Progress Review on 'Make in Pakistan'

The Pakistan Business Council (PBC) has been advocating a “Make-in-Pakistan” thrust to promote employment, value-added exports and import substitution. The aim is to generate jobs by reversing the premature deindustrialization of the country and avoid the recurring external account crises which force repeated IMF and other bailouts. For too long, the country has been resorting to short term, expedient measures that have made it import reliant and consumption driven. PBC has also been highlighting the need to make it easier to do business and to broaden the tax base to enable much needed investment in socio-economic development. This checklist of progress over the last eighteen months in the main factors affecting business, in particular manufacturing, concludes that despite improved understanding and attention by the policy makers, it remains difficult to do business in Pakistan.

On a positive note, it is a case of glass half full rather than half empty. The present government deserves credit for starting a journey of reforms that will take several years to bear fruit. PBC has consistently advocated for the renegotiation of the free trade agreement with China. The Government has now successfully negotiated a more optimal arrangement and is working with other countries along similar lines. The Pakistan Rupee is more competitive. Energy cost for exporters is at par with the region. The government is moving with determination to broaden the tax base. Presumptive taxes are being withdrawn. Steps are in progress to stem under-invoicing. Duty on some raw materials has been reduced to encourage local production. The two major leaks in the economy – transfer of funds abroad and the leakage of money into the undocumented real estate sector are being plugged. Fiscal policy making and tax audits are to be separated from tax collection and FBR is in the process of being overhauled with infusion of talent and technology.

There is however, a need to do more as the checklist shows. The fiscal regime remains complex with 47 different types of taxes and a bureaucracy focused on extracting higher revenue from a narrow base of existing tax payers; tax rates remain higher than the region, especially GST at 17% which in a largely undocumented economy, provides incentive to evade; minimum turnover taxes for low margin sectors as also in the initial years of investment and in otherwise tax exempt projects in Special Economic Zones (SEZs) discourage investment; reduction and subsequent withdrawal of tax credit on balancing, modernization and replacement is also retrogressive for upgradation of industrial output; duty on intermediate items used in local production remain high and will negatively impact import substitution; cost and availability of land and the provision of utilities, even in SEZs, is a major constraint; development finance institutions no longer exist to provide long term credit; and bank lending to SMEs remains abysmally low. SMEs are also not properly integrated into the export value chain in which duty reclaim process is complex. Subsidy for sugarcane creates distortion and dis-incentivizes cultivation of cotton, which is required for value-addition by the textiles industry. It also does not encourage the cultivation of oil-seeds, resulting in high imports of edible oil. Foreign Direct Investment policy needs to be directed to export-led or import substitution industries and those for which local investors lack capital and risk appetite, such as oil and gas exploration.

Most government processes remain complex and paper-based with poor accountability for speed and quality of decision-making. An overstaffed bureaucracy not only slows down the economic activity, it also burdens the nation with higher expenditure. It is a pity that the core competence required to succeed currently in business in Pakistan is the ability to overcome bureaucratic hurdles. At its extreme, the degree of bureaucracy and the knowledge required to of deal with it, becomes an undesirable barrier to the entry of new players. Trade, fiscal and corporate laws should be subjected to regulatory guillotine to eliminate all non-value adding, time and energy sapping requirements that make it difficult and costly to do business.

Encouragingly, a national consensus on the economy, which the PBC has been advocating for some time, is now receiving greater resonance amongst political parties. This should be seized upon to add momentum to change. If politics is an art of the possible, economic sovereignty is a prerequisite for the country’s prosperity, security and global standing.  Regional trade, another requisite for economic growth is stalled for want of favorable relations with our eastern and western neighbours.

Whilst the government undertakes policy reforms, business must do its bit to invest in capacity, capability, productivity and quality to be able to compete globally. Due to capacity constraints, Pakistan has not benefited from the tariff measures taken by the United States (our single largest export destination), against China, India or Turkey. Pakistan’s exports are mainly low value-added, 100% cotton-based goods whilst global demand is shifting to man-made fibres. Reliance on protection must be time based. More businesses must adopt responsible gender and environmental practices that are good for business and good for society and also deliver Pakistan’s commitment to the United Nations Sustainable Development Goals. The responsibility to lead this is greatest on large businesses. Hence Pakistan Business Council’s initiative to establish the Centre of Excellence in Responsible Business (see: https://www.pbc.org.pk/centre-of-excellence-in-responsible-business-cerb/).

Even with progress on the factors highlighted in this report, it is unlikely that the going will get much easier for business in the near future. However, this pain is necessary for sustainable gain. All stakeholders must therefore develop the patience and fortitude to bear it. Short-term expediency must not (again) be allowed to compromise fundamental reforms. Failing this, Pakistan will keep knocking on the IMF’s doors, as it has been doing in the past. Without economic autonomy, the nation will neither enjoy sovereignty, nor command the validity, legitimacy or respect in the comity of nations.

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