Economic indicators raise hopes despite uncertain
conditions
By AMANULLAH BASHAR
May 14 - 20, 2001
The coming Federal Budget for 2001-2002 to be
announced in June essentially has to be evolved on the basis of the
way the national economy performed during the year.
Moreover the implications of the downward revision
in various economic targets including the exports target from $10
billion to $9.2 billion, GDP growth rate from 4.5 per cent to 3.5 per
cent, drastic cut in agriculture targets due to persistent drought
have also to be reflected in the budgetary measures.
All these indicators portray to give a tough time
to the financial experts to give a consolatory budget to the people
already hit by the inflationary pressures and depressed economic
conditions prevailing in the country.
The Federal Export Board will be meeting sometimes
this week to review the overall export performance during the year.
The board will also take stock of the items, which have registered a
growth in terms of quality but shown a negative trend in terms of
value. Active players in the export sector however were uncertain even
meeting the revised export targets. The export target for the current
fiscal was reduced from $10 billion to $9.2 billion in view of the
sluggish trends in various segments of the economy especially by the
agriculture sector due to drought conditions.
During the year, the rate of inflation both on
Consumer Price Index (CPI) and Sensitive Price Index (SPI) increased
by 4.69 and 5.32 per cent respectively. According to Federal Bureau of
Statistics (FBS), transport and communications increased the most i.e.
10.69 per cent while fuel and energy, which shot up by 10.28 per cent,
followed it. Both these sectors have their own multiplier effects on
the general prices.
The visit of a 5-member IMF review mission at the
time when the federal budget is in the offing is all the more
significant. The revenue collection position was improving and the
downwardly revised target of Rs417 billion is however seems to be
achieved by June this year.
According to informed sources, the IMF members were
of the opinion that Pakistan will have to maintain macroeconomic
discipline and improve the competitiveness of the economy and public
debt dynamics. They are of the view that fiscal consolidation;
especially an improved revenue effort was essential for restoring
macroeconomic stability. Moreover, they stressed that continued
progress with structural reforms would be necessary for attracting
private investment, achieving high growth and alleviating poverty.
The Fund members have identified enhancing
governance, broadening of tax base, strengthening tax administration
and improving the financial position of public enterprises and banks
as particularly important structural reform area. Economic performance
during the first half of 2000-2001 was better than envisaged under the
programme with regard to inflation; overall budget deficit and
external current account position. However economic growth was lower
than projected and revenue performance fell short of the programme
objectives. The Fund officials also maintained that demand for
currency and private credit was much stronger than projected but
monetary targets were met through unorthodox measures at end December
2000 but the implementation of the ambitious programme of structural
reforms was broadly on track.
Though the Finance Minister Shaukat Aziz has
admitted the fact that the pace of investment is not as fast as the
economy needs, yet it has started to flow in. It takes time to change
the thinking of people and that's why we want to build sustainable
reforms then we must invest in capacity building and must train our
people.
In order to streamline the pace of investment,
various measures are in the pipeline, which include appointment of
investment counselors at Pakistan embassies abroad. Successful
Pakistani businessmen residing in foreign countries will be appointed
as honorary investment counselors. Countries like Saudi Arabia, Dubai,
Oman, Malaysia, Indonesia, Korea, South Africa and G-8 countries are
being focused for attracting investment in the sectors of textile, oil
and gas, information technology, agriculture through organized, modern
management and latest technology.
He admitted that the dilemma the economy faces, is
that if we move very fast with implementation of economic reforms it
costs a lot of money and if it is allowed the economy would confront
with fiscal deficit. However there is no constraints as far as the
will of the government is concern, the only constraint is the
financial capacity.
Just announcing the reform agenda is not enough
actually implementation is the key, it requires people, their
training, a system and a procedure.
Finance Minister Shaukat Aziz has made a real
assessment of the state of the economy while he said that just
announcement of the economic reforms is not sufficient; it is the
implementation of the policies, which produces the results. The
economic reforms agenda he claims is entirely home grown and developed
over a period of time in consultation with various stakeholders in
continuing of satisfactory pace. The government is comfortable with
this pace of reforms as we are taking deep structural reforms in many
areas including tax system, agriculture, privatization and governance.
Shaukat Aziz feels that the IMF and ADB are
important stakeholders and are very comfortable with the pace of
reforms. "We are not interested in ad-hoc measures, which will
not be sustainable," he said. This government has gone on
documentation and tax survey across the country and the tax
collections this year are up by 15 per cent over last year, adding, 15
per cent increase in tax collection is the highest Pakistan has ever
had. We are slightly below the target but that is because of drought
and economic activities a bit slow.
APTMA
The All Pakistan Textile Mills Association (APTMA),
which is one of the most important contributors to the growth of the
national economy suggests that the government should ensure that the
local textile industry gets the required raw materials at
internationally competitive prices: to enable this important sector
play the role it deserves.
For the year 2001-2002, the Agricultural Ministry
has slashed cotton production target to 8.6 million bales. While the
local textile industry requires 9.5 million bales for its own
consumption. Hence, cotton will come under tremendous pressure. Spurt
in cotton consumption necessitating a cautious approach towards
exports, as we believe the outcome may be a dampened growth of cotton,
simultaneously affecting the domestic textile industry. However,
before the realization of famine, the ministry had set a target of
10.5 million bales in 2001-2002.
The largest single buyer and user of the cotton
output is the domestic textile sector which during financial year 2000
bought 8.8 million bales or roughly 78 per cent of the year's ex-farm
production.
APTMA feels that Pakistan cannot optimize the
benefit of the silver fibre unless each stakeholder gets its due
share. Hence the cotton policy be formulated to ensure that the local
textile industry gets the required cotton at internationally
competitive price.
It is proposed that export of cotton should only be
allowed if there is surplus of cotton after meeting the local textile
industry's cotton requirement. Moreover, in order to practice the
concept of free trade, Trading Corporation of Pakistan (TCP) should
not be directed to intervene to artificially boost the cotton prices
above the international prices.
APTMA appreciates that the Engineering Development
Board (EDB) and CBR for notifying those Ring Spinning Frames are not
manufactured locally, however, CGO dated March 24, 1998 stands
suspended w.e.f. 1st July 2000 and the duty Free Import of this
machine is allowed thereafter. However since it has been acknowledged
time and again that RSFs are neither manufactured presently nor have
been manufactured after 1988, APTMA had requested that RSF imported
after 1988 should also be allowed the benefit of duty free import. It
is proposed that RSFs may be treated a not manufactured locally from
1988 onwards and refund of duty be allowed to all such imports made
during the relevant period.
India
India is producing good quality textile machinery
and spares in technical collaboration with world renowned textile
machinery producers. The price of Indian textile machinery is also
lower than its competitors' prices. Since Pakistan is presently not
producing textile machinery it will save considerable foreign exchange
if import of textile machinery and spares are allowed from India,
APTMA recommended. It is proposed that duty free import of textile
machinery including testing equipment and spares from India be
allowed.
Project financing/ BMR
Inspite of directives of the finance minister and
governor SBP to allow BMR and new project financing to the textile
industry at reasonable rates of mark-up, banks are reluctant to extend
the financing required by the textile industry except to textile
companies groups, which are financially very healthy. The textile
industry is serious and keen to rapidly upgrade and increase its
production facilities in line with the strategic long term textile
plan of the government but it not being supported by availability of
the required bank financing at reasonable rates of mark-up.
It is proposed that SBP should ensure that adequate
and timely financing for genuine BMR and new projects requirements of
the textile industry is made easily available at a reasonable cost
through the banks.
Export refinance
The SBP on July 19, 1999 extended export refinance
facility for export of cotton yarn below 30 counts for upto 31st
December 1999. Subsequently cotton yarn and grey cotton cloth were
brought in purview of commodities eligible for export finance w.e.f
June 30, 2000.
On August 19, 2000, the SBP withdrew export
financing of all types of yarn and provided financing to bleached and
unbleached at 10 per cent mark up instead of earlier 8 per cent. All
other categories of cloth/fabrics are allowed export finances at 8 per
cent and this facility is available till June 30, 2001. The SBP now
has increased the rate under EFS by 1.5 per cent. This decision of SBP
has come at a time when exports are falling far behind the target and
the foreign exchange earning position of the country is not too
encouraging. There can hardly be any dispute with the principle of
subsidy elimination, but in case of textile exports, especially yarn,
the timing for a start towards elimination of subsidy is not opportune
in the current situation.
APTMA recommends that export refinance facility be
restored on yarn and if its not possible at least the facility be
allowed on value added yarn of the following type.
I Yarn Count 30 and above
II Combed yarn
III Blended yarn
IV Dyed yarn
V Melange Yarn
VI Elastane yarn including Lycra yarn.
Gas Connection for Self Power Generation
In the textile industry, electricity comprises 27
per cent of its operating cost. Electricity supply by WAPDA and KESC
is not only expensive but its supply is uncertain and unreliable. To
ensure regular and uninterrupted power supply and reduce operating
cost, many APTMA members have imported gas power generators. However,
inspite of persistently pursuing ministry of petroleum and natural
resources for the last several years, permission for gas connections
to operate power generators has not been allowed todate, APTMA
expressed concern.
Meetings have also been held with minister for
petroleum and natural resources and minister for commerce on the
subject. In that meeting APTMA was assured that since textile
production units are export oriented, gas sanctions for generators
will be given top priority soon as details of the applications and gas
requirements are provided by APTMA. The required information was
provided to the Ministry. Nevertheless, inspite of persistent and
continuous follow up, todate, the permission has not been granted.
Ministry of Petroleum and Natural Resources has written to the
minister for commerce soliciting his recommendations for issuance of
gas connections for generators on the basis that these are required
for promoting exports. APTMA has proposed that gas connections for
generators be allowed to export oriented textile units throughout the
country without further delay.
Qaiser Ahmed Shaikh
Former President of Karachi Chamber of Commerce and
Industry (KCCI), a leading exporter turned politician Qaiser Shaikh
was an elect member of the suspended National Assembly, has strongly
recommended to assign a greater role to the private sector if we
desire to reactivate business activities in Pakistan.
The blood sucking performance of the huge public
sector entities like PIA, Railway, Banks etc, which are surviving at
the cost of the poor. They are living on borrowing, he said. They suck
huge funds from the financial sector every year on one pretext or the
other. Instead of throwing precious public funds into these bottomless
pits, the state of the economy demands that each penny should be used
productively, which the public sector is unable to perform. He said
that immediate steps are needed to get rid of the white elephants
being pampered at the cost of poor of this country. Because the
sufferer of the bad economic conditions are the poor alone. Trust the
private sector for manning the public sector entities running in
losses, already proved many stories of success, the private sector has
the capacity to turn these organizations into a profit making
organizations, he expressed the hope.
Giving an overview of the economy, he said that
against the target of 4.5 per cent for GDP growth rate set for the
current year it is somewhere 3.5 per cent. Similarly, the export
target, which was set at $10 billion, is again reduced to near about
$9 billion; these are the clear indications of the slowdown of the
economy.
Accelerated efforts for collection of more revenues
have shown some increased figures as compared to the collection of the
last year, yet as a result of this unorthodox collection of revenue;
the economy plunged into deep recession. Efforts to collect more
revenues from the existing taxpayers will not lead to growth of
business. Instead of squeezing the business for more revenue; steps
are needed to enable to pay more revenue by providing more business
opportunities. Steps to collect revenues just to please the IMF to get
more loans may shake the base of business in Pakistan, Qaiser
observed.
He said that export-led growth is the central part
of the economic agenda for the present government, however the people
responsible for implementation of the reforms especially in the export
sector are not behaving in conformity of the policy. For example, he
said that exporters are running from pillar to post for getting
refunds. In most of the cases the refunds of duty draw back have not
been paid for the last two years. These held up refunds have created
cash-flow problems for the exporters. Obviously, the people
responsible to disburse refund creating problems by delaying the
disbursement of the refunds for their personal gains. There is the
need for such a mechanism, which can single out the person or persons
responsible for holding up the disbursement of the rightful refunds.
Criterion for check and balance is the most significant element for
the economic reforms a success. Even the best decisions and policies
would not yield any tangible results if the corrupt are allowed to
make distortions in the implementation of the policies, he said.
Qaiser said that policy of power devolution given
by the present government is likely to redress the problems faced by
the people at the grass root level. However, it has hurt a strong
quarter of the vested interests in this country. In order to disturb
implementation of power devolution they are coming out on false
pretext to create problems by unleashing parochial feelings among
smaller and bigger provinces.
Qaiser said that it is in the interest of Punjab if
more provinces are created for administrative point of view. This
would ease the situation on various mounting problems and pressures
faced by the huge population i.e. 60 per cent of the total population
of the country. Take the example of neighbouring Afghanistan having 22
provinces, Similarly India has already opted for this policy in the
larger political, social, and economic interest of the people.
Creation of more provinces within the federation has no harm except to
the elements of vested interest, he observed. This would also mitigate
the complex of the smaller provinces that Punjab is grabbing the
lion's share out of the divisible pool of the national resources.
FPCCI
Federation of Pakistan Chambers of Commerce and
Industry (FPCCI) appreciates the appointment of federal tax ombudsman
and demands for the strengthening of the institution of tax ombudsman
by extending its scope to down the line and making it financially
independent. Previously it also recommended to constitute settlement
commission and also nominated its representatives on the commission
was approved. Later, the government shelved the scheme. FPCCI one
again demands for the revival of the settlement commission including
the representatives of the private sector nominated by FPCCI.
It has been observed that the government is making
assessment of the textile mills of Punjab and NWFP at Lahore, which is
creating problems and inconvenience, to the assessee. The assessment
of these industrial units should be done in the cities where their
head offices are located.
One of the most important problems being faced by
the businessmen is the refund of their claims from the income tax
department. The officials of income tax department delay the refund of
claims, as they have to show these amounts for meeting their targets
for a particular time period. FPCCI recommends that the refund section
of income tax department should be separated from the collection
department.
FPCCI suggests that government should impose tax on
every expenditure e.g. usage of mobile phones, automobiles, foreign
travel, hotelling etc. this will not only increase the tax revenues
but will also help in documentation of these individuals who are
presently not in the tax net. This will widen the tax base and will
help in reduction of the tax slab. It has been observed that in NWFP
province where about 90 per cent of trade is in the hands of Afghan
refugees who are not paying any taxes, the consumption/expenditure tax
will bring them under the tax net which will increase the government
revenues. Income tax on car dealers and commission agents is reduced
from 10 per cent to 5 per cent. The government should not ask about
the source of investment for new industry. This will encourage the
industrialization process in the country. The advance tax rate, which
is presently 6 per cent, should be brought to pre-budget year
2000-2001 i.e. 2 per cent for industrial importers and 5 per cent for
the commercial importers. The income tax return form should be
simplified for the convenience of the taxpayers. Withholding tax
should be reduced from 10 per cent to 6 per cent for travel agents.
The income tax authorities should issue exemption certificate to
travel agents on submission of requests along with the certificate
from airlines for payment of withholding tax.
Presumptive tax of 10 per cent be reduced to a
reasonable level and the dealers should not be required to file income
tax returns separately as 99 per cent of the business of a petrol pump
comes under it.
Presently there is statutory requirement for all
listed companies to distribute minimum 40 per cent as cash dividend
out of the net earning for the year if their reserves are more than 50
per cent of their paid up capital. This is causing lot of hardships to
the companies who have comparatively smaller paid up capital and their
equity base comprises mainly of retained earnings in the form of
reserves. If 40 per cent cash dividend is not given, 10 per cent tax
is imposed on reserves over 5 per cent of paid up capital. Due to this
restriction companies with small paid up capital are facing adverse
current ratio problems due to high pay out of cash dividend. It is
suggested that the requirement of 40 per cent dividend should also
include bonus shares and the upper limit for cash dividend pay out be
fixed at 50 per cent of paid up capital of the company to avoid 10 per
cent tax on their reserves over 50 per cent of company's paid up
capital.
FPCCI recommends that the government should plead
the case with IMF for providing relaxation in the maximum proposed
rate of tariff, as Pakistan is signatory of WTO and IMF. World Bank
and WTO have joint responsibility to help developing countries to
enhance the capacity of industry. Besides Pakistan has product and
tariff bound commitments with WTO, which should also find
consideration by IMF. Pakistan has notified product and duty bound
rate position to WTO in 1995 and government of Pakistan may plead the
case with IMF for deleting condition of tariff down sizing or tariff
reforms in budget 2001-2002 by putting proper arguments that IMF,
World Bank and WTO have joint responsibility that any imbalance which
will narrow down the difference between cost of domestic products
competing imports shall add to the sick list of industries which may
not be the desire of IMF and World bank as they like to increase the
capacity utilization and not otherwise. Besides, tariff protections
are compensatory for the difference in level playing fields and
absence of comparable infrastructures and are also accountable to
inconsistent policies.
Senator Bilour
Ilays Ahmed Bilour, former president, Federation of
Pakistan Chambers of Commerce and Industry (FPCCI) while talking to PAGE
said, 'Pakistan swamped by debts, needs a moratorium at least for 10
years to get a breathing space for recovery of its financial health'.
Bilour said that the Chief Executive has taken some
good economic decisions, since they are not implemented in letter and
spirit by the people responsible for enforcement of the government
decisions, they are not producing the desired results. He said that
due to uncertain conditions the buyers are reluctant coming to
Pakistan for business deals. There is a general trend that the buyers
prefer to station at Dubai or other places and call businessmen from
Pakistan for business negotiations. Why this trend is in vogue needs
to be looked into, he said.
Regarding export performance, Bilour said that the
government had to revise the export targets due to stagnant economic
conditions. Situation demands that besides broadening of the export
base, Pakistan should also use its political means abroad to enhance
exports. SROs, which are hampering exports, also needed to be removed.
He said that held up Refunds for more than two years causing serious
cash flow problems for the export. On one hand the governments talks
about export targets while on the other no body bothers about the
declared facilities are properly available to the export sector or
not, Bilour said. The duty of the government functionaries is supposed
to be the facilitators to the private sector but unfortunately it is
otherwise in Pakistan, as government functionaries are known for
creating troubles, what a funny situation?
Outlook
Dr. Muhammad Umar Chapra, Advisor to Islamic
Development Bank, Jeddah has rightly pointed out that various
governments in Pakistan found it easy to live lavishly on the borrowed
money. The governments never made serious efforts to live within
means.
The culture to live on borrowed money never enabled
the economy to develop its own resources for generating revenues
within the country. Another reason for the absence of tax culture in
Pakistan is the unjust system of tax collection. People in general are
willing to pay the taxes provided the tax regime is fair and
progressive, ruled by good governance. Otherwise the practice of tax
evasion will continue to grow like the cases of power theft from WAPDA
and KESC because their tariffs are also unjust and not realistic. A
just system is the key for success irrespective of the area of
operation or application.
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