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Simplification of the Pakistani Tax Regime

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Simplification of the Pakistani Tax Regime

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

 

 

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

Low Rates

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

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

Lower Administrative Costs and Compliance

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

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

A Broader Base

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

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

 

Predictability and Certainty over the Long Run

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

Limiting Corruption

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

Economic Efficiency

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

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

 

Does austerity lead to prosperity?

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Does austerity lead to prosperity?

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

 

Ali Salman | March 06, 2023

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

Revisiting “D” word: Pakistan should opt for debt restructuring

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Revisiting “D” word: Pakistan should opt for debt restructuring

External debt servicing burden country faces today is one of the highest in the world

Ali Salman | January 09, 2023

 In its recent media release, the independent Economic Advisory Group (EAG) has encouraged the government to consider initiation of debt restructuring negotiations to avoid the risk of “disorderly default”.

It clarified that “this will…come at the expense of meeting additional conditionalities agreed with the creditors, who will bear the cost of restructuring. None of these options are without economic pain, but a well-managed restructuring process can allow the economy to recover faster than otherwise.”

In this article, I will advocate this view that given the trade-off, the Ministry of Finance should seriously consider debt restructuring.

To provide a context, Pakistan’s external debt servicing has increased from $6.5 billion in FY13 to close to $26 billion in FY23. This is equivalent to 65% of Pakistan’s exports (estimated at $40 billion in FY23) and 37% of exports and remittances.

In 2013, Pakistan’s external debt servicing was only 20% of exports. The external debt servicing burden (as a percentage of exports and remittances) that Pakistan faces today is one of the highest in the world.

The finance minister has repeatedly maintained that Pakistan will not consider debt restructuring and will honour its external debt servicing. So far, he has managed to deliver on his promises.

It seems that he is pursuing a two-pronged strategy: one is reliance on friendly countries like China and Saudi Arabia. Last week’s army chief visit to Saudi Arabia and a telephonic contact between the premiers of China and Pakistan must be related to the same strategy.

The second part of his strategy seems to secure additional funding from external sources, especially the Geneva conference, for flood rehabilitation.

Pakistan is seeking $16 billion of grants and debt under this head, from which it has received about $4 billion already. This may be sufficient to secure external debt servicing for FY23 without the need of any restructuring.

Although the international agencies are demanding strict control over the planned spending, money, in the end, is fungible.

However, if Pakistan’s hopes of securing significant additional external funding for flood rehabilitation are not fulfilled, then the reliance on expectations from friendly countries will become critical.

Also, pressure to increase electricity tariff and fuel surcharge will be difficult to resist, which will be detrimental to the cost of living and the dwindling political capital of PML-N.

Alternatively, we propose that Pakistan should sit down with all creditors to agree on a new schedule of external debt servicing and at the same time lift administrative controls on import and import payments immediately.

Once we do it, business activities will restore and economic output will begin to gain momentum. While trade deficit may increase as a result, this should not worry us.

About 90% of Pakistan’s imports are non-luxury in nature. It means that it is very costly to control imports without the risk of an overall economic slowdown. We have already witnessed it in the last quarter of 2022.

Any calls for import substitution at the policy level should be strictly discouraged, while markets may be encouraged to become more competitive.

Importantly, this strategy will minimise the gap between the open market and black market exchange rate. Once this is done, the remittance flow through banking channels will not decrease and exporters will be encouraged to realise their receivables sooner than later.

This will bring a substantial increase in the monthly dollar inflow, which will provide an additional cushion to Pakistan’s forex reserves, thus giving some degree of confidence to the policymakers, and to the market.

Debt restructuring will also decrease the pressure on the government to increase electricity tariffs or petroleum levy, though in the end, we will need to respect international prices.

There will be genuine apprehensions of a further downgrade by the international credit rating agencies in the case of debt restructuring. This concern is not well-placed.

First, Pakistan’s bond has already been downgraded to the junk status despite timely payments on Eurobonds in December 2022. This was in the making since the middle of 2022, owing to the catastrophic fiscal decisions made by the ousted PTI government.

In this context, the finance ministry under Miftah-Dar deserves credit for reducing the risk of default at least in the recent past.

That does not preclude the risk of a disorderly default in the future. The fact that banks are dishonouring LCs of importers is a default at least at the private-sector level.

The banks are claiming difficulty in release of dollars due to administrative controls by the central bank. Dar has made it public that while he is not going to change the SBP autonomy status, he believes that this has gone too far.

Ultimately, credibility, predictability and transparency in economic decision-making is the most important strategy for any government. This should be rules-based and not based on discretion.

Economic stability can be ensured by sticking to these rules and by institutionalising economic governance.

As the EAG press release reminds us, policymakers must acknowledge the difficult choices the country faces and overcome policy paralysis to avoid the dire consequences of a disorderly default.

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

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

This article was originally published in The Express Tribune on January 9th, 2023.

An economy losing steam

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An economy losing steam

Ali Salman

Most glaring example of unsound fiscal management is primary deficit.

As the Economic Survey 2021-22 indicates, we should celebrate a respectable growth rate of 5.97%, a rise in exports by 27.8% and an increase in tax collection by 28.1%.

These numbers mask three important facts. First, the growth rate has, once again, brought us to an unsustainable current account deficit, thus subjecting us to an IMF bailout.

The “policy structural break” was the shift between Abdul Hafeez Sheikh and Shaukat Tarin. Between these two finance ministers, the PTI government essentially lost all its goodwill it had accumulated.

Second, the rise in exports is not the result of an increase in productivity or policy – it is the result of a rise in international prices.

While the rise in exports is a welcome sign, one needs to question if this was a result of any policy or improvement in the competitiveness of our industry or was it driven by international factors.

We have argued that this increase was unrelated to the government or industry and is likely to be reversed – unless we can demonstrate growth in new sectors.

Third, the increase in tax collection was largely driven by an increase in the import tax receipts, which increased the cost for both businesses and consumers. Some 45% of our tax revenue is realised at the import stage, which is the highest in the world.

The most important question is whether our economy is in a financially sound position or not? My short and simplified answer is “No”. Our economy is losing steam, or perhaps has lost it.

The most glaring example of the unsound fiscal management of an economy, especially when it is under an IMF programme, is the primary balance, which ought to be positive.

Primary balance is the fiscal balance adjusted for interest payments. In other words, our fiscal balance should be marginally higher than the interest payments.

The Economic Survey mentions that we had a primary surplus of Rs451.8 billion in FY21, which has turned into a primary deficit of Rs447.2 billion in FY22.

This is the direct result of a disproportionate rise in the total expenditure, which rose by 27%, accounting for a 21.2% rise in the current and 54% rise in development expenditures. It brought growth at a very high cost, basically costing once again our financial freedom.

As a policy instrument, we continued to depend on interest rate, which was increased by 675 basis points (bps) in one year, but it failed to stem the rising inflation, as it was coming from elsewhere.

State Bank of Pakistan’s (SBP) autonomy is principally laudable, however, it is inconsequential in our economy at the moment as consumption is continuously being fuelled by remittances, and to some extent, cash transfers, as the Economic Survey rightly notes.

The other indicator of the major failure was a steep increase in the current account deficit – from $543 million to $13.8 billion in one year.

It is attributed to the rising trade deficit, which itself is a function of import expansion on account of higher demand.

The productive capacity of the economy has not kept pace with the rising demand, which has resulted in a spiralling trade deficit and a current account deficit which the economy is not able to sustain.

The current account deficit itself is not a bad thing, and we can tolerate up to $7 billion of deficit at the current level, however, anything beyond that level will be unmanageable.

In hindsight, once we had achieved a desirable level of current account deficit last year, the government should have contained its spending and should have introduced policies to bring in foreign direct investment (FDI).

Instead, it took the opposite step and introduced off-budget subsidies. It also obstructed free and competitive capital resource allocation by heavily leveraging the construction sector, which blocked capital without adding any tradable stock to the national assets.

The introduction of off-budget subsidies and an artificial reduction in fuel prices not only halted the IMF programme, they also deteriorated our fiscal account sharply.

The new government inherited this economic mess, but by not moving to correct the mistakes quickly, it has lost a strategic opportunity, which will not come again.

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

Published in The Express Tribune, June 13th, 2022.

Prime Comment on Economic Crisis in Sri Lanka

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Prime Comment of economic crisis in Sri Lanka

The Sri Lankan economy was performing reasonably well among developing economies with an average real GDP growth rate of 5.2 percent from 2011 to 2018. However, the economy took a downturn with the onset of COVID-19 and subsequent lockdowns, and the real GDP growth rate declined from 3.3 percent in 2018 to a negative 3.6 percent in 2020 and rose to 3.7 percent in 2021. The government was struggling to manage its fiscal operations facing fiscal and current account deficits like most developing countries. Nonetheless, the situation worsened due to an exponential rise in global commodity and energy prices, a halt in tourism activities due to pandemic enforced lockdowns and travel restrictions, the surge in external obligations from a rise in external debt, and a significant loss in tax collection due to ill-conceived tax reforms.

Resultantly, Sri Lanka had to announce bankruptcy on external obligations in April 2022 where the government’s external debt stood at $51 billion in 2022 and was unable to fulfill its external obligations because foreign exchange reserves fell to $1.94 billion.

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مڈل مین بارے بدگمانی چھوڑئیے

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مڈل مین بارے بدگمانی چھوڑئیے

مصنف: علی سلمان

مڈل مین ہر اُس لعن طعن کا سزاوار نہیں ٹھہرتا جو اُس پر دوش ڈالی جاتی ہے ۔

نوٹ:- یہ تحریر اصل انگریزی تحریر کا ماخوذ اردو ترجمہ ہے ۔ اصل انگریزی متن کی تحریر انگریزی جریدے دی ایکسپریس ٹربیون میں 10مئی 2021ء کو شائع ہوئی تھی ۔

پاکستان کے اقتصادی پالیسی ساز حلقوں کی تدبیروں اور عامیانہ بحثوں میں اقتصادی چیلنجز بارے مستقل طور پر جو لکیر پیٹی جاتی ہے وہ مڈل مین کا کردار ہے جسے اکثر و بیشتر بے جا طور پر مارکیٹ کی حرکیات میں تمام تر برائیوں کا محور سمجھا جاتا ہے ۔
ہر ایک اقتصادی سیکٹر میں مڈل مین اور ڈسٹریبیوٹر کا کردار ناگزیر ہوتا ہے ۔ غور کیجیے کہ کون کپڑوں کو فیکٹریوں سے دکانوں میں پہنچاتا ہے؟  یہ بحث زرعی منڈی کی حرکیات میں نسبتاً زیادہ آسانی سے سمجھی جاسکتی ہے ۔
مڈل مین بارے یہ بدگمانی دیکھنے کو ملتی ہے کہ وہ کسان اور صارفین دونوں کا استحصال کرتا ہے اور اپنے پیوستہ مفادات میں اجتماعی فلاح، اخلاقی اقدار اور مستعد کارکردگی کے تقاضوں کو نظرانداز کرکے ناجائز منافع اینٹھتا ہے ۔
مڈل مین بارے مخبوط رویہ رکھنے کے کارِ لاحاصل نے اقتصادی پالیسی سازوں کے ساتھ ساتھ مبصرین کی توانائیاں بھی نامناسب حد تک سلب کرلی ہیں اور اُن کی صلاحتیں دائرہ ءِ عمل سے خارج بے سروپا حل تجویز کیے جانے تک اٹکی ہوئی ہیں ۔
ایسے ناقابلِ حصول قسم کے سلجھاءو کا مدعا کبھی عیاں اور کبھی پنہاں الفاظ میں مڈل مین کے کردار کو ختم کیے جانے کا متقاضی ہوتا ہے اور وہ بھی اِس خودفریبانہ امید پر مبنی ہوتا ہے کہ مڈل مین کو ختم کرتے ہی قیمتیں کم ترین سطح پر آجائیں گی ۔
امید ہے کہ مدعائے مضمون یہ گوش گزار کرواپائے گا کہ مڈل مین جسے ہم نے ناسمجھی میں ’’شیطانِ مجسم‘‘ سمجھ رکھا ہے کا معاملہ ’’بد اچھا بدنام برا‘‘ والا ہے اور یہ کہ مڈل مین ہر اس لعنت و ملامت کا قصوروار نہیں ہے جو اُس کے سر تھوپی جاتی ہے ۔ درحقیقت معاشیات کی معقول معاملہ فہمی رکھنے والا کوئی بھی شخص جو کشادہ نظری سے حقائق سننے کو تیار ہو وہ معاشی حرکیات کا ادراک کرلینے کے بعد ہماری روزمرہ کی زندگی میں مڈل مین کے کردار کو سراہنے لگے گا ۔
کسی پریکٹس بارے تھیوری ہر اُس کے لیے رہنما ہونی چاہیے جو اُس کی اہمیت سمجھتا ہو ۔ مسلمانوں میں ایک مذہبی پیشوا امام غزالی نے ڈیوڈ ریکارڈو سے آٹھ صدیوں قبل ’مسابقتی منفعت‘ کی تھیوری کا ادراک کرلیا تھا جو یہ بتاتی ہے ’’ ۔ ۔ ۔ کسانوں کی کثرت زرخیز علاقوں میں ہوتی ہے جہاں زرعی آلات تیار نہیں کیے جاتے جبکہ اُوزار ساز لوہار ترکھان کاریگر وہاں ہوتے ہیں جہاں کسان نہیں ہوتے ۔ لہٰذا فطری طور پر ایک دوسرے کی ضروریات کی بہم رسانی کے لیے وہ آپس میں اشیاء و خدمات کا تبادلہ کرتے ہیں ‘‘ ۔
ایک ہی زمان و مکان میں کسان کھیتی باڑی کرنے کے ساتھ ساتھ آڑھتی نہیں بن سکتا اور ہر صارف بھی روزانہ کھیتوں میں جاکر منڈی سے سستے نرخ پر سبزیاں نہیں خرید سکتا؛  لہٰذا ایسے میں مڈل مین کی ضرورت پڑتی ہے جو کسان اور صارف میں وسیلہ بننے کی مشقت اٹھائے اور خود کو رِیسک کے جوکھم میں ڈال کر اپنا منافع کمائے ۔
جو قارئین اس تھیوری کو سمجھ یا اس پر اعتماد نہیں کرسکتے اُن کے لیے تعاملاتی شواہد سے اخذ کردہ ڈیٹا پیش ہے ۔ حکومتِ پنجاب زراعت بارے ایگریکلچر مارکیٹنگ انفارمیشن سروس (اے ایم آئی ایس) کا محکمہ چلارہی ہے جہاں نرخ بندیوں کا ڈیٹا تواتر کے ساتھ مرتب کیا جاتا ہے ۔
یہ محکمہ ’اے ایم آئی ایس‘ متعدد اجناس کی نقد فصلوں کی قیمتوں میں مرحلہ وار چڑھاءو کے اشاریے مرتب کرتا ہے جیسا کہ کٹائی شدہ فصل کا بھاؤ تاؤ، غلہ منڈی میں تھوک کی بولی لگنا اور پرچون کی دکانوں میں صارفین کے لیے نرخ بندی طے پانا ۔ یعنی کہ فصل سے دکان اور کسان سے صارف تک کے نرخ بندی کے تخمینوں کے اعدادوشمار مرتب کرتا ہے ۔
اس محکمہ کے لاگت اور منافع جات کی مد میں مرتب کردہ اعدادشمار تجاویزی نوعیت کے ہیں ۔ ان اعدادوشمار کا موازنہ کبھی بھی پاکستان کے محکمہ شماریات (پی بی ایس) کے مرتب کردہ مروجہ قیمتوں کے اعدادوشمار سے کیا جاسکتا ہے ۔ اس طرح سے، جو کوئی بھی فصل کے نرخوں کا منڈی کے نرخوں سے موازنہ کرنے کے بعد بالآخر پرچون سے موازنہ کرے گا وہ اس معاشی سرگرمی سے کسان اور مڈل مین کے کمائے گئے منافع میں تفاوت کا تناسب با آسانی سمجھ سکے گا ۔
زرعی اشیائے خوردونوش کی طلب اور رسد کا توازن یعنی ’’فوڈ باسکٹ‘‘ جس کے تحت صارفین کے لیے قیمتوں کا اشاریہ یعنی کنزیومر پرائس انڈیکس (سی پی آئی) ترتیب پاتا ہے میں 20اشیاء شامل ہیں ۔ اس اشاریے کے مطابق 70فیصد غذائی اخراجات 20فیصدی نچلے درجے کی آمدن والے گھریلو صارفین کی جانب سے بلحاظِ اخراجاتی ترتیب سات اقسام کی اشیائے خردونوش کھلا دودھ، آٹا، آلو، پیاز، ٹماٹر، چکن اور کوککنگ آئل کی مَدّوں میں کیے جاتے ہیں ۔
راقم الحروف نے اپنے تجزیے میں گندم اور تین جنس کی سبزیوں کے ڈیٹا سے استفادہ کیا تھا جو کہ ایگریکلچر مارکیٹنگ انفارمیشن سروس پنجاب(اے ایم آئی ایس) اور ادارہِ شماریاتِ پاکستان (پی آئی بی) سے لیا گیا تھا ۔ یہاں ضمناً ایک احتیاطی نکتہ سپلائی چین کے جاری سلسلے بارے مختلف سطح کی تقابلی قیمتوں سے متعلق ذیل میں دیا جارہا ہے جسے ملحوظِ خاطر رکھا جائے ۔
زرعی منڈی کی حرکیات خصوصاً جب وہ نرخ بندی اور تجارتی قیود کی پابندیوں کے زیرنگرانی ہوں تو ایسے میں وہ باقی منڈیوں کے برعکس زیادہ شدت کے ساتھ اتارچڑھاءو دکھانے پر مجبور ہوتی ہیں لہٰذا تخمینہ کاری میں عمومی رائے اپنانے کی بجائے احتیاط برتنے کی ضرورت ہوتی ہے ۔
اگر مڈل مین کے کردار کا تجزیہ تھیوری کے ساتھ ساتھ اعدادوشمار کی روشنی میں بھی کرلیا جائے تو یہ ثابت ہوجائے گا کہ نہ تو مڈل مین ہتھیانے والا استحصالی ہوتا ہے اور نہ ہی کسان منافع سے محروم رکھا گیا لاچار مفلس ہوتا ہے ۔ ثبوت میں ذیل میں دیا ڈیٹا دیکھیے ۔

مثلاً سال2020ء-2021ء کے دوران گندم، پیاز، ٹماٹر اور آلو کی نقد فصلوں میں کسانوں کے کمائے گئے منافع کا تخمینہ15فیصد سے 253فیصد کی پہنچ تک کا تھا ۔ اس کے برعکس مڈل مین کے منافع کی پہنچ 18فیصد سے 36فیصدتک کی معمولی سطح کی تھی ۔ درحقیقت اگر آپ گہرائی سے دیکھیں تو کسان اور مڈل مین میں منافع کے تفاوت کا یہ حاشیہ تھوک اور پرچون کی متضاد سطحوں پر خریدوفروخت سے ماخوذ ہے ۔ اس سے یہ نتیجہ نکلتا ہے کہ کسان کا کسی ایک سال میں غیرمعمولی منافع کما پانا اور کسی دوسرے سال میں بھاری نقصان اٹھانا دونوں صورتوں کے امکانات معمول کا معاملہ ہوتے ہے ۔ جو کوئی بھی دیہی معیشت کی سمجھ بوجھ رکھتا ہو اس کو یہ اتار چڑھاءو سمجھ میں آ سکتا ہے ۔
اسی طرح مڈل مین کا منافع نپی تلی سطح پر اس لیے رہتا ہے کہ اُسے فصلوں کی کٹائی کے بعد غلہ گوداموں میں رکھنے اور طلب کے مطابق بیچنے میں نسبتاً کم رِسک لینا پڑتا ہے ۔ یہی تو اقتصادیات ہے ۔ اس میں حکومت کو کیا کرنا چاہیے؟  زیادہ تر معاملات میں حکومت کو کوالٹی چیک اور ادارہ جاتی سطح پر معاہداتی تقدس اور تحفظاتی اقدامات کے سوا مزید کچھ نہیں کرنا چاہیے ۔
درحقیقت مڈل مین کو استحصالی سمجھنا ایک غلط العام وسوسہ ہے ۔ مڈل مین کو استحصالی کہہ کر ہم صرف اپنی من گھڑت اختراع کا اظہار کرتے ہیں ۔ جب تک منڈی کی حرکیات ہر خاص و عام کے لیے کھلی ، آزاد اور مسابقتی رہیں گی تب تک استحصال معاشی عمل کے خودرو بہاءو سے مسدود ہوتا رہے گا ۔
مڈل مین کا کردار معاشی لین دین میں محور کی حیثیت رکھتا ہے ۔ ٹیکنالوجی کو مڈل مین کا متبادل خیال کرتے وقت ہ میں یہ ادراک کرنا ہوگا کہ یہ تبدیلی وساطت کی تنسیخ پر منتج نہیں ہوسکے گی البتہ وسیلہ بننے والے کردار کی تبدیل کرپائے گی ۔ مثلاً آڑھت کے ناگزیر عمل میں آڑھتی کا عامل کردار اب تک کوئی کارندہ کرتا آرہا ہے وہی عمل ورچوئل پلیٹ فارمز کے میکانی کرداروں سے کروائے جانے کی تجویز ہے جس کا نتیجہ اسی قدر یا زیادہ منافع ورچوئل پلیٹ فارمز کو دینا ہوگا ۔
اگر حکومت کسانوں اور صارفین میں براہ راست تعلق کے لیے مارکیٹیں قائم کرنے جارہی ہے تو وہ صرف ہمارے قیمتیں نہ دیکھ پا سکنے کے امرِ مانع کی خصوصیت کی بنا پر آزاد نہیں قرار دی جاسکتیں۔
تشویش کی بات یہ ہے کہ ایسا کرکے حکومت نے وہ بار اٹھایا ہے جسے کرنے کی نہ تو وہ متحمل ہے اور نہ ہی اس کا کوئی لینا دینا ۔ ایسا کرکے حکومت اپنے کرنے کے بنیادی اور لازمی کاموں کو پس پشت ڈال چکی ہے ۔

 

Olive story – how to harness potential?

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Olive story – how to harness potential?

Ali Salman

With 4m hectares identified for olive plantation, country can become major player in long run

TUNIS: Tunisian city famous for olives and olive oil where I was invited by one of the world’s largest producers of organic olive to visit their mill and processing facilities. In about 20 years since its formation, the company has achieved global leadership with annual production touching 50,000 tons of olive oil. There is a lot that Pakistan can learn as it has set its eyes to enter the competitive olive market.

The recent bilateral interest between Tunisia and Pakistan to enhance economic cooperation offers a fertile ground for both countries. For at least the last 15 years, the government in Pakistan has provided support to olive growers in the form of free plants, subsidised drip irrigation system and other facilities. It has even brought olives processing machines, which are available free of charge to the growers.

According to the government, 4 million hectares of land has been identified in Pakistan which is suitable for olive cultivation. Spain, the world’s largest olive oil exporter, which has almost 40% of global market share in exports, has around 2.5 million hectares of land for olive cultivation. Pakistan imported around 4,000 tonnes of olive oil in 2020, and locally produced 1,000 tonnes last year. Also, Pakistan is anticipated to import 3.7 million tons of edible oil in the current year.

These figures are clearly indicative of the huge gap that exists and suggest high level of potential demand for Pakistani olive oil – initially domestically, and then in the international market. Tax holidays on the import of machinery for olives, rupee depreciation and CPEC are all major factors that may contribute to increase in olive oil production by local companies.

In addition to the potential areas for greenfield projects, estimates have revealed that if 8 million wild olive trees in different provinces are grafted and converted into productive olive, there is a huge potential for earning export revenue. The government’s initiative in 2016 to launch an ‘Olive Valley’ programme in Potohar grew 1 million olive trees on 8,000 acres. Some 750 farmers worked on the programme to produce olive oil.

The government also plans to issue certifications for the marketing and branding of olive oil by the private sector. The project targets plantations over 50,000 acres in the country by 2022. There are many small-scale olive growers in Pakistan, and some of them have started branding and selling them locally. Local producers and sellers are now marketing Pakistani extra-virgin olive oil in the niche domestic markets.

Their pricing strategy largely follows the imported brands. With 12,000 hectares under plantation of olive plants already, and with 4 million hectares of land identified for olive plantation, Pakistan has the potential to become a major player in the long term. However, it needs patient investment, rigorous planning and vigilant execution over the next couple of decades. Thanks to a supportive government, the unmet demand and vast supply of land and olive plants, Pakistan may become the next olive story of the world. There are some major challenges.

First, it is the economies of scale without which it is not likely to reduce the current high level of cost – and hence high prices. This can only be done through land consolidation and corporate farming. Second, quality assurance and standardisation of labels is critical for winning customer trust. Third, investment in branding is an important precondition for getting market share. Fourth, investment in olive demands patient investment – it cannot yield even full-scale production in the first five years and earning of income only follows that.

Lastly, and most importantly, if we cannot sell olive oil at a price which is competitive in terms of substitutes, then this story will not go beyond hypes – of which we have seen a lot lately. The oft-repeated “Pakistan mein bara potential hai” (Pakistan has a lot of potential) is an over-rated statement of half-truth. One needs a realistic assessment and hard work before realising the potential. Pakistan’s emerging olive oil sector presents a similar potential but hopefully it will not face the same fate as others.

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

Published in The Express Tribune, February 28th, 2022.

Prime Comment on Russia Ukraine war

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Prime Comment on Russia Ukraine war

Pakistan needs to maintain a balance between two conflicting trading partners

Countries, especially the developing world, are already struggling to manage domestic and external pressures, which have severely affected the sustenance of the lower-income groups. Pakistan is also experiencing financial troubles with inflation spiraling out of the control. The conflicting parties must strive to resolve conflicts in a peaceful manner and global leaders must play their part in bringing Ukraine and Russia to the table for dialogue on the issues instead of mere imposing sanctions.

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Cost of welfare policy

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Cost of welfare policy

Ali Salman

Welfare is not free as someone always pays cost of this system

Elderly women from Younisabad meet every two months since 2019 to discuss implementation of the Sindh Senior Citizens Welfare Act, 2014 that still remains pending. PHOTO: Sameer Mandhro

ISLAMABAD: Welfare is an elusive term. Politicians talk about welfare all the time and seek votes on the basis of providing welfare to the masses.

There is a popular concept of a welfare state, which supposedly can take care of the masses, say through the provision of unemployment allowance or subsidies or food.

However, it is obvious that despite being packaged as free, or subsidised, welfare is not free. Someone always pays the cost of this welfare.

It’s a question of resource allocation and market structures who gets benefits and who pays costs. Academically speaking, welfare economics deals with this and considers policies which can maximise benefits for all or most members of a society.

Distribution of welfare usually takes the form of allocation of resources towards a specific component of population.

Take one example – the subsidy or concession for housing loans. Ownership of houses has become difficult for the present generation, which increasingly comprises nuclear families.

In a recent PIDE publication, the popular notion of shortage of 10 million houses is contested, citing 70% home ownership at the national level as per PSLM 2019-20.

However, the government has announced a programme of constructing or facilitating the construction of five million houses. Following this target, the government announced various fiscal and monetary incentives in an effort to correct “market failures”.

It announced a major amnesty scheme to attract investment in real estate. It also set mandatory lending targets for commercial banks.

To date, with Rs38 billion disbursed, the Mera Pakistan Mera Ghar financing scheme has benefited not more than 10,000 households.

On the other hand, prices of land, which takes as much as 80% of the cost of a house in a city, have risen by 60% for everyone in cities like Lahore and Islamabad in just two years.

This has resulted from an unusual flow of capital in real estate – according to a recent news report, as much as $19 billion has been buried in empty urban plots in 2021 alone.

This is the direct consequence of a policy defined by tax exemptions and fiscal subsidies.

Lesson 1: The welfare policy in the name of poor people has benefited a few thousands while causing losses to millions of people.

A majority of households would have benefited in the absence of these incentives and especially through reforms in building regulations.

Another example of welfare policy is the universal health insurance – the Sehat Sahulat Card, which has provided Rs1 million medical insurance to all eligible citizens in Punjab and Khyber-Pakhtunkhwa.

This has been generally lauded by all. However, with a careful look – and as some time passes by – the problems in the universal medical insurance will become clear.

The government will find it impossible to fund the programme on its own very soon while the public health system will deteriorate.

A differently designed health protection programme would have led to the flow of greater investment in the public healthcare system.

A small admission fee is affordable by all and should be charged without exception. The government should have left insurance to be managed by the private sector.

This is how resource allocation and adjustment with market structures can work to maximise welfare for most of the population at the least cost.

Lesson 2: A universal and publicly funded health insurance is a bad idea and the government can achieve more by investing in the public healthcare system.

Another popular example of a welfare policy is price control. The prime minister and federal cabinet keep monitoring prices of fruits and vegetables – with noble intentions.

The government has established price control committees and hired more price inspectors than before.

Prices are only going up. If the government were to focus on a two-pillar strategy – invest in agricultural productivity and allow border trade, it would have provided both short-term and long-term solutions.

On the other hand, price controls have made sure no one invests in agriculture, thus undermining the major goal of keeping prices low.

Price controls provide clear signals to investors and traders – do not enter into the business.

Lesson 3: Price controls distort welfare.

Welfare policies must be put to a simple theoretical question of efficiency and incentives. To bring in welfare economics once again, one can look at the economic surplus – the sum of consumer surplus and producer surplus.

I will also add a fiscal equation here given our constraints and would caution against any policies becoming a fiscal burden.

As three examples above indicate, in each case, welfare policies have distorted incentives and have contributed to the reduction of welfare in fact. This is why, it is very difficult to design a welfare programme which can ensure increase in the overall welfare without greater loss.

A wiser option for a government may be actually do no welfare at all, especially if it poised to do more harm than good.

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

Published in The Express Tribune, February 28th, 2022.

Should IMF define Pakistan’s economic policies?

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Should IMF define Pakistan’s economic policies?

Ali Salman

Agreement with lender driving country’s economic direction, targeted reforms

The latest IMF Country Report on Pakistan is out, and $1 billion are in.

The report’s language is largely critical and cautionary. Whether one agrees with the IMF programme or not, one thing is clear – Pakistan’s economic direction, policy discussions and targeted reforms are all driven by the agreement with the IMF.

Anyone wishing to understand what our economic managers are deliberating or planning just needs to read the 34 pages of IMF report.

Everything, including taxation policies, housing finance policies, social protection programmes, and development spending has to follow the guidelines as defined in this document. Any policies or allocation not consistent with the IMF guidelines will be reversed.

Consider. There has been a heated media debate on the State Bank autonomy bill, which has already been passed by parliament. IMF’s prescription prevailed.

The government announced a major housing finance programme one year ago with unprecedented allocation of Rs30 billion as subsidy, which now risks reversal or reduction as the IMF staff disagrees with it.

To improve fiscal space, the country needed to surpass tax collection targets. A mini-budget was passed and the FBR is likely to exceed its collection target now.

By setting policy targets, the IMF has defined policy debate also – or at least the debate that the government will be keen to listen.

There are five dimensions. In IMF’s own words, these are (i) reinforcing fiscal discipline by mobilising revenues and controlling current spending (ii) ensuring disinflation through a tighter monetary policy stance; (iii) maintaining market-determined exchange rate and building external buffers; (iv) restoring financial viability of energy sector; and (v) advancing structural reforms, including by addressing deficiencies in AML/CFT regime, SOE governance, and business climate, as well as stepping up to the challenges posed by climate change.

Let me simplify. To remain in the IMF programme, the government must increase tax rates and cut state spending, increase interest rate further, keep exchange rate free floated, increase energy tariffs, and close down state-run companies.

All of these measures will result in fast deterioration of political capital and increase in public dissonance that the government is visibly experiencing.

Hypothetically speaking, one can get out of this “bondage”, by not agreeing to accept $6 billion in the first place, from which $3 billion is yet to be received.

With the remittance and export receipts expected to gross over $60 billion this year, and balance of payments cushion available through FDI, Roshan Digital Accounts and bilateral loans from countries like China and Saudi Arabia, Pakistan will not experience any major difficulty if it does not receive $1 billion of the IMF fund in one year.

The problem does not lie in finances. The problem lies in how to understand our economy and a missing credible resolve to put our house in order.

If we cannot understand, for example, what are our housing needs, we remain gullible to a political fiction – called construction of 5 million homes.

This target has no relationship with the demand from an increasingly mobile and dynamic population.

By allocating resources to concessionary financing for real estate, the government has done developers, especially the elite developers, a major favour. Real estate prices have skyrocketed and land has become unaffordable.

Fiscal and monetary measures were grossly misplaced. The IMF staff is right in asking to reduce and reverse this bonanza. It is, at the end of the day, a lender only and not an agency for housing policy.

Take another example. Pakistan needs more fiscal resources and also needs to stop leakage of hundreds of billions of rupees channelled through SOEs.

To close down inefficient state-owned enterprises is hard. To come up with an equitable tax mechanism is harder. The easier option to increase government resources is to increase the tax rates.

All that it takes is changing input figures in an excel sheet in a computer in the Q-block. This is the genesis of the mini-budget.

As a lender, the IMF does not, and should not, care about where the money comes from. It will care about performance criteria and structural benchmarks. Where the actual performance is missing, the commitment to future reforms is good enough reason to qualify for waivers.

Should we blame the IMF? Far from it. If I were Pakistan’s finance minister, I will actually follow the broad IMF guidelines – without asking for its funds and hence will define my own strategy, pace and priorities.

I will bring in a broad-based, low-rate regime instead of just hiking rates. I will figure out how to use the policy to unlock the dead land in cities. I will preserve the SBP policy autonomy and will reduce its operational autonomy.

These reforms need systematic thinking and research, otherwise they will be short-lived and will never get local ownership. While we continue to outsource policy and research to lenders, we will keep passing on the blame to them.

IMF is not right or wrong. It is the government approach to policy which can be right or wrong. It has the agency to design a reform programme which can work for Pakistan. It has stopped exercising this agency.

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

Published in The Express Tribune, February 14th, 2022.

From economic growth to transformation

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From economic growth to transformation

Ali Salman

It calls for grand re-look at allocation of resources including public spending, taxes and tariffs

photo reuters

ISLAMABAD: Economists in Pakistan generally agree that the country has followed a boom-bust cycle of economic growth throughout its history.

While the long-term average growth rate is a respectable 5%, the cyclic nature of this growth, largely propelled by external finances, has always led to macro imbalances. That, in turn, has forced successive governments to seek bailout from the IMF that has always started from stabilisation.

We have run this model for 22 times. If the current trends continue, we will do it again.There is something deeply wrong in our growth model, or indeed in how we understand growth. The underlying driver of growth has never been productivity, which is why it is always short-lived and uneven.

Moreover, its distributional impact on both businesses and poverty remains questionable.

Our productive structure remains ossified, exhibited in a very narrow export basket. Our average income has not increased much and in recent years, we have begun to fall behind regional peers. Lastly, the public finances have remained in shambles, with the increasing portion of tax revenue being allocated to service our debt.

Dr Hafiz Pasha has already predicted that soon 100% of tax revenue may have to be allocated to debt servicing. We both pray it proves to be wrong.

There is no short-term respite from this crisis. In the medium to long term, we must transform our economic model. For that to happen, we need to change our narrative from growth to transformation.

We have seen far too many episodes of borrowed growth, whether it is funded by consumption, investment or debt. Each time, we have successfully managed the cash flow crisis to live to another day. Transformation was never our need. I believe we have reached the brink now.

The recently launched document, “New Vision for Economic Transformation: Rethinking Resource Allocation and Productive Structures” by the Economic Advisory Group, offers a solution. It analyses the factors hindering the efficient allocation of resources, hence contributing to economic slowdown, and presents practical suggestions.

It builds on a number of good studies, which have been done in recent years, and presents a coherent framework for policy debate. The suggestions put forth in the document are organised under four themes: revisiting the pricing regimes that currently govern agriculture and commodities’ sectors; revamping the education system with the aim to introduce and mainstream pathways for vocational training at the level of higher and post-secondary education; reduction in tariff and non-tariff trade restrictions and greater integration with the regional trade blocs; and, finally, rethinking the industrial policy with special emphasis on moving away from picking winners to rewarding innovators, improving land use within cities, and simplification of the tax code.

Examples of success

To naysayers, let me offer two good examples. The liberalisation of our motorbike industry 20 years ago opened up the sector for new investors and manufacturers.

Our annual production went up manifold from around 50,000 in 2000 to above 600,000 in 2008 and crossed 1.3 million in 2020. This phenomenal increase was accompanied by a downward pressure on prices. The motorbike assembled in Pakistan with the leading brand name was sold for Rs70,000 in 1999, which I remember paying as I bought my own two-wheeler after graduation.

The amazing fact is that it was still available at the same price in 2018. In fact, now Pakistani consumers can afford to buy a motorbike at almost half the price of the leading brand.

Another example. In the last three years, Pakistani footwear sector has registered a stunning growth and may reach $1 billion in exports by 2027. One major policy change that enabled this growth was slashing down import duties on industrial raw material in 2018-19. Once the government was convinced of giving up a portion of its customs revenue, it enabled the private sector to grab the opportunity. It already had the necessary manpower and skillset.

In just three years, the production has registered a 50% growth. This can be done in all other sectors.

In both examples, what we witnessed was not just growth but also sectoral and structural transformation. Growth eventually followed, but it is a sustainable growth. Transformation bears fruit for businesses as it helps create opportunities. It leads to more job creation, which helps in social harmony. It facilitates the government in changing its revenue basis – from dependence on indirect taxes to shift to direct taxes, which is more equitable.

While these are great examples of success, our large-scale sectors, particularly in agriculture and industry, have remained in protected walls.

Without altering the productive structure of our economy, and without letting some of them to fail, we cannot hope to improve the livelihood of our masses. The best welfare regime is the creation of productive and well-paying jobs. To change the productive structure, we need to change how we distribute incentives. When we withdrew incentives available to one or two motorbike assemblers, through protected tariffs, we experienced transformation and growth.

When we altered our import substitution to export-led model in the footwear sector, we again saw transformation and growth. Transformation is not just about liberalisation, which is a necessary but insufficient condition. It is about a grand re-look at how we allocate and re-allocate our resources including public spending, taxes, tariffs and regulations. It is not a pipedream. We have already begun doing it.

The writer is the founder of PRIME Institute and a member of the independent Economic Advisory Group

Published in The Express Tribune, December 20th, 2021.