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.
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.