PBC urges govt to go for structuralized IMF programme

KARACHI: Pakistan Business Council (PBC) has urged the federal government to go for a structuralized International Monetary Fund (IMF) programme to address the fundamental flaws that impact the economy.

The council has recommended the following actions to revive the industry in a Make-in-Pakistan thrust.

1. Alignment of government policies: The ECC should establish a task force, which with the Council of Business Leaders, should identify conflicts in existing government policies which create complexity, raise cost and make doing business difficult. The focus of this exercise should be to promote employment, ideally through value added exports and by encouraging import substitution. It should also identify ways to create a level playing field by broadening the tax base. The Prime Minister must be seen to be leading the thrust to revive industry and exports.

2. Fiscal Policy: Fiscal policy making should be separated from tax collection. Fiscal policy should address the medium to long term objectives of creating and sustaining the scale and competitiveness of industry as well as of country’s tax revenues. Tax collection by the FBR should be made effective by a radical change in leadership, induction of fresh talent and the use of technology, as well as through simplification of returns and the reengineering of processes and targets to reduce the risk of harassing tax payers. The primary KPI should be taxes collected from new tax payers. Cases for audit should be selected on a transparent basis and conducted by experts, independent of the FBR, as should appeals.

Fiscal policy should promote capital formation, accumulation, consolidation and investment.

Formation of groups leads to scale. Group structures should be promoted by restoring the provisions enacted in the Finance Act 2007. Public listing should be incentivised.

All presumptive taxes should be phased out. Taxes collected in advance may be adjusted against assessed profits based on the tax returns filed by everyone engaged in a taxable activity should file.

Tax evasion should be made a criminal offence.

The tariff policy should promote industrial growth and not be used merely as a revenue tool.

Cascading import tariffs should ensure that raw materials and intermediate items, not available in Pakistan, are taxed at a significantly lower rate than finished products to encourage local manufacturing. Anomalies in Regulatory Duties on inputs for the manufacturing industry should be removed promptly. The FTA concessions on finished products, other than machinery not produced locally, should be curtailed.

The Federal Government should engage with the provincial governments to address the growing complexity and conflicts resulting from the devolution of power. The aim should be one National Tax Authority, reducing the number of taxes and simplifying the payment and filing of returns.

The Government should standby the commitment made by its predecessor to bring the corporate tax rate down by 1% each year until it reaches 25 percent. The sales tax rate should be revised downwards.

To discourage tax evasion, the withholding rates for non-filers should be increased to three times the rate applicable to tax filers. The FBR’s primary performance target should henceforth be tax collected from new tax payers. When assessing performance against targets, tax refunds outstanding should be excluded. Tax in advance of due date should not be sought. The effectiveness of tax collectors should be judged by the number of cases won in the courts.

3. Trade Policy: All trade agreements should be renegotiated and future arrangements should ensure the maximization of Pakistan’s value-added exports, promotion of jobs in the country and the optimization of tax revenues. Pakistan must achieve tariff parity with Asean, Australia and New Zealand in the FTA with China. Even Bangladesh enjoys more favorable access than Pakistan.

The coordination between the Ministry of Commerce and Pakistan Customs should be improved to stem the rampant misdeclaration of imports, underinvoicing and smuggling.

The Federal Government should work with Provincial Governments to aggressively deal with the blatant sale of smuggled products. Imported food items should carry Urdu labels and ingredient information.

Pakistan should enter into electronic exchange of trade data with all leading trade partners to stamp out underinvoicing. The National Tariff Commission should be made more responsive to the interest of domestic industry.

4. Exports and Import Substitution: Cost of energy to industry should be brought down to create jobs and be globally competitive. Whilst export industries should be prioritized, those producing import substitutes should not be ignored. From a trade balance perspective, a $ saved in imports is equal to a $ generated from exports. However, the
former contributes more in taxes.

Exports should be zero-rated for all taxes to avoid the need for refunds. Tax refunds outstanding should be settled promptly.

Export rebates should be credited by banks upon the realization of foreign exchange proceeds. Pakistan should continuously maintain a competitive exchange rate.

The government should fast forward schemes to provide pre and post export refinance and export credit guarantees. It is essential for Pakistan to broad base its exports, both in product profile and destination markets. Textiles, which represent 6% of world trade cannot continue to compose 60% of our exports. TDAP should move into a PPP model
and be empowered to help achieve a quantum jump in exports as opposed to simply participating in exhibitions.

Global demand in textiles has shifted from 100% cotton to manmade fibers, whilst Pakistan continues to focus on the former. A comprehensive review of the factors thwarting Pakistan’s adaptation to demand should be undertaken.

There is opportunity for Pakistan to benefit from the tariff surcharge imposed by the US on goods from China. In the immediate time horizon, this would be from utilizing spare capacity and existing capabilities. In the medium term, textile industry in particular should team up with Chinese companies to relocate plants to this country. The Chinese can also help upgrade skills, transform product quality and help Pakistan diversify its market focus.\

Provinces should review the policies that inhibit industry in general and exports in particular. As land in big cities is expensive, vertical factories for apparel and light industry and “plug and play” industrial estates with adequate utilities, infrastructure and transportation facilities should be developed. Cluster focus will additionally bring scale and synergy. Bangladesh and Vietnam have successfully deployed these models.

With rising cost and import of oil and gas, Pakistan needs to redouble effort on exploration, in particular of gas for which the current wellhead prices are far lower than what we pay for imports.

5. FDI: The policy should focus on exports, on technology oriented sectors and on those for which the private sector lacks capital and risk appetite, such as infrastructure and oil and gas exploration. Concessions should be tailored to promote JVs and public listing.

The BOI should develop sector knowledge and sharpen focus on investors (foreign and local) that meet this criterion.
6. Agriculture: The distortion created by incentivizing the growth of sugarcane and wheat, at the expense of cotton (required by the textile industry), and oilseeds (deficiency of which forces imports exceeding US$ 3.5 billion annually) should be reviewed, especially in the context of scarce water resources. An Agri-Emergency should be declared to increase the per acre yield and to promote employment and exports. Likewise, dairy and meat yield and quality need to be improved. China could help grow long-staple cotton in arid conditions, improve yield and variety of rice and address factors in cold chain and logistics that impede horticulture.

7. National Standards: The Governments should ensure a national standard in conformance with global best practice for products, services and the environment.

Provinces should ensure compliance. This will reduce complexity, provide scale and help improve competitiveness.

8. SMEs: SMEs have the highest potential to add jobs. Provision of bank credit through credit guarantee schemes should be facilitated, especially to SMEs in the agri sector and those engaged in exports, whether directly or through larger exporters. Private sector businesses and State Owned Enterprises should be incentivised to incorporate more SMEs into their value chains. Regulatory constraints that limit the growth of private equity should be removed.

9. The ICT Sector: The world is moving to a knowledge economy. This is where Pakistan needs to focus for future jobs and exports. Computer programming should be made part of school curriculum. The federal and provincial tax burden on broadband should be reduced and every nook and corner of the country should be internet enabled.

Software exports, Business Process Outsourcing and Call Centers need to be encouraged through comprehensive alignment of federal and provincial polices.

Pakistan has amongst the highest number of freelance software developers but fragmentation results in sub-optimal earnings and remittances. Obstacles, such as the  absence of a payment platform that thwart Pakistani businesses in eCommerce, especially in exports, should be removed.

10. Skill Development: There is significant room to improve the skill base to enable industry to be globally competitive. The government should encourage public private partnerships and the deployment of WPPF towards upskilling and vocational training. A special focus on promoting women’s employment should include support for daycare centers.

11. CPEC SEZs: To make CPEC truly a game changer, investment in SEZs should be promoted along a “plug and play” model for all, not just the Chinese investors, provided it (i) results in net incremental jobs; (ii) positively impacts the external account and (iii) does not undermine existing industry. Tax holiday is one such concession that needs to be reconsidered. A 50 percent export condition should apply.

12. The Environment: Pakistan is a water-stressed country. It is also vulnerable to the havocs of climate change. In pursuit of its commitment to the United Nations Sustainable Development Goals, the Government should work with the private sector to promote greater responsibility towards the environment. In particular, it should support initiatives for water and energy conservation such as by right pricing this scarce resource and by promoting investment in reduction, recovery and recycling of materials to address garbage and solid waste management.

Published in Business Recorder