PML-N Economic Agenda Tracking Report (July – December 2014)

31/08/2022by PRIME Institute PRIME Institute No Comments

Introduction

PML-N Economic Agenda: Tracking Report reviews Pakistan’s economic performance by tracking the progress made on the implementation of economic manifesto announced by the party in power in Islamabad, Pakistan Muslim League-Nawaz (PML-N). The purpose is to initiate and inform policy dialogue and public debate on the progress made on the economic agenda of PML-N. This tracking directly serves the basic principle of a functioning democracy: accountability. Current report covers progress made during July-December 2014.

Read or Download the full report here: PML-N Economic Agenda Tracking Report (July – December 2014)

PML-N Economic Agenda Tracking Report (April – June 2014)

31/08/2022by PRIME Institute PRIME Institute No Comments

Introduction

To read the full report online or download, click ahead: PML-N Economic Agenda Tracking Report (April – June 2014)

PML-N Economic Agenda Tracking Report (January – March 2014)

31/08/2022by PRIME Institute PRIME Institute No Comments

Structure
The report picks three distinct sections of the PML-N manifesto: Economic Revival, Energy Security and Social Protection, which it terms as “economic agenda”. These three “Areas” are then divided into “Components” and “Sub-components”. In most cases, these are based on a simple reproduction of text of the manifesto, and in some cases, some editing has been carried out for the purpose of clarification and structure, but without altering the meaning of the authors of the manifesto. Under the area of Economic Revival, 10 components and 55 sub-components have been identified. Under the area of Energy Security, 15 components and 21 sub-components have been identified whereas under the area of Social Protection,
three components have been identified.

To read the full report, click ahead: PML-N Economic Agenda Tracking Report (January – March 2014)

PML-N Economic Agenda Tracking Report (June-December 2013)

31/08/2022by PRIME Institute PRIME Institute No Comments

Introduction

This report reviews the first six months of the federal government’s economic performance spanning over June-December 2013 in the light of PML-N economic agenda, now the ruling party. Developed on the pattern of a scorecard, the report allocates scores on 26 goals identified by PML-N manifesto based on its performance in three areas: Economic Revival, Energy Security and Social Protection.

The score is assigned on an objective and quantifiable criteria and is not based on perceptions of any individuals. To ensure reliability, the score has been assigned on three distinct parameters: policy and legislative developments, institutional reforms, and implementation. The report and scorecard has been compiled by a team comprising political scientists and economists. It has been shared with a select audience from the business community, politicians and economists for the purpose of feedback and has undergone several revisions….

To access the full report, click ahead: PML-N Economic Agenda Tracking Report (June-December 2013)

Esther Perez Ruiz Remarks on Trade Connectivity Book Launch

13/07/2022by PRIME Institute PRIME Institute No Comments

Perspectives on the Trade’s Impact on Economic Transformation and People’s Wellbeing

IMF Resident Representative to Pakistan, Esther Pérez Ruiz

Good morning everyone. Thank you very much to the Economic Advisory Group, PRIME, and the
Friedrich Naumann Foundation, for the opportunity to be part of today’s launch of the report on
Trade and Connectivity. I am very honored to participate in this panel with the Honorable
Minister for Commerce, your Excellency the Ambassador of the Republic of Indonesia,
Chairperson Economic Advisory Group, and Dr. Aadil Nakhoda from IBA Karachi.

Today’s theme greatly appeals to me as I have seen, in my life experience and as a professional,
how trade can really make a difference for people’s wellbeing.

Let me start with some family memories around trade that go back to my great-grandfather,
who at the turn of 20th century, lost in a wolf attack his most valuable asset, a horse carriage he
used to provide essential goods to isolated villages scattered around a remote valley in Spain.
Deprived of his livelihood, he migrated to Bilbao, which was at the time one the most the
prosperous and export-oriented cities in Spain. So, after many years of hard work, he managed
to set up a company to export tiles, on a small scale, to the rest of Spain, Portugal and France…

Click below to read full report:

Remarks by Ms. Esther Perez Ruiz on Trade Connectivity Event

For inquiries, please contact info@primeinstitute.org or call at 03330588885.

Trade connectivity highlighted as engine of sustainable growth

07/07/2022by PRIME Institute PRIME Institute No Comments

July 6th, 2022

PRESS RELEASE

Trade connectivity highlighted as engine of sustainable growth

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

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

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

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

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

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

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

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

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

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

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

Pakistan and the European Union under GSP+

30/06/2022by PRIME Institute PRIME Institute No Comments

Pakistan and the European Union under GSP+

Pakistan was awarded the GSP+ status on 1^st of January 2014 that aimed at promoting economic stability and good governance in the country. The status, which expires in December 2023, provides full removal of duties on most of the European Union’s tariff lines and is subject to compliance with 27 International Conventions. Although Pakistan’s exports to the EU since 2013 have increased by almost 46.6% (FY 13’ to FY 22’) which stand at USD 7.6 billion (10 months) in 2022 and are projected to increase to USD 8.3 billion by the end of FY 22’ (excluding the UK), the country’s compliance with and performance of the 27 mandatory conventions remain inconsistent.

The analysis in this report disaggregates Pakistan’s bilateral trade with the EU in two periods– 2007-2013 and 2014-2022. The findings indicate that Pakistan’s exports to the EU have increased from an aggregate USD 37 billion (2007-13) to an aggregate USD 66 billion (2014-2022); compared to its exports to the world i.e. from an aggregate USD 150 billion to USD 217 billion in the same period.

Although cumulative exports to EU between these two periods have increased by almost 78.4% (as compared to growth in exports to the world in same period i.e. by almost 44.7%), Pakistan’s exports to the EU since FY13’ (before the start of GSP+) have risen at a relatively slow pace i.e. by approximately 46.6% (FY22’).

The proportion of Pakistan’s exports to the EU in total exports has also increased from 24.6% (2007-13’) to 30.1% (2014-22’) as compared to other major export destinations including China (6.4% to 8.6%) and USA (17.8% to 17.9%) in same eras.

Moreover, Pakistan faces immense competition from its regional competitors like Bangladesh, which enjoyed a 25% share in EU’s imports among GSP beneficiaries in 2018 followed by India (24%), Vietnam (14%), and Indonesia (10%). Although Pakistan had a 9% share in EU’s imports among GSP beneficiaries in the same year, Bangladesh has a higher Revealed Comparative Advantage in textiles – a major sector under GSP₊ status.

This report provides an overview of Pakistan’s trade performance under the GSP+ status and implementation of International Conventions. Pakistan’s GSP+ utilization rate has been high i.e. 96.5%. With that, proportion of EU’s total trade with Pakistan among other GSP+ beneficiaries is comparatively better i.e. 0.3%. However, the GSP+ utilization rate could be further increased through exhausting tariff lines that constitute a higher proportion of EU’s imports including Chapters 42, 61, 62 and 63.

In the absence of this preferential status, Pakistan would have to bear an MFN tariff of 12% under most traded chapters (42 and 61 to 63). For Pakistan to remain in the scheme for 10 more years, it must ratify and implement 5 new conventions in addition to the previous 27. Additionally, for a better approach, it should start negotiating with the EU on tariff lines not falling under the GSP+ preferential status for the next GSP+ agreement.

Click below to read full report:

Pakistan and the European Union under GSP+

For inquiries, please contact info@primeinstitute.org or call at 03330588885.

An economy losing steam

16/06/2022by PRIME Institute PRIME Institute No Comments

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 13^th, 2022.

Post Budget Roundtable cautions on Budget credibility

14/06/2022by PRIME Institute PRIME Institute No Comments

Post Budget Roundtable cautions on Budget credibility

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

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

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

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

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

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

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

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

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

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

Prime Note: Federal Budget 2022-23

14/06/2022by PRIME Institute PRIME Institute No Comments

Prime Note: Federal Budget 2022-23

By Tuaha Adil

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

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

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

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

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

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

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

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

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

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

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

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

Prime Comment on Economic Crisis in Sri Lanka

17/05/2022by PRIME Institute PRIME Institute No Comments

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.

Click below to read full comment:

Prime Comment on economic crisis in Sri Lanka Download

Roundtable for tax cuts on telecom

26/04/2022by PRIME Institute PRIME Institute No Comments

PRESS RELEASE

ROUNDTABLE PROPOSES TAX CUTS ON TELECOM FOR THE BUDGET 2022-23

(Islamabad, April 25, 2022) Policy Research Institute of Market Economy (PRIME) has organized a roundtable session on the Telecom Sector of Pakistan with an objective to enable discussion on major tax issues in the sector and gather further recommendations for the upcoming Budget 2023. The meeting incorporated stakeholders including Cellular Mobile Operators (CMOs), fixed broadband operators, telecom equipment vendors, mobile phone manufacturers, telecom industry specialists and the Ministry of IT and Telecom.

During the meeting, following recommendations were made for the upcoming Budget 2022-23:

Reduce withhold tax on Internet use to 8% – ideally abolish it
Harmonize Sales Tax rate on Telecom Services, across all jurisdictions (provinces) to facilitate ease of doing business.
Abolish Advance Tax on spectrum auction to reduce the extra burden on Cellular Mobile Operators’ (CMO)
Bulk Electricity billing for Mobile Base Stations, in order to remove complexities of Withholding Tax claims by CMOs
Reduction in Customs Duty on telecom equipment and optic fibre cables from 20% to 5%, and on batteries necessary for the telecom service providers. Also abolish Additional Custom Duty (2% and 6%) and Regulatory Duty (5%) on these items.
Abolish Withholding Tax on import of all types of telecom equipment

Telcos representatives believe that withholding tax on usage is a stumbling block in the growth of the telecom sector, which, through the Finance Act 2021 was reduced from 12.5% to 10%, and 8% was promised for future years. However, through the Finance (Supplementary) Act, 2021 the rate of withholding tax was increased from 10% to 15%. As per one of the officials from the industry, Rs.40 billion tax collection by the FBR every year remains unclaimed, which is extracted from the poor users who do not fall under the income tax category.

During the meeting, stakeholders also proposed a uniform Sales Tax rate for telecom services across all the provinces, that should be in line with other services, in order to promote ease of doing business.

In addition to that, they believe that spectrum is not a property therefore, Advance Tax on spectrum auction should be completely abolished.

Similarly, in case of Withholding Tax on electricity bills of thousands of mobile base stations, the roundtable demanded bulk billing for the CMOs in a move to reduce complexities involved due to the very large number of claims on advance tax. Same is already done in case of bank branches.

Moreover, it was proposed that the Custom Duties on batteries used by the telecom sector (8507.6000 & 8507.2000) should be reduced from 11% and 20% to 5% whereas, Regulatory Duties and Additional Custom Duties should be completely abolished.

Representatives from the Industry added that only 10% of the towers in Pakistan are connected with optical fibers. However, according to research done by the Huawei Company, countries entering the 5G regime have 40% to 50% of towers connected with optical fibers. Neighbouring countries in the region also average between 27% to 30%. On this account, representatives informed that the industry is currently paying 68% in form of duties on imports of optical fiber cables. It was agreed that these levies must be brought down in order to progress towards 5G.

Due to excessive taxes on telecom, the telecom operators claimed that their rate of return on investment is now below the weighted average cost and that they are unable to service their debts.

The discussion concluded with remarks from the Additional Secretary Ministry of IT & Telecom, Aisha Humera, who was of the view that striking the right balance between revenue and growth is a challenge for the government. On a positive note, the Ministry agrees on taking the draft proposal forward to the concerned authorities including the Finance Ministry and FBR. Additional Secretary expressed the hope that while the government will consider these tax cuts, the industry should also commit increasing their investment.

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