Ehsan Malik, CEO, Pakistan Business Council’s Speech at the Pakistan Business and Economic Summit, Karachi 22nd October 2016
October 24, 2016
October 24, 2016
Honorable Minister, distinguished leaders of business and co-stakeholders in “Opportunity Pakistan, Assalam Alaikum and Good Morning.
Pakistan Business Council is Pakistan’s pre-eminent think tank and business advocacy body composed of businesses that have a substantial investment and long term commitment to growth. Its members represent 10% of GDP and nearly every 5th Rupee of tax revenue and annual exports. Together the members directly employ 300,000 with millions more in the extended value chain. We work closely with relevant government ministries, regulators and others through evidence based representations with the objective of strategic, medium to long term transformation of the business environment. The key rationale of PBC’s foundation in 2005 was to move beyond the narrow single-industry focus of trade bodies and often short term, tactical and issue based orientation of the chambers. In the next stage of its evolution, PBC will leverage the strength of its members to reach out to and help develop capacity and capability of medium-sized businesses to world class. In the process we will promote “Pakistan Incorporated”. The first such initiative is the Centre of Excellence in Responsible Business which will focus on inclusive & sustainable development by generating livelihoods, promoting women’s empowerment and decoupling growth from impact on the environment. It will also focus on ethics, values & governance standards to strengthen the formal sector in pursuit of sustainable value creation. We are working on a second centre of excellence on competitiveness to focus on quality, productivity and innovation, again primarily in the SME sector.
In PBC’s focus on improving capability and capacity of business in Pakistan, we are fortunate to have 22 MNCs from 12 countries amongst our members. These MNCs like their Pakistani co-members recognize that what is good for Pakistan is also good for them and that the larger the formal sector becomes, the easier it is for them to operate within that eco-system in a responsible manner.
Moving on to the economy:
In fiscal 2015/16, Pakistan recorded the highest GDP growth in eight years, lowest inflation in ten, lowest borrowing cost in forty and the highest forex reserves in recent times. So please join me in applauding the government for this achievement…….
The government has also moved in the right direction by differentiating between filers and non-filers of tax returns, in trying to bring real estate into the formal sector and for penalizing benami transactions. But now that we have some space, we must not miss this opportunity to take hard calls. There are ominous clouds on the horizon. The trade gap grows despite low oil cost, exports represent less than 50% of imports, remittances are vulnerable and external borrowing has mushroomed. The government must resist populist moves as general elections approach. This is the time to build a national consensus on economic policies so that all political parties and other stakeholders come on the same side to help Pakistan grow. In an otherwise unpredictable business environment, the least a government can do is to offer consistent Policy framework which can be implemented irrespective of who is in power. PBC has through its National Economic Agenda a basis to build this consensus and we will be engaging with political parties and others to develop a common ground to take it forward.
Here are some factors that need to be addressed by the consensus:
Ladies and Gentlemen, a country of 200 million population cannot have a vibrant economy without a strong domestic industry, one in which large, medium and small business all play a role in generating exports and employment. Domestic industry in Pakistan has over many years been undermined by poorly negotiated free trade agreements, yet the Ministry of Commerce pursues more, as if to assemble trophies for the mantelpiece! Smuggling, incentivized by high tariffs and facilitated by porous borders and the Afghan Transit Treaty have further eroded its competitiveness.
You can’t achieve competiveness in exports if domestic industry, potentially able to address 200 Mn people cannot build scale. Exports are suffering not just because of global recession. Our energy costs are about twice those of Bangladesh. So is labor cost and we operate largely in the low value-added segment in which such costs represent a high percentage. The exchange rate tool has been deployed more effectively by China, India and Vietnam. But more than all these factors, we lack a trade vision and strategy that all stakeholders buy into and which is overseen by the PM. We have fragmentation in government.
FDI is important but how do we hope to convince foreigners to invest in the country if we don’t even monitor, report or talk of our own domestic investment. When do you last recall seeing statistics on domestic investments reported in the business press – we read about FDI all the time? The Board of Investment focuses on FDI. Who focuses on domestic investment? It is easier to get an appointment with the FM and the PM for visiting CEOs of foreign companies than it is for most local business leaders. I would go further to say that Pakistani business leaders are treated with suspicion whilst the red carpet is rolled out for FDI!
Taxing the already taxed is a very shortsighted policy to meet deficits. Levying WHT on non-filers should not become, as it has, a revenue raising exercise; it should amount to a penalty for not filing returns. Incidentally the Rs. 21 Bn collected from the 0.4% WHT on banking transactions of non-filers, palls against the Rs. 5 Trillion of such transactions on which it is levied! But having said that, the key reason why these non-filers do not enter the tax base, or tax “net” as they would term it, is for fear of harassment. They see those in the formal sector, particularly large tax payers subjected to multiple audits by the FBR. For the sake of fair-play why not entrust audits, if justified, to independent firms? FBR’s discretionary power needs to be reviewed and its KPI’s must move from total taxes collected to tax received from new filers, existing filers etc.
There is an unfortunate and growing notion that profit is bad and so it is justified to take a larger portion of it in one or another form of tax or levy. It is thus deemed Ok to tax larger profits through Super Tax. There is also a belief that capital accumulation and consolidation to build scale and efficiency need not be encouraged, indeed should be penalized and discouraged. Thus some very progressive recommendations of a PBC-inspired government task force on group taxation which were implemented in 2007 have in the most recent budget been modified in a retrogressive manner. Cascading taxes on inter-corporate dividends have been imposed and group relief for losses has been restricted. Incidentally without the earlier set of rules which had placed Pakistan amongst leaders in the emerging market, you wouldn’t have Engro, Pakistan’s pre-eminent group, in its current state and structure. Left as is, there won’t be a justification for pure holding companies going forward. We will not see Pakistani groups emerge in the international arena, like Tatas in our neighbor in the east.
At $50 Bn, there is no doubt that CPEC brings the largest investment since the British invested in the canal system of Punjab over a 100 years ago. Implemented properly, CPEC would be a game changer. But there are watch outs. The gift horse we are reluctant to see in the mouth must not turn out to be a Trojan horse. We need greater transparency. What would be the extent of Pakistan private sector involvement, if any, in building the infrastructure of power plants and road network? How would current centres of industrial concentration, particularly in and around Karachi, which is not on the main route of CPEC, fare against the free zones being created elsewhere, especially in Gawadar? We can’t afford another Gadoon saga. Will the latter add incremental jobs and exports or undermine existing investment? Will Pakistan generate incremental foreign exchange to service CPEC related debt and equity investment? Do we know what such remittances amount to each year for the next 15-20 years? Would we be able to attract a million of the eight million jobs likely to exit China as its labour cost becomes prohibitive? India, Bangladesh, Cambodia and Vietnam are already beneficiaries of this job displacement, even without CPEC equivalents.
Having said all this, there is hardly a foreign investor in Pakistan that has over a period of time grown or earned less than their investment elsewhere. Unilever Pakistan which I had the privilege to lead grew four-folds in nine years surpassing its global growth by a multiple of five. Most foreign investors have from a first mover advantage reaped the demographic dividend of a large aspiring middle class in Pakistan. The fact that whole sectors like Telecoms lack a local player cannot entirely be blamed on the government. Pakistani businesses too need to take risks and invest in such sectors. We have good examples of this from across the border.
PBC believes that if fundamental reforms are implemented consistently, Pakistan’s economy can grow at 7%-8% pa i.e. in the same growth league as China and India. Making that happen is an equal responsibility of business and the government. The onus is on business leaders like us to lead this change. I want to thank Nutshell for this opportunity to share our views.
Thank you. Pakistan Zindabad.