Poorly – negotiated deals cause $18bln in annual trade deficits

KARACHI: Pakistan incurred over $18 billion in annual trade deficits due to poorly-negotiated agreements with different countries, a business policy advocacy group said on Wednesday.

The country’s trade deficit with China sharply rose to $15.32 billion in 2016 from $3.2 billion in 2006 when they signed free trade agreement, Pakistan Business Council’s (PBC) data showed in a report. Trade deficit with Indonesia increased to $1.86 billion since 2013. Trade deficit with Malaysia was, however, down to one billion dollars as compared $1.55 billion in 2008.

“Domestic industry has been undermined in the last decade by a combination of poorly negotiated free trade agreements, liberal import policy, shortage and cost of energy, misuse of the Afghan transit treaty, smuggling, under-invoicing, and tax evasion,” PBC said in a statement. “The net result is that jobs have gone offshore, mainly to China, whilst we focus primarily on export of commodities instead of adding value (and jobs) locally.”

The country cautioned the government against the proposed free trade agreements with Turkey and Thailand.

The council said there is a significant mismatch between Pakistan’s exports capability compared with Turkey and Thailand.

“Pakistan already enjoys relatively low access to both countries. Both countries desire access to Pakistan’s automobile, auto parts, chemicals, plastics and rubber markets, which would undermine existing industry,” it said. “Turkey is one of the highest users of trade defenses, even against its FTA partners.”

The council said Pakistan’s share in world exports fell to 0.13 percent in 2016 from 0.16 percent in 2003, while Bangladesh’s share rose to 0.24 percent from 0.09 percent during the period.

PBC further said Pakistan has been facing recurrent external account crisis for the last couple of years. The country has sought bailout packages from the International Monetary Fund 12 times since 1988, its data showed.

PBC emphasises development of information and communications technology (ICT) sector. “One of the factors inhibiting the growth of ICT is low broadband penetration, a consequence of high taxation of this sector,” it added. “The move to lower the taxes on smart phone instruments and cellular usage, though symbolic, is in the right direction and one which needs to be augmented to close the digital divide.”

The council said a three-year tax holiday for start-ups, will also nurture the emerging ICT sector, which has potential for both jobs and exports.

PBC said the country has the lowest investment to GDP ratio of 15.8 percent as compared to India (31.5pc), Bangladesh (31.3pc), Sri Lanka (32.2pc) and Indonesia (32.8pc).

“An essential element of promoting scale and competiveness is by encouraging capital formation, accumulation and consolidation,” it added. “These have to be supplemented by measures to widen and promote public participation in listed companies.”

The council said super tax, tax on bonus shares and retained reserves act as penalties for success rather than as an encouragement for investment. “Regretfully, super tax now enters its third year, resulting in an aggregate tax rate of 40 percent – twice the average tax rate in Asia,” it added. “Retained reserves will continue to be taxed, albeit on a different basis, impeding capital accumulation and thus investment.”

PBC also recommended the restoration of the Finance Act 2007 regime for taxation of groups, including the withdrawal of cascading taxes on inter-company dividends. “These are essential to promote the emergence of strong Pakistani groups on the global markets,” it said. “Unfortunately, the budget failed to address this.”

Published in The News