Stimulus needed to overcome virus effects

KARACHI: Pakistan Business Council (PBC) on Monday called for an urgent economic stimulus to bolster the industrial sector to fight off ill-effects of coronavirus.

PBC, representing local and foreign investors, sought a straight reduction of 200 basis points in the incoming monetary policy announcement, citing aggressive stimuli introduced by the leading economies to mitigate the impact of the coronavirus crises.

“A policy rate of 13.25 percent for a non-demand-pull inflation of 5.5 percent is not justifiable,” the business advocacy body said in a report. “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 council advised the government to deliberate upon a rationalised tax target with the International Monetary Fund and renegotiate tax credits for businesses sustaining their employment levels.

“The front-loaded tax targets without improving the FBR’s (Federal Board of Revenue) capability to broaden the tax base are like putting the cart before the horse,” it said.

“With its current capability, the FBR is forced to pursue more tax from those already paying a disproportionate amount.”

PBC further urged the government to eliminate restrictions on imports, vital to keep industrial production. The government was advised to dissolve 100 percent letter of credit (known as LC) margin on industrial inputs. “Import is the need to re-engineer processes to avoid their build up in the future,” it said.

The council said the government has made a good start to release tax refunds and rebates “but there is still a backlog”.

“The much-promised automation of sales tax refunds to exporters subjected to sales tax in July has failed and it is time for the government to review and revert back to zero-rating of the export sectors,” it added. “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.”

PBC is looking forward to a review of export finance scheme with exports shipments on halt after tight unloading of cargoes at the western ports.

“It’s an ill wind that blows no one any good. The coronavirus crisis is no exception,” it said. “The textile sector was inundated with orders diverted from other countries, but now faces requests for delayed shipments due to closures in the west.”

The council termed oil fall as a godsend that would “reduce the burden on current account and offer the government an opportunity to bridge fiscal deficit by retaining some of the benefit of falling costs”.

“The government’s ability to provide incentives to business to maintain levels of employment and wages is severely limited due to the IMF program,” it said.

PBC warned of layoffs and reduced work weeks. They are inevitable due to coronavirus and have already set in auto and other sectors.

“Inevitable also is the impact on the cash flow of heavily borrowed sectors of the economy and their ability to repay loans on time,” it said. “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 bail out borrowers with an otherwise good record of performance.”

The council said the time is unusual and call for unusual measures. “Whilst social distancing is wise to protect from coronavirus, economic distancing will only accelerate the deindustrialisation of the country, lead to unemployment, destroy the export capability and result ultimately in greater reliance on import-based consumption.”

Published in The News International