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.
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 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.
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.
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.
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?
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.