PBC for urgent stimulus to deal with coronavirus challenge

The Pakistan Business Council (PBC) on Monday called for a 200 basis points (bps) cut in the policy rate and renegotiate the tax targets with the International Monetary Fund (IMF) to make them commensurate with the Federal Board of Revenue’s (FBR) capability to grow the tax base.

It also demanded for releasing the remaining tax refunds and export rebates to provide immediate liquidity to exporters.

The other demands include abolishing LC Margin on Industrial Inputs, authorise banks to credit rebates upon realisation of export proceeds, review the Export Finance Scheme, offer tax credits for sustaining employment levels and launch an emergency fund to bailout borrowers with a good track record.

As leading economies in the world launch aggressive stimuli to mitigate the economic impact of the coronavirus crises, the PBC urges the government and the State Bank of Pakistan (SBP) to act swiftly and meaningfully to protect the already ailing Pakistan economy.

“The US Fed rate is now down to virtually zero, a $1.5 Trillion is to be injected to provide liquidity to the banking system and the US Congress has passed a bipartisan package to help businesses with payroll and other tax credits,” stated Ehsan Malik, CEO of the PBC.

He added, “The central banks of UK, the EU, Australia and New Zealand and their governments have taken similar action to provide liquidity, bring down the cost of borrowing and provide incentives to maintain employment. Promoting employment is the most sustainable way to create societal sustenance, especially in these challenging times.”

A Policy Rate of 13.25 percent for a non-demand-pull inflation of 5.5 percent is not justifiable. To make a meaningful impact on business cost, a 200-basis point immediate reduction is necessary. It should then be followed by further reductions. The State Bank, like the US Fed, should consider more frequent meetings of the Monetary Policy Committee than once in two months. In rapidly changing times, response times are critical.

The front-loaded tax targets without improving the FBR’s capability to broaden the tax base is like putting the cart before the horse. With its current capability, the FBR is forced to pursue more tax from those already paying a disproportionate amount. The government should immediately commence talks with the IMF to arrive at realistic targets and seek time and resources for institutional reforms of the FBR.

A 100 percent LC margin was imposed to stem imports. There is now an urgent need to revive production. It is not appropriate to continue with LC margin on industrial inputs.

The government has made a good start to release tax refunds and rebates but there is still a backlog. This is money that belongs to business and should speedily be returned to it to help sustain employment and exports. Equally import is the need to re-engineer processes to avoid their build up in the future. The much-promised automation of sales tax refunds to exporters subjected to sales tax in July has failed and it is time the government reviews and reverts back to zero-rating of the export sectors. Secondly, there is no plausible reason for exporters being required to file claims for rebates when banks can credit their accounts with the appropriate percentage upon realisation of export proceeds. These are simple steps but need an empowering, rather than a controlling and bureaucratic mind-set.

The Prime Minister must lead a deregulation drive. It’s an ill wind that blows no one any good. The coronavirus crisis is no exception. The Pakistan textile sector was inundated with orders diverted from other countries, but now faces requests for delayed shipments due to closures in the West. The Export Finance Scheme will need to be reviewed to cover this.

Another godsend, unrelated to coronavirus, is the decline in oil prices. This will reduce the burden on Pakistan’s current account and offer the government an opportunity of bridging its fiscal deficit by retaining some of the benefit of falling costs.

Lay-offs and reduced work weeks are inevitable due to coronavirus and had already set in sectors like the auto industry. The government’s ability to provide incentives to business to maintain levels of employment and wages is severely limited due to the IMF Programme. In a renegotiated programme, tax credits for those businesses sustaining their employment levels should be considered.

A large percentage of businesses hurt by the coronavirus related closures (marriage halls etc.) are in semi-informal sector with low level of recorded employment and so will not benefit from these tax credits. This would be an additional impetus to formalise.

Inevitable also is the impact on the cash flow of heavily borrowed sectors of the economy and their ability to repay loans on time. Banks were selectively cooperating to manage exposures, yet allowing extra time to borrowers to repay.

The State Bank should consider formalising an emergency fund to bailout borrowers with an otherwise good record of performance.

These are unusual times and they call for unusual measures. Whilst social distancing is wise to protect from coronavirus, economic distancing will only accelerate the deindustrialisation of the country leading to unemployment, destroy the export capability and result ultimately in greater reliance on import-based consumption. Everything we wanted to address through a “Make-in-Pakistan” thrust.

Published in Business Recorder