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Re-structuring the economy

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Gen Pervez Musharraf's government faces big challenge while putting economy on right track

Special Correspondent, Islamabad
Nov 08 - 14, 1999

The Chief Executive has taken a tough decision. He has prioritized improvement of economy to the highest level. All governments in the past pledged to improve Pakistan's dilapidated economy to a somewhat acceptable slot but ultimately failed to achieve the goal. There were, at times, political decisions to be made but the politics of the country did not allow them achieve their objective. Even Nawaz Sharif who enjoyed the biggest mandate in 1997 general elections, failed to elevate the falling economy. The question is that, "Can the Chief Executive, Gen Pervez Musharraf do so? PAGE takes initiative by starting a debate on how to improve Pakistan's economy. PAGE's story is based on a set of interviews of different government officials.

It is pointed out at the outset that 70-72 per cent of the tax is initially collected by the withholding tax agents i.e. banks, corporate bodies and companies, on behalf of the Central Board of Revenue. This portion of tax collection is passed on to the CBR without any discernible large-scale misappropriation. Maximum corruption, however, occurred in the remaining 28-30 per cent tax collection that is collected by CBR itself. About 10 per cent of the latter is ultimately refunded as rebate that again is a source of corruption because of contact of tax payer with the collector. If the role of the CBR is eliminated, it would likely lead to better results. There is a need to build a two-way confidence. The government machinery should trust the taxpayer and vice versa.

The turnover tax system should be adopted in which companies should be allowed to declare their gross income without mentioning the source. Random check should be made for a few companies by independent auditors to find out whether the returns had been filed by them correctly. The other view is that the provision for random check again would result in contact of taxpayer with the collector and hence lead to corruption. The tax collection business should be given on contract to the private sector. This would ensure a guaranteed amount of revenues to the government that would increase further in the coming years. An intelligence section should be established in the taxation department having full authority and powers to investigate and unearth tax evading individuals or firms. A target of revenue collection should be fixed for each sector/area/district and it should be made mandatory for the officer concerned to achieve that target.

The Afghan Transit Trade is adversely affecting the local economy since such imports that are exempted from all duties and taxes are actually smuggled back into Pakistan. It is proposed that the same rates of duty/taxes should be levied on these imports as are applicable for imports into Pakistan. The collection thus made, could even be passed on to the Afghan Government after deduction of 4-5 per cent as handling charges. Since this option is not acceptable to the Afghans, the other alternative is to guard the borders very strictly so that the chances of smuggling are effectively minimized. Smuggled goods should be removed from retail shops spread throughout the country, by giving them a proper notice and warning by launching a campaign through press and electronic media.

The Pharmaceutical industry should be asked to manufacture their raw materials locally. For this purpose, a time frame should be fixed for each industry, that should be strictly observed. Ship breaking industry provided a big source of employment to the people. This industry should be provided with proper help and incentives by introducing laws similar to those in Oman, Bangladesh and India.

The National Savings Certificates and Defence Savings Certificates have recently been subjected to 2 per cent withholding tax that is not justified as it serves as a disincentive and likely to lower the savings rate even further. The other view is that these certificates, in case of most of investors, where held by institutions, industries or moneyed people who could afford to pay. It is pointed out that Mahana Income Scheme, in which mostly poor people have invested their money are already taxed. Therefore, taxing of the saving certificates is not unjustified. It is also argued that the interest of bank borrowing is closely linked to the Consumer Price Indicator. When the interest rate of 16 per cent was fixed for Defence Saving Certificates, the CPI was 13 per cent. Now when CPI has come down, the rate of return on savings certificates was also required to be brought down.

The economy would not improve unless the national savings rate does not improve. For this purpose the bank interest rate should not be more than 10 per cent in order to ensure development and revival of industrial sector. It is necessary that credit/loan is available to the investors on lower rates. By bringing the rate of return on savings certificates down from 16 per cent to 14 per cent the government would be in a better position to persuade banks to bring the lending rate to a lower level.

The most important problem that requires proper attention is unemployment. It cannot be solved unless the economy is improved as a whole. Areas/sectors are required to be identified where investment would give quick returns in Development of Agriculture sector and revival of sick industrial units in particular. In the agriculture sector the concept of flat rates for tube wells should be reintroduced. Moreover, drastic reduction in the current price of raw cotton is hitting the farmers adversely. This required immediate steps to safeguard the interest of farmers as well as ginners who are ultimately being fleeced by the Textile Industry. The other view is that the previous government had already taken cognizance of the situation and 15 per cent excise duty had been imposed on the imported cotton that would stabilize the price of raw cotton in the country. Moreover, incentives could be provided for encouraging cotton export.

In the present system, credit facilities are available mainly to the richer section of the society. In order to provide access to the poor people, and to promote micro-business, it is necessary that schemes of smaller credits be introduced on the pattern of Garmeen Bank of Bangladesh. At present both producers and consumers are unhappy over the prices of commodities. Only the middleman is benefitting from the system, who must be made to pay as he has the capacity to pay. In order to attract investment, import of machinery by industrialists with their own foreign exchange should be allowed duty free.

In the present scenario, the economies are not operating in isolation but are equally affected by many external factors. For the last few years, the international economy particularly in the Far East and South East Asia is in recession, which also affected Pakistan's economy. As a result, exports have also suffered badly. Still the drop in exports in quantitative terms is only 20 per cent while 80 per cent of the earning loss is due to reduction in unit prices. Exports could be enhanced through diversification.

In order to get rid of the clutches of conditionalities of the international donor agencies, it is essential to adopt the policy of self-reliance. For this purpose, the basic aim should be to discharge all debt servicing liabilities as soon as possible. For this purpose, additional resources would have to be created by speeding up the privatization process for state owned corporations/assets. In order to attract remittances through banking channels, the system needed to be improved by giving some incentives. The State Bank of Pakistan could introduce a cash bonus scheme or some other facility such as allowing duty free import of vehicles or other items on bringing in a certain minimum amount of foreign exchange through banking channels. Another way of attracting savings of overseas Pakistanis could be for the banks' introducing a pension scheme for the overseas Pakistanis. The details could be worked out jointly by the Ministry of Labour, Manpower and Overseas Pakistanis and the Board of Investment.