest in history, primarily due to exceptionally high inflation during the year.

Throughout history, the fragility of money has been a persistent concern in Pakistan. The value of money has consistently depreciated over time, with a decline in its purchasing power for goods and services included in the CPI basket by one-tenth from 1974 to 2001 and one-sixty-eighths from 1974 to 2023. The Pakistani rupee (PKR) has also experienced a similar decline in value against foreign currencies. For instance, the value of one US dollar in Pakistani rupees increased from less than 10 in 1974 to 248 in 2023, resulting in a 25-fold cumulative loss.

Monetary fragility can be attributed to excessive monetary growth. The growth rate of broad money (M2) has consistently exceeded that of real GDP by a significant margin and has even surpassed nominal GDP growth. Real GDP has increased ten-fold over the past five decades, while nominal GDP has increased 644-fold. However, monetary growth during this period exceeded 1000 times, indicating inefficiencies in both monetary and fiscal policies that have contributed to this expansion and, ultimately, the devaluation of money. Since its inception, the Pakistani government has heavily relied on borrowing from the State Bank of Pakistan (SBP) to finance its budget, leading to an unsustainable monetary expansion. Although the amended SBP Act has limited the government's ability to issue its debt to the SBP, monetary expansion has continued. The SBP has provided the necessary liquidity to banks, which have, in turn, lent it to the government


Over the last five decades, the monetary value has been fragile and unstable, resulting from the misguided and ineffective implementation of monetary, fiscal, and exchange rate policies. Particularly, the short-term real interest rate has remained marginally negative and has shown poor responsiveness to rising inflation, exacerbating the problem. The State Bank of Pakistan has recently adopted a reactionary stance in response to inflation and currency depreciation. However, this approach proved to be ineffective as well. The interest rate, which serves as the SBP's monetary policy instrument, has yielded little success in controlling inflation and exchange rates. Furthermore, interest rate changes hurt economic activity, particularly in large-scale manufacturing. On the other hand, fiscal slippages emanating from increased spending without matching revenue have led to domestic debt accumulation. At the same time, the overvaluation of the exchange rate has caused a trade deficit, contributing to external debt accumulation. Both of these debts are responsible for the monetary fragility that Pakistan is currently facing.

The methodology used to rate sound money requires revision, particularly for developing countries. The rating scheme awards countries with the highest score for inflation and money growth components if they adhere to a zero inflation or deflationary policy. However, these policies are not preferred by any central bank globally; rather, they aim to maintain positive inflation. Additionally, inflation persistence may exhibit positive or negative trends over brief periods, making the standard deviation of five years’ inflation an inadequate indicator of the solidity of money.

This is because the standard deviation is a measure of variation that applies equally to both rising and declining inflation. Finally, there are limited options available for scores related to restrictions on foreign currency accounts within the country and overseas. For example, the State Bank of Pakistan permits foreign cu rrency bank accounts in Pakistan but restricts the flow of some types of funds into these accounts. Moreover, certain restrictions may sometimes hurt economic freedom, but their imposition can lead to more stable and sound money.While different countries may have varying degrees of restrictions, the current rating scheme fails to assign scores based on the severity of such restrictions.
A comprehensive reform agenda is needed to improve the solidity of money in Pakistan. The rationalization of government size, effective coordination between fiscal and monetary policies, efficient debt management, and establishment of an enabling environment for continuous economic growth, which provides equal opportunities to all, are pivotal requisites. It is crucial to re-evaluate the existing monetary-fiscal policy mix and ascertain the appropriate operating instrument for the State Bank of Pakistan to restrict monetary expansion and exercise its autonomy. Setting the policy rate to contain inflation while expanding the money supply as a response to government borrowing from scheduled banks is unproductive. A suitable monetary-fiscal coordination mechanism can be designed to overcome the high inflation and excessive debt predicament. Fiscal policy must adhere to the Fiscal Responsibility and Debt Limitation Act, and there is a need to put in place an accountability mechanism for the government's non-compliance, which can help limit the budget deficit and financing obligations. The government's economic intrusion must be reduced through reforms while simultaneously rendering tax policy more efficient. An Act of Parliament can restrict the deliberate overvaluation of the exchange rate, for which a suitable indicator needs to be developed

For inquiries, you can reach out to us at info@primeinstitute.org or farhan@primeinstitute. Alternatively, you can also call us at +92 (51) 8 31 43 38.

New Privatisation Policy Framework | Working Paper

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NEW PRIVATISATION POLICY FRAMEWORK

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1. Introduction

The Policy Research Institute of Market Economy (PRIME), as part of the project titled “Privatisation Acceleration Initiative” has prepared this working paper to contribute to the on-going debate and policy initiatives to support, and accelerate, privatization of commercial State-Owned Enterprises (SOEs). As the government has no policy framework for privatization at the moment, we realize that a discussion and consensus on privatization policy is essential. This paper contains a brief overview of the challenges and a list of recommendations which are based on consultation with the stakeholders. We hope that this can lead to useful deliberations and policy evolution. The scope of this working paper is to develop a framework which can be applied to commercial SOEs and outsourcing of public services to private contractors. We hope that it will make the process of privatization transparent, free it from ad-hocism, minimize the potential of misappropriation and corruption attached with it, shorten the process, improve its sustainability prospects, and take cognizance of labour market sensitivities.

2. Background

The issue of privatization of the SOEs is reflective of the complexity, ambivalence and indecisiveness of the public policy in Pakistan. These three traits are embedded in the process of privatization, on the one hand, and on the other, they demonstrate the inability and incompetence of the state institutions and agencies set up from time to time in order to privatize, as the first step, the commercial SOEs, and in particular, but not limited to loss-making SOEs.

A historical review of the various attempts at privatization of the SOEs reveals a number of issues impeding the process of privatization and it is these impediments that have left us with an economic legacy consisting of a heavier footprint of the state (more than 200 SOEs including 87 commercial SOEs1, and 67% state footprint2 in Pakistan’s economy), that includes from commercial SOEs to non-commercial SOEs.

As the state unavoidably needs to shed its burden of the commercial SOEs (whose assets today value more than 40% of GDP), and as it will no doubt relieve the citizenry also from the ever-increasing tax-burden utilized to sustain most of the SOEs, it is imperative to facilitate and accelerate the process of privatization and at the same time to make it transparent, free from bureaucratic and legal disincentives and regulatory hurdles.

And, as the political and economic stakes are extremely high, privatizing the SOEs successfully requires that the concerns of all the stakeholders and issues related with individual SOEs be addressed in a satisfactory manner.

3. Consultation Exercise

PRIME conducted the “Workshop on Privatisation and SOE Policies of the Federal Government” on the Thursday 6th of December 2023, at the Best Western Premier in Islamabad. The workshop had participants and representation from the Competition Commission of Pakistan (CCP), the Petroleum Division (Energy Ministry), an SOE, Zarai Taraqiati Bank Limited (formerly Agricultural Development Bank of Pakistan), a regulator National Electric Power Regulatory Authority, a think tank, Center for Economic Research in Pakistan, and a multilateral lender Asian Development Bank (ADB).

The session was chaired by the Privatisation Minister Fawad Hasan Fawad, and was conducted by the Executive Director PRIME Ali Salman and Programme Director Syed Ali Ehsan. Political Economist and PRIME Distinguished Fellow Dr Khalil Ahmad facilitated the discussions. The first segment of the workshop contained a presentation by Lahore University of Management Sciences (LUMS) Fellow at PRIME Hassan Abbas, with his focus on facts related to privatisation.

Next was an interactive session with participants exchanging their diagnoses on repeated failures to privatise State-Owned Enterprises (SOEs). This was followed by a discussion session on amendments to the privatisation policy and the SOE Policy. The discussion was held under Chatham House Rules. The Workshop was concluded with comments by the Privatisation Minister followed by a networking exchange over Hi-Tea.

4. Identification of Problems

The first interactive discussion revolved around the identification of recurring systemic patterns hindering past privatisation attempts by various governments.

4.1 Problems Stemming from Human Resource Complexities

A significant number of pressures emanate from the labor force related complexities. These were traced to opposition by unions, over extended job contracts which no new owner would plausibly try to accept.

4.2 Political Resistance by employee unions

The participants raised the matter of employee unions blocking privatisation attempts through political resistance and legal measures. Employee unions in many commercial SOEs have direct affiliation with political parties. As large, organized voter segment, employee unions can exert significant pressure on political representatives to oppose privatisation

4.3 Legal Resistance by Unions and Special Interests

Another mechanism that has blocked privatisation efforts has been the invocation of courts by special interests. Unions as well as ex-servicemen communities, and even Public Interest Litigation lawyers are able to obtain legal stay orders at different levels of a privatisation process to completely paralyze the process.

4.4 Unsuitable Human Resource and Rigid Ecosystem

Private investors seeking to turnaround SOEs are unable to relocate, dismiss or terminate the employment contracts of unsuitable HR due to internal organizational rules, or legal protections contained within past legal precedent established by the judicial courts.

Many SOEs contain specialized positions which would otherwise not exist in the private sector. Mostly, these employees cannot be utilized under a new management plan 3 brought in by the private investor. At the same time, the courts have generally protected the positions and financial compensation of such employees, adding a layer of management complexity, and an additional cost burden without value addition.

4.5 Conflicting Interests of Management

Amongst the identified issues were uncertainties caused by conflicting legislation. New laws conflict with older laws, creating ambiguity in what should be well-established processes. This coupled with a broad culture of judicial activism creates a negative environment for privatisation of PSEs. Significantly, G2G transactions are not dealt with clearly under the law.

4.6 Legislative and Judicial Uncertainties

Amongst the identified issues were uncertainties caused by conflicting legislation. New laws conflict with older laws, creating ambiguity in what should be a well-established process. This coupled with a broad culture of judicial activism creates a negative environment for privatisation of SOEs. Significantly, G2G (Government-to-Government) transactions are not dealt with clearly under the law.

5. Recommendations

After the identification of problems, the participants engaged in a discussion around remedies to eliminating failure in privatisation attempts. These were shared as follows:
5.1 No court other than a specialized Privatisation Appellate Tribunal should be allowed to adjudicate civil or criminal cases related to any privatisation transaction. In the past, even government entities have gone into litigations against the federal government.

5.2 Major modifications must be made in the Privatisation Commission ordinance as well as the regulations to modernize the privatisation framework, and to incorporate international best practices.

5.3 Contradictory and conflicting legislation/statutes which create procedural uncertainties must be reviewed and synchronized to eliminate procedural ambiguities in the privatisation process.

5.4 Political parties should clarify their position on the privatisation of SOEs, and specify their plans to a certain degree, so that political uncertainty around the issue can be mitigated.

5.5 A System of reward and punishment be adopted for the bureaucracy overseeing the privatisation process, and regular performance appraisal of the management overseeing the privatisation must be arranged periodically to ensure process continuity, and management effectiveness. Line Ministries managing SOEs must have answerable/accountable bureaucracies.

5.6 Parliamentary Committees in the National Assembly and Senate overseeing privatisation matters and SOE performance issues must play a more active roleand provide more effective oversight and ownership to keep stakeholders accountable to privatisation goals.

5.7 Bundling of SOE verticals may be done after discussions with investor groups. If investors feel that they would draw greater benefit from purchasing a bundle of verticals together, and if Privatisation Commission deems greater value in terms of incoming receipts, then the organizational management can organize assets accordingly.

5.8 Use Special Purpose Entities (SPEs) as an off-balance sheet tool to park the liabilities of Commercial SOEs, whose compromised balance sheet may be the single biggest hinderance in their privatisation. An SPE holding company can be created to manage all these liabilities arising privatisation in one place. An SPE may not come into existence legally until a deal has been reached and finalized.

5.9 Commercial SOEs should be exempted from the conventional rules of the Public Procurement Regulatory Authority (PPRA) to improve their responsiveness to market forces responsiveness and operational environmental threats. Instead PPRA may work on a separate framework for procurement compliance for Commercial SOEs.

5.10 The Central Monitoring Unit of the Finance Division should be given time bound objectives regarding the management of SOEs and those Commercial SOEs which are on the active privatisation list.

5.11 A periodical report on the financial performance of state-owned enterprises comparing them with their private sector counterparts should be prepared and published.

5.12 All SOEs should maintain an accurate Asset & Liability Register (Balance Sheet) and such statements need to be verified by credible and approved external auditors.

5.13 Financial review of SOEs should report any losses which the government might have parked or re-assigned for accounting purpose under any other name or entity.

5.14 A public service campaign to build a favourable public opinion for privatisation should be designed and implemented. It should be backed by research and case studies.

5.15 Training should be conducted by the Privatisation Commission for the benefit of any new organizational management team undertaking privatisation. This training should be compulsory for any management team as soon as their SOE has been added to the active privatisation list.

5.16 A conflict-of-interest policy needs to be introduced and implemented in the board meetings to ensure that those who are present at the board meeting do not have a commercial interest in the transactions. Disclosure rules may be reexamined and incorporated into organizational rules to minimize the possibility of board members’ interests conflicting with transparency and efficacy of the privatisation process
For inquiries, please write to us at info@primeinstitute.org

STICK-IN-THE-MUD: WHY PAKISTAN IS FALLING BEHIND? A Case of Missing Transformation

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STICK-IN-THE-MUD: WHY PAKISTAN IS FALLING BEHIND?
A Case of Missing Transformation

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Author: Ahmed Jamal Pirzada | Dr. Aadil Nakhoda
Saihan Mohammad | Sarah Javaid

Why is Pakistan falling behind? What is the role of dismal labour productivity growth in hindering meaningful transformation? Can overallocation of resources in some sectors at the expense of others due to political economy reasons explain Pakistan’s poor economic performance? This report attempts to answers these questions through the lens of structural transformation.

The report starts with documenting the phenomenon of missing structural transformation in the case of Pakistan. Specifically, unlike regional peers, agriculture’s share in both total employment and value added has decreased by significantly less over the past several decades. Moreover, changes in the composition of both the export and the import baskets also point to limited economic transformation. We also find that the limited transformation Pakistan has undergone has been towards sectors with low productivity growth thus undermining the country’s future growth prospects. One of the key reasons behind the lack of transformation is that labour productivity in both the overall economy and the agriculture sector has increased by the least in the case of Pakistan relative to the regional economies. As a result, unlike in most other countries, there is limited incentive for labour to move from agriculture to non agricultural sector.

But what is behind the dismal increase in labour productivity? We find that, contrary to popular belief, a critical reason for this is the lack of capital deepening. In fact, capital-to-output ratio has been declining since late 1970s such that today Pakistan has one of the lowest levels of capital-to-output ratio across the list of 183 countries included in the PWT dataset. We think that high macroeconomic uncertainty due to irresponsible macroeconomic policies, including low foreign reserve buffers, are critical for understanding the persistent decline in capital-to-output ratio and, as a result, low growth in labour productivity.

The second half of the report starts with documenting differences in labour productivity across sectors. This is important since it has the potential to open doors for policymakers where reallocating resources from less productive to more productive sectors can increase overall productivity in the economy. Consistent with the rest of the literature, we find that the agriculture sector has one of the lowest labour productivity in Pakistan. Labour productivity in the agriculture sector is 47% that of the non-agriculture sector. We consider if differences in wages and production technology across the agriculture and the non-agriculture sectors can explain the difference in labour productivity between the two. However, we find that these factors cannot explain the observed differences, pointing to an overallocation of resources in the agriculture sector due to reasons which are related to government policies and market failures such as frictions in the credit markets.

Since an increase in labour productivity is critical for meaningful transformation, the report goes on to explore how an increase in integration in the Global Value Chains can help increase overall productivity in the economy. We document that the level of participation in the GVCs is one of the lowest for Pakistan. Surprisingly, and contrary to what we find for other fast-growing economies, the GVC participation in Pakistan is lower for the export sector than it is for the non-export sectors. We conclude the discussion with showing that an increase in GVC participation can go a long way towards increasing the productivity growth and, as a result, facilitate the transformation process.

The discussion in this report centres around the allocation of resources across the economy. However, we note that the challenge of resource misallocation as in the case of Pakistan is not just a challenge of technical knowledge and administrative expertise but also has power-relations between the ruling elites and the effectively disenfranchised masses at the core of it. What is considered economically inefficient could very well be maximising the economic rents for the elites. Therefore, we are unlikely to achieve meaningful progress without bringing these power-relations to the forefront of any discourse on reforms

For inquiries, you can reach out to us at info@primeinstitute.org or farhan@primeinstitute. Alternatively, you can also call us at +92 (51) 8 31 43 38.

Pakistan & EU Trade Potential: The Bottlenecks and Roadmap for Reforms

by PRIME Institute PRIME Institute No Comments

PAKISTAN & EU:TRADE POTENTIAL
The Bottlenecks and Roadmap for Reforms

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Author Dr. Aadil Nakhoda

Trade plays a vital role in driving economic growth, but Pakistan’s trade performance has been volatile, with stagnant export growth and a rising trade deficit. The Generalized Scheme of Preferences (GSP) Plus is offered to a select group of exporters to the European Union (EU) based on a set of pre-defined criteria and the fulfillment of various conventions regarding human rights, labor rights, good governance, climate change and environment protection. Pakistan received the status on January 1, 2014. Pakistan currently is a signatory to all the 27 conventions and is also a signatory to the additional conventions proposed under a new revised scheme that is likely to replace the current one that is expiring at the end of this year. Although, Pakistan is not in imminent danger of losing the preferences awarded to its exporters, uncertainties loom as Pakistan faces challenges that can adversely impact its status. While Pakistan has experienced growth in trade with the EU during the GSP Plus period, it is imperative that the exporters continue to receive the preferences. To fully exploit trade potential and effectively compete with counterparts, it is essential to assess the trade patterns. This report undertakes a comprehensive exercise to not only determine the trading patterns with the EU but also bring forward recommendations that can help boost Pakistan’s exports to the EU and to the world.

This study outlines and evaluates the pattern of imports into the European Union (EU) from Pakistan, highlighting not only on the significance of the trading relationship between the EU and Pakistan but also emphasizing on the potential threats and risks if the preferences to Pakistani exporters offered through the GSP Plus Scheme are revoked. The main objective of this report is to identify the bottlenecks hindering trade growth between Pakistan and the EU and propose reforms to enhance bilateral trade relations such that Pakistan can benefit more from the GSP Plus scheme. The study undertakes a comparative analysis as it considers the trade patterns between the EU and Bangladesh, India and Vietnam. These three countries are major regional counterparts that are likely to influence the trading relationship between Pakistan and the EU.

Pakistan is the largest beneficiary of the GSP Plus scheme. The EU imported $9.1 billion from Pakistan in 2021, increasing from $5.4 billion in 2013. More than $6 billion of the imports in 2021 were under the GSP Plus preferences. The largest industry was the textile industry, accounting for approximately 80 percent of the imports. While imports into the EU from Pakistan in rice has increased significantly since 2017, the imports in leather have decreased. The share of leather products in imports decreased from 10 percent in 2013 to 5 percent in 2021. Further, the set of top market destinations in the EU for the four Asian countries is approximately the same, suggesting that import demand is likely to be generated from within these markets. This highlights the need to emphasize product diversification. Analysis on the patterns of imports in other non-traditional industries is crucial for policymakers seeking export diversification. This study further considers four major products from industries which are not traditionally export-oriented in Pakistan, namely denatured ethy-alcohol, medical instruments, inflatable balls, and footwear as products in which Pakistan has shown relatively higher potential in terms of trade with the EU.

This report presents various challenges with the help of different trade indicators. For instance, Pakistan reports higher values of revealed comparative advantage in the exports of textile products, leather products and rice, but Pakistan and Bangladesh report relatively lower unit values, particularly in the exports of textile products to the EU. Indian and Vietnamese exporters are less likely to compete against Pakistan in terms of the unit value of imports into the EU, while Pakistani exporters may face competitive pressures from Bangladeshi exporters. Further, this report considers the imposition of technical non-tariff measures and the degree of regulatory convergence achieved towards those imposed by the EU. Although the indicator on the adoption of NTMs scores high for the Asian counterparts of Pakistan, the indicator on regulatory convergence scores low for all countries. Pakistan with low frequency and coverage of technical NTMS, lacks technical NTMs on its imports. This suggests that Pakistan does not impose pre-defined measures to counter the imports of substandard and dangerous goods into the country as observed in its counterparts, which has implications on quality of goods imported and produced in Pakistan. Customs and transport-related firm-level obstacles are briefly discussed towards the end of the report. Pakistani firms are the most constrained in this aspect.

One of the more important findings highlighted in this report is that the revocation of the GSP Plus status will lead to a trade loss of more than $3 billion, with significant loss in exports of bed linen, and men’s and women’s trousers. The biggest market affected will be Germany. The loss of $3 billion is significant as Pakistan faces critical balance-of-payment related challenges. Hence, it is crucial that all efforts are made to ensure that Pakistan complies with all the requirements to continue with the status. The loss of status will have a profound impact on the economy.

For inquiries, you can reach out to us at info@primeinstitute.org or farhan@primeinstitute. Alternatively, you can also call us at +92 (51) 8 31 43 38.

Special Investment facilitation council

by PRIME Institute PRIME Institute No Comments

Special Investment facilitation council

Govts policies to revive economy- International Investment

Objectives:
 Reduce the cost of doing business.
 Streamlining federal and provincial government.
 Formation of industry cluster.
 Achieving policy convergence across fiscal, monetary and trade policies.

Mahrukh Hameed: The Govt is concerned within aim to bring about the kind of changes you know quick fixes would you say these are quick fixes?

Ali Salman: Well these are the major aim of setting up the special investment facilitation council goes as per the announcement goes beyond the quick fixes and here they are talking about not only reducing the cost of doing business but also the streamline the business regulations improving the facilitation or coordination between federal and provincial govt  and also setting up industrial zones so this is a long term plan and one key feature of this plan is according to the govt’s announcement that they will improve the coordination between the civilian and military leadership of the state rights and the assumption on the underlying  you know plan is that specially when we talk about external investors they look for stability in the govt and unfortunately the political govts  in the last few years have not been able to provide that stability in policy outlook  so we can agree or disagree but the under on the objective is to ensure the stability  and also to start systematic or institutional reforms a lot of these have been there in the past also I think a high level of  coordination between military and civil leadership was not there at least this scale we observed some of these for instance in CEPEC authority in the past which was then closed down we also  observed during  FATF when Pakistan was fighting Its case there was significant coordination between the two side of the state. I think this is another stage where a lot of details to be still you know unveiled. So, it is too early to say unless we hear about those terms and conditions under which these investments are been planned.

Mahrukh Hameed: Do you agree with Dr Qais Aslam? I mean of course tourism is the huge part or should be a huge part of any economy. In the past we saw some inroads being made but they never really materialized is that you know it is why have we consistently failed in that direction. Do you think it has   to do with stability also our security situation a multitude of factors.

Ali Salman: Tourism is definitely one of the most important potential areas and before we go into the sector ill like to take a step back like to add something which DR Khaqan was saying and this is import point that whether we are able to move from a debt creating instrument to non-debt creating instrument and hoping the FDI that we will attract now under this policy would be actually known that creating. Now this is what we assumed earlier when we were you know bringing Chinese investment in the power sector right. So, on the paper this is not a loan this is an investment in the IPB mod. But the terms and conditions are such that this sovereign guarantees were secured and because of those sovereign guarantees the liabilities have been build into  our system whether we are able to use the electricity produced by Chinese IPPS or not we have to pay the bills and so you know those details are yet to announced therefor I really hope that when we are talking from for instance one of the announcement which was made recently was by Abu Dhabi port that they have shown commitment to invest USD 1.8 bn in managing the Karachi port trust when the current the arrangement expire. now what will be terms and conditions of this arrangement whether will be bringing any kind of sovereign guarantee or not whether it will be a private sector participation would be there or not and, on that note, if you look at the formation of the SIFC and the subcommittees one thing which you will notice is that that there a lot of coordination between the govt across Ministries across the civilian Military side of the govt. Although technically military has no direct role in economic governance. But we are seeing the private sector is largely missing from the composition and I think one of the important stakeholders should have been the association like overseas chambers like other associations which are really bringing or have brought significant amount of private sector investment and one can argue whether this private sector investment has increased efficiency in govt or in Pakistan economy or not whether this is as we call as market seeking investment. Those discussions must be framed but hopefully when we get more details about these contracts, we can be able to comment more on that later.

Mahrukh Hameed: Is it true that there is a criticism as far as the private is concerned that they are largely rent seekers?

Ali Salman: Well again if you prioritize one sector to another sector for instance in the past auto sectors and textile sector and in the recent real estate sector were our favorite. When you do this pick and choose of winners and loser within private sector, what happens govt announce special privileges, special incentives, tax holidays which then create protection which will lead to rent seeking. So, this should not be the case.

Mahrukh Hameed: there was a controversy during the last govt where USD 3 mn to that we have given without any under the RPM. So, there are a lot of issues here that unfortunately we have  not resolved till now.

Ali Salman: Tourism The National assembly standing committee on public accountants committee has taken this initiative and try to ear more details of how these funds were utilized. There is a counter argument that during the time of COVID when the demand was compressed and those funds were utilized to keep the industry going, to keep the employment in any stable position so that helped but that's one argument, so we did like to again know  the details of how this was invested. For instance, was it invested in plant and machinery, or it divested to other sectors of the economy so this is still an open question. A lot of speculation is there but the important thing is that Level playing Field is the most important thing in any of these investment regimes that must be insured right by the govt.

Mahrukh Hameed: Do you agree that we don’t have kind of cohesion synergy what.

Ali Salman: That is the whole idea behind this SIFC that the govt and the leadership in different institutions have realized that there is lack of cohesion. There are already institutions which were supposedly responsible like one window operation. There were many institutions which have  not worked in the past. So, it’s not the issue of perhaps the formation of these bodies but I think we need to see how they function and what kind of results they bring. For instance, one very important area of collaboration which can happen because of this civil military corporation in the economic area. Over last few decades the state have invested billions of dollars in the invested billions of dollars in the defense  capacity and that is also improved the quality of products. Let’s say in the Aerospace sectors but those capabilities have not come out for commercial usage. So, while we talk about defense production is one of the four or five priority areas. I would like to suggest that defense RND should be picked up as one of the themes under SIFC where the technology spillover and you know it should be allowed to be benefited by the private sector. so, this is exactly what happend after second world war in U.S case where us Govt ensured that the private sector research is they become the customer of the research and they were also supporting funds like DARPA funds. So, this is an example where we can pick, and I hope that the civil commercial application of this research needs to b fully exploited. If we want real collaboration between civil and the military side  in terms of  economic governance.

Mahrukh Hameed: As far as this is you know this investment in human capital is concerned. Its again a whirlpool, if we look at any measure that’s being taken it seems like done before but it must be redone differently, would you agree with that, II mean you were doing the same things but there are certain things that have to be done differently because seems to be very innovative in the sense that the measures that have to be taken.

Ali Salman: That I Intend to be agreed with you that a lot of these ideas for instance, the mapping of land for better use of cropping has been there for ages right. So, this is not that we are coming up with news idea altogether we are may be trying to be propose a new mechanism and this is very important to present that we are not short of resources, the question is how we are allocating those resources. For instance, it was pointed out correctly that significant part of the RND goes into the exist salaries 90 too 95 percent these  institutions which are responsible for the research 90 to 95 percent of their budget goes into the salaries and not to the actual research. So, if you are not doing actual research then obviously you will  not find the productivity improvement which we should expect. So, these are the ground realities. Now which extent these  ground realities can be changed by these mega structures that we are seeing now like Apex committee’s implementation this is a big question mark. One of the things which actually  when we   talk about research is that we should be spending less money in universities and more money in the industry side of research. Every industry has problems like agriculture, engineering, and electronics. You  will find problems of efficiency and problem of branding  in every industry. They need research but if you give more money to the universities, I’m   afraid that lot of money is being wasted in just production of papers but actual problem solving. One more thing I would like to add because we are talking about here collaboration between civil and defense side, one thing which note concerned is this increasing syncretization of our economic policy now it was mentioned for instance drones are under the control of military establishment. in the past we heard this  similar case can be made about 3D printers which all over the world is used openly by universities by industrialists by young entrepreneurs to experiment. We can’t import  3D printers because the people in the security establishment I think this is the security threat. We can’t import a drone because it will become a security threat. Now these technologies must be democratized if we want the  fruit of this investment to be used by entrepreneurs by innovators, not just in the govt but outside the govt. only then I think we can see real prosperity, otherwise I’m afraid that this top-down approach which SIFC seems to suggest is not going to bring the desirable result in the long run.

Closing remarks by Ali Salman: One of the important takeaway massages especially in the context of SIFC would be ensuring of transparency and credibility. When the Govt says that we will ensure repatriation of capital which the investors will bring now, obviously in the last one year we have seen that given the macroeconomic situation that was stopped. So, that kind of big challenge on the govt shoulders how to bring that kind of transparency. Secondly, when we talk about business regulations and facilitations lets use the existing research which has been done and would to especially mentioned the research done by PIDE on its large series that use the research to improve the regulatory environment and then implement those changes.

Withholding Tax Regime: Doing Business Perspective

by PRIME Institute PRIME Institute No Comments

Withholding TAX REGIME: DOING BUSINESS PERSPECTIVE

Author: Muhammad Anas Farhan

This paper looks at the withholding tax regime and assesses the impact of the present regime on taxpayers. We found that the Emphasis of Pakistan’s revenue stream is on indirect taxes rather than direct taxes, both at Federal level and Provincial level. During FY2021-22, 67% of FBR’s direct taxes came from withholding taxes. Similarly, share of indirect revenue in total provincial revenue of Sindh, Punjab, Khyber Pakhtunkhwa and Balochistan, remained at 98%, 85%, 86% and 95% respectively.

We discovered a long list of categories and rates of withholding tax in the Income Tax Ordinance, 2001. Rates of withholding tax for corporate and non-corporate entities are different. Withholding tax rates to be applied for persons whose name is on active taxpayers’ list and for persons whose name is not on active taxpayers’ list, are also different. The issue of double taxation and even multiple taxation exists under prevailing tax law.

A withholding agent is made to go through a complex and lengthy procedure to comply with the provisions of Income Tax Ordinance, 2001.  These include the deduction of tax, deposit of tax into Government Treasury, reporting of withholding tax details to FBR through filing of periodic withholding tax statements, reconciliation of withholding tax statements with financial statements, assessment, audit, and verification of withholding record of withholding agents, issuance of tax deduction certificates to taxpayers evidencing deposit of withholding tax into Government Treasury.

The withholding sales tax regime prevailing in every province/territory of the country is different. If withholding sales tax categories and rates pertaining to every province/territory are taken together, these are massive, as in the case of income tax. Cost of doing business for withholding agents in Pakistan, with the existing withholding income tax and withholding sales tax regime, is on much higher side, with no benefit at all from the principal taxation authorities.

We have made five recommendations i.e., simplified WHT regime at both Federal & Provincial level, make withholding taxes adjustable, apply same withholding rules to sales tax on services in every province, minimize reporting requirements,  and eliminate strict audits and assessments of withholding agents.

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Vertical Distribution of Divisible Pool of NFC Award for Azad Jammu Kashmir and Gilgit-Baltistan

by PRIME Institute PRIME Institute No Comments

Vertical Distribution of Divisible Pool of NFC Award for Azad Jammu Kashmir and Gilgit-Baltistan

Jammu and Kashmir, either administrated by Pakistan or India, is declared ‘disputed’ by the United Nation. The administrative responsibility of one part of Jammu & Kashmir (J&K) is entrusted to Pakistan through “trust obligation” of UN Security Council resolutions (UNSC) and UN Commission for India and Pakistan, UNCIP. The paper is about the fiscal decentralization for these ‘disputed’ territories i.e., Pakistan Administrated Jammu & Kashmir (PAJK) and Gilgit-Baltistan (GB).

The National Finance Commission (NFC) award is distribution of financial resources between the Centre and provinces – the vertical distribution – and among the four federating units – the horizontal distribution. The federal government has two sources of revenue i.e., tax income and non-tax income. The tax income is the divisible part under the NFC award. First, vertical distribution of divisible pool is decided between the federal government and four provinces i.e., Baluchistan, Khyber Pakhtunkhwa (KP), Sindh, and Punjab. Subsequently horizontal distribution among the provinces takes place. The current arrangement under the 7th NFC award is such that out of gross divisible income, the first 1% goes to KP as reconstruction relief due to ‘War on Terror’, and 0.66% goes to Sindh as compensation for abolishment of Octrio and Zila Tax in 1997; afterwards 57.5% goes to four provinces and the remaining income comes under the domain of federal government. The federal government pays for its obligations under its domain including debt servicing, defense, salaries and pension of federal employees and development and non-development funds to two ‘disputed’ territories of PAJK and GB. It is important to note that there is defined formula to distribute the 57.5% revenue only among four provinces, not for the territories of PAJK and GB. Moreover, Clause 3(A) of Article 160 of the Constitution says that the share of provinces in the new NFC award will not be less than prescribed share in the previous Award (i.e., 57.5%).

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PRIME’s Position Paper on Tax Reforms

by PRIME Institute PRIME Institute No Comments

PRIME's Position Paper on Tax Reforms

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