It
is the appropriate time to prepare sector specific plans and
integrate them in budget
By
SHABBIR H. KAZMI
Apr 15 - 21, 2002
The preparations for Federal Budget for financial
year 2002-03 are in full swing. It is expected that the budget will be
announced in May. However, there seems to be less enthusiasm among the
business community. Some critics say, "Making any suggestion and
then expecting that the government will incorporate it in the budget
is hoping against the hope." Whereas others believe, "It is
the best time to do loud thinking so that not only realistic targets
are fixed but conducive policies can also be prepared to achieve these
targets."
The argument put forward by the first group is,
"The budget is not being prepared now. It was prepared way back
when Pakistan was negotiating the Poverty Reduction and Growth
Facility (PRGF) with International Monetary Fund (IMF). At the best,
the GoP is busy in fine tuning which became necessary after September
11 incident and subsequent events. While Pakistan has emerged stronger
on the external front, meeting revenue target, achieving the desired
GDP growth rate and avoiding use of grants to meet the shortfall in
revenue are the key concerns."
Reportedly, the IMF has expressed its concerns and
even warn that if the agreed targets are not met, continuity of the
programme will be difficult. Saying this much, the IMF has also
accepted the reasons which did not allow the country to meet some of
the targets. Some analysts say, "Meeting or not meeting the
targets is of no consequence because of the vocal support of some of
the members of the IMF Executive Board." Whereas, the consensus
of economic managers of Pakistan is, "Concerted efforts must be
made to not only meet the targets but to achieve even better
performance. It is 'home grown' agenda and the country must overcome
the problem which have been haunting people for decades. This is the
most appropriate time."
A common belief is that Pakistan expects to get
around US$ 1.3 billion from the IMF over the next three years under
the PRGF, which is too small an amount. It is the successful
completion of Standby Agreement with the IMF which paved the way for
entering into PRGF arrangement. The IMF has also brokered reprofiling
of Pakistan's external debt once the targets were met. Therefore,
meeting the targets will enable Pakistan to negotiate funds in future
on its own terms rather than following the dictate of lenders/donors.
After looking at the policies and efforts of
present economic managers and the PRGF document, it is evident that
the forthcoming budget will envisage measure for: increasing revenue
collection, reducing all types of deficits, broadening education and
health services scope, undertaking mega infrastructure development
projects and continuing restructuring reforms. All these efforts are
aimed at achieving sustainable GDP growth rate which should be double
the population growth rate.
Increasing revenue is a problem which most of the
previous governments have not been able to resolve. The issue has
always persisted and further aggravated due to declining rate of
import tariff. Some analysts say, "In order to obtain funding
from the IMF, the various governments not only kept on fixing higher
targets but never took sufficient measures to come even close to the
target. This include delay in: 1)
implementing GST regime, 2)
introducing tax on income from agriculture and 3)
continuing with area and industry specific exemptions, and even
venturing into schemes like yellow cabs, green tractors and
construction of motorways and convention hall. Most of these projects
were aimed at attaining political mileage. On the one hand revenue was
declining and on the other hand despite spending billion of rupees,
GDP growth rate could not be accelerated."
This is the third budget being presented by present
economic managers. It is on record that despite incursion by the
bureaucracy not only that realistic targets were fixed but efforts
were made to achieve them. These efforts have been applauded even by
the lenders. Have they (economic managers) done any thing which is
extra ordinary? Yes, they have made and implemented some difficult
decisions which other governments were reluctant to take. The other
plus point is that instead of following cosmetic surgery approach they
have opted for those measures which may take slightly longer time to
yield results, but have the capacity to put the economy back on track.
The critics of present regime say, "We do not
accept the bogey of economic revival because its impact has not
trickled down to masses". Whereas others say, "Why don't we
accept first that economic development process was derailed?
Therefore, most of the time was spent and efforts had to be made on
putting the economy back on track. Most of the key issues have been
resolved, particularly the external debt and recovery of
non-performing loans, and the economy is gaining momentum. The success
of the measures introduced is evident from the improved performance of
the economy in July-December 2001 period, despite September 11
incident and subsequent events, as compared to the performance during
the corresponding period of last year."
However, it is important to find reasons for not
meeting some of the targets, particularly revenue collection. The
decline in revenue is attributed mainly to reduction in imports. The
IMF has also accepted this fact. As efforts are being made to follow
market based policies and reduction in import duty on plant and
machinery and raw material, in the absence of alternative measures,
the shortfall was inevitable. The rationale behind reduction in import
duty is that, front loading adds to cost of project, erodes
competitiveness of local industries and forces the government to
follow duty drawback regime. Therefore, Pakistan must follow 'no duty
- no drawback policy to improve competitiveness of local industries.
Such an environment cannot be created without
introducing tax on consumption. The GST offers a solution. However,
the key issue is that efforts are being made to introduce this tax in
a society where culture for paying taxes voluntarily does not exist.
On top of this so far only half-hearted efforts have been made. There
was a need to first establish infrastructure for collection of GST and
also to create awareness about the payment procedure and only then
introduce this tax. The net result is that while collection of custom
duty has gone down, there has been no corresponding increase in GST
collection.
There is pressure on the GoP to gradually withdraw
all types of subsidies being offered at this juncture. It may be true
that subsidies are against the spirit of market based economy, but, is
it not a fact that even the developed countries provide massive
subsidies? Some analysts say, "The objection of lenders is not on
the quantum of subsidies but on the way these are calculated and
distributed. Therefore, there is a need to understand the system being
followed by the developed countries and also to replicate it in
Pakistan.
Saying this much, some analysts raise an important
question, has Pakistan really gained anything from providing
subsidies? The general feeling is that subsidies have proliferated
inefficiency. Textile industry enjoyed the benefit of artificially
kept low price of cotton for a very long time, but never came out of
syndrome of producing coarse counts of yarn. Same is also true about
supply of electricity and gas to domestic consumers at subsidized
rates. The persistent higher electricity tariff for industrial
consumers has led to a situation where bulk of WAPDA and KESC supply
go to domestic consumers. On the one hand this policy has affected
revenue stream of utilities and on the other hand eroded
competitiveness of local industries.
The lenders have also been demanding gradual
withdrawal of area and industry specific exemptions. One has to
examine cost and benefits of such exemptions. Whether or not such
exemptions have helped in industrialization? It is on record that such
exemptions have created uneven playing field, proliferated
inefficiency and wastage. Besides, these incentives were provided for
a limited period to overcome initial teething problems and cannot be
continued for an indefinite period.
A closer look at the performance of various
industrial zones, which were given duty and tax exemption status like
Hub, Nooriabad, Chunian, Hattar and Gadoon Amazai, provide ample
evidence of failure of this policy. The blame for failure also goes to
government, partly, because of inconsistency and sudden change in the
policies.
The 'SRO Culture' has produced and protected 'rent
seekers', only. This was due to allocations of funds by banks and DFIs
for specific areas and industries and lending at discounted interest
rates. The explicit intention behind these incentives was to invite
entrepreneurs to invest in the areas which did not have adequate
infrastructure. However, it appears that the implicit intention was to
oblige the rent seekers. Since the real investors were shy to go to
these areas many economically unviable units were established by
opportunists. Analysts say that those who do not agree with this
expression should look at non-performing loans of NCBs and state-owned
DFIs.
Saying this much, even those who may not doubt the
sincerity of government, believe that these policies were executed in
a very bad manner. Availability of funds at discounted rates and the
various exemptions created uneven playing field for the units located
in tariff areas. Since most of the units were not economically viable
and also sponsored by those who hardly had the experience to manage
industrial units, the result has been disastrous. Neither the
efficient manufacturing could be established nor is there a
probability of reviving these units after the GoP has decided to
follow market based policies.
After getting a fairly good idea about the possible
complexion of forthcoming budget and top priority given to
accelerating GDP growth rate and poverty alleviation, there is a need
to remove all the irritants hampering growth and performance of
industries. As regards infrastructure projects, the driving force
should be self-sustained ability and strict monitoring and evaluation
of these projects at various stages of implementation.
Even more important thing is to improve confidence
level of local investors. Holding investment conferences, by spending
millions of rupee, cannot serve the purpose. If local investors are
shy no foreign investors would be keen in making investment in
Pakistan. Ground realities are not as harsh as perceived and
performance of economy is not as disappointing as portrayed by the
critics. Irritants like high interest rate, law and order situation,
attitude of bureaucracy, growing disparity between rich and poor, poor
getting poorer, inadequate housing and public transport facilities,
inflict cynicism among masses. Therefore, there is a need to resolve
the above stated issues.
One of the reasons for this cynicism is onslaught
of globalization process, subsequent to formation of the World Trade
Organization (WTO). The overall feeling is that under the various
articles of WTO, developed countries in general and large
transnational companies in particular are trying to get control over
markets of developing countries. The perception is not totally false
because the articles of WTO have been drafted by the consultants from
developed countries, with the aim to gain maximum economic power. The
most disappointing fact is that developing countries are hardly posing
any resistance to protect their own interests. It is also true for
Pakistan due to inability of the local bureaucracy to understand these
articles.
Is it not a fact that when the US tried to protect
its steel industry lately, European Union put the highest resistance?
As opposed to this, the efforts made by Pakistan are not only
insufficient but disappointing. Pakistan has signed the highest number
of agreements. Neither the officials nor the industries have been able
to understand the consequences of implementing these agreements
blindly. For example the GoP is following reduction in import tariff
as well as opening up of domestic market without realizing the adverse
consequences. Even the private sector does not understand the
implications or is entirely depending on the government to bail them
out.
It is being said with great pride that the GoP has
reduced custom duties drastically over the years, even at the higher
rate, as desired and agreed at the time of signing of various
agreements after Pakistan became a member of WTO. However, it is also
a fact that the GoP has not followed the cascading approach. The GoP
has not kept reasonable difference between the duty on raw material
and finished goods. In a country where industries have always enjoyed
protection, opening of market alongwith the reduction in duty on
finished products have been too hard a blow for those who have not
learnt to live without the crutches in decades.
To understand the gravity of situation, one must
find out, what is being done to face the challenge of complete phase
out of textile quota regime? The integration of textile trade under
WTO was started as back as in 1995 and the complete phase out is
expected by December 31, 2004. Has Pakistan done enough to meet the
challenge? At the best 'Textile Vision 2005' has been prepared but
neither the policies nor the strategy has been prepared to maintain
Pakistan's share in global textile trade. Pakistan is way behind its
traditional competitors, even the next door neighbour.
While it may be true that collectively textile
industry has not done much to beat the competition, it is also on
record that large textile exporters, with the help of APTMA and
Ministry of Commerce have been resisting imposition of non-tariff
barriers. It is evident from the fight against the US as regards
imposition of anti-dumping duty on combed yarn and anti-dumping duty
on bed linen by the European Union. However, the fact is that the
'war' was fought with the help of foreign attorneys and local
expertise was at the lowest. Textile industry has paid a fabulous cost
as fee to these attorneys.
CONCLUSION
The second tranche under the PRGF has been released
but the IMF has also expressed concern about: 1)
continuous decline in revenue collection, 2)
decline in expenditure on high priority social sector, 3)
continuous operational losses in the public sector entities and 4)
possible use of grants to meet shortfall in revenue. The Fund has also
hinted towards suspension of further disbursement in case Pakistan
does not meet the agreed targets.
As the GoP aims at accelerating GDP growth rate, it
has become imperative that sector specific policies should be prepared
and integrated in the game plan to achieve the targets. Low capacity
utilization, hardly any BMR activity in last five years, delay in
formation of regulatory authorities and slow pace of privatization are
some of the key issues. Though the point do not come under the preview
of finance bill, these must be addressed on top priority. Specific
attention has to be paid to textile industry which is the major
foreign exchange earner for the country.
Structural reforms have to be pursued more
vigorously. In this regard specific attention has to be paid on
capital market reforms. It is no secret that capital market is the
biggest source for mobilization of funds for establishing industrial
units. There is a need to further improve efficiency and transparency
of capital market.
The average lending rates in the country have come
down to some extent. However, due to high intermediation cost
depositors have been the losers. The country needs to improve savings
rate which can not achieved without ensuring the rate of return on
deposit to be a little higher than the rate of inflation in the
country.
It is estimated that non-performing loans are still
a snag. High provisioning against such loans deprive shareholders and
depositors from getting a modest return. Therefore, there is a need to
further accelerate the recovery campaign of the financial
institutions.
The successful privatization of Pak Saudi
Fertilizer and overwhelming response to the subscription of National
Bank shares must give courage to Privatization Commission to undertake
swift and speedy privatization of Pakistan State Oil Company and NIT
and listing of Habib Bank and United Bank on local stock exchanges. At
the same time privatization of Karachi Electric Supply Corporation and
corporatize entities of WAPDA must also be pursued.
The referendum has to be held by the end of April
and then elections for provincial and national assemblies. Though,
these events are not expected to cause any serious interruption in
economic activities in the country, efforts have to be made to avoid
any deterioration in law and order situation.
|
Dr. Arshad Vohra
Chairman, SITE Association
There is no doubt that most of the present
economic policies have been unmitigated disaster. Some of the policies
have been progressive and visionary in a positive sense but then there
is no deep-rooted commitment by the implementing agencies to bring
about immediate benefits of these policies. It has become difficult to
do business when the government never pre-empts a situation but always
waits for the mountain to fall before taking a decision, that too in
most cases is already too late. The lower hierarchy of the government
has made a mockery of the incentives offered to foreign investors.
|
|
