Salvaging the ravaged economy – now or never!

Pakistan’s economy has been facing an array of challenges in recent years ranging from low growth and high inflation to large fiscal and current account deficits as well as declining foreign exchange reserves.

In the last five years, Pakistan received $32 billion loans from various sources, including World Bank and in contrast, the country earned $140 billion from exports. With that, the rumors of Pakistan being at the brink of default and collapse are spreading like bushfire.

However, the question arises if the situation is as alarming as social media and some of the political players from the anti-state group are propagating to tarnish the reputation of Pakistan. Ironically, social media is playing a big part in it because we as a nation collectively love to mock ourselves globally. Some of the politicians are sharing all sorts of apprehensions and spreading negativity on social media.

Our tax to GDP ratio is woefully low. At less than 10 percent, it is insufficient to cater to development needs, let alone defense and social security nets. The ratio is awfully flawed and encourages the formation of a parallel economy under the garb of protecting the vested interests of connected ones. Hence, the reliance on indirect taxes is on the rise. Largescale landowners are enjoying sky rocketing profitability and paying less tax by taking shield behind small farmers. How can someone with 10 acres of land pay the same tax as someone with 500 acres of land? Similarly, ultra-rich have bought property, and are paying only a fraction of taxes while keeping their money in the form of dollar and gold. Propping of land prices should be discouraged, starting with the owners of thousands of housing societies developed on agricultural land.

On the other hand, not only our government but also we as a nation need to change our behaviors and thought processes if we aim to survive. Our inclination to imported items should be replaced with the use and promotion of local products. Not, only this will create a positive impact on our economy but will also help local businesses to flourish. Economic growth is the result of increase in the capacity of an economy to produce goods and services. No country can achieve improved economic productivity without adequate policies. When the alarm bell blares, the government wakes up in a haphazard situation, bans all imports all at once causing severe damages to business, exports and even lives of people as anything to everything from lifesaving drugs to important raw materials required in business to complete export orders are banned. Consequently, our repute in the international market in irreparably damaged as exporters fail to deliver timely. Bangladesh and India have already taken advantage of this dire situation.

The government needs to formulate a sustainable model to regulate ban on imports and instead of banning all items, only luxury items such as cellphones and imported fancy food should be banned. In addition to 50 percent additional duty on cigarettes, 100 percent additional import duty on betel leave (paan), and 25 percent additional tax on beverages can be imposed. 10 percent surcharge on airline tickets can also be imposed, whereas import of vehicles should be strictly banned for one year and all other luxury items discussed earlier should be banned for two years.

All real estate transactions should be at actual value; otherwise, government can purchase these properties at 90 percent of actual market value. Simultaneously, all builders must hand over apartments and shops to buyers by the prescribed timeline, otherwise daily penalty of Rs1,000 should be credited in the account of the buyer. Automakers should be banned from delivering any unregistered car. It must be registered first and then must be delivered within the prescribed timeline, otherwise Rs1,000 per day penalty should be credited in the account of the buyer.

The proportion of Pakistan’s informal sector has remained consistently above 70 percent of total employment for over a decade. This undocumented sector of any economy is generally associated with lost tax revenues, unfair competition, low productivity, labor rights abuses and environmental degradation. According to the data available at worldeconomics.com, the size of Pakistan’s informal economy is estimated to be 35.6 percent, which represents approximately $457 billion at GDP PPP levels. Every citizen should realize his foremost patriotic and ethical duty to become a tax filer. We have legalized the term ‘non-filer’ and ‘unregistered tax payer’. People who regularly file income tax returns have to pay only 1 percent on property transfer tax against 2 percent tax paid by property owners who are non-filers. Whether it is the auctioning by the government or any other private entity, tax filers pay only 10 percent tax against 15 percent tax paid by non-filers in Pakistan.

The difference here between a filer and a non-filer is so little that in general people do not opt or wish to become a filer. The government can play a significant role in this regard. Instead of increasing taxes on a filer, it would be better to enroll and encourage a common man to become a tax filer in order to achieve the tax collection target.

Citizens who fall in the tax brackets and yet do not file tax should be completely prohibited from buying any movable or immovable assets. Their passports should be confiscated and their foreign travel should be completely banned. Such strict measures will allow masses to turn into taxpayers.

Currently, according to the latest Active Taxpayers List (ATL), the total number of taxpayers is only 3.59 million. Every shop in markets should be tax filers. In case, any shop is found to be a non-filer, the president and secretary general of the market association should be fined Rs10, 000 each in addition to one week in jail for each non-filer.

On the other hand, ensuring the availability of transparent POS (POINT OF SALES) system is a must at every retailer point no matter how big or how small of a retailing point it is. In case of its absence, retailers should be fined heavily. With these little steps, we can achieve betterment.

If the government starts to live within its means by enforcing strict fiscal discipline, focusing primarily on widening its tax base, grow revenues much higher than inflation, documenting the economy and using the primary surplus to repay debts, our fiscal vulnerability would decrease significantly. In a nearly 30 percent inflationary scenario, the debatable textbook monetary policy demands interest rate hikes to combat depreciation and discourage government borrowing. Had only our rupee been stabilised with export and remittances inflows, the cost pushed inflation would have been lower. At this point, Pakistan is operating a near current account surplus and tightening wouldn’t help. Nevertheless, temporary tightening might be necessary for a few quarters until the foreign reserves prop up.

Ending untargeted subsidies, mainly energy sector subsidy, was another major dent to the economic balance sheet. Radical full cost recovery and private sector model-esque reforms are necessary to stop the bleeding. The masses are already paying Liquified Petroleum Gas rates for gas consumption. If we had more Liquified Natural Gas in the system, our economic growth would have been higher. With the commencement of cheaper nuclear and Thar power plants and additional hydel flows in the medium-term, our energy mix would get better. Though, tax credits are correct tools to nudge the economic direction, subsidies for the rich should be put to an end. Start with taxing the rich and curtailing their perks. Moreover, it is pertinent that there should be a WACOG system for gas/RLNG too like that available in electricity.

We not only need to make these changes in order to avert such circumstances for the future but also need to boost our economy by increasing our foreign reserves. Exports are the best possible way to boost economy of any country. The government is lauded for their efforts for exporters during these tough times such as ensuring the provision of gas and electricity during these winters and removing the artificial dollar cap. However, a lot more is left to be done in terms of creating ease in doing business, exempting exporters from PESSI and EOBI contributions, provision of market competitive energy tariffs etc. We need to look at our competitors Bangladesh, Vietnam and India. The economies of these countries are still flourishing in spite of global recession. Their exports are showing continuous upward trends. We need to learn from their business policies and look into our loopholes to counter the international market competition. We need to learn from these markets. Pakistan also needs to diversify and upgrade its product offerings. However, the most important lesson that we can learn from Bangladesh is to learn from experiences and mistakes and make policies and mitigating strategies to overcome the challenges and flaws of the system. For instance, Bangladesh’s largest challenges were disasters, deaths, and safety issues in the textile industry. Some of these tragedies have received worldwide coverage, the Dhaka fire and collapse of Rana Plaza (2013) being the most notable. Bangladesh learned from its mistakes and started taking responsibility for its workers and the reforms, which were once promised came into actual practice.

We need to develop an action plan not only to solve our immediate problems but also to ensure long-term solutions to such problems. Policies such as a “24-hour helpline” for manufacturers, who are importers and require immediate assistance in case of any supply chain disruption, should be in place. Towards this end, the government should set up a national commission center, which will work in a dedicated manner to address sustainability and compliance issues. We need solutions but not just the temporary ones, we need solutions that are sustainable and beneficial for us in the long run. By increasing our exports and facilitating five export oriented sectors, we can definitely put our economy back on track.

In addition, other measures should be taken that include refunding all demurrage and detention charges incurred by EOU sector to maintain competitive costs of exports, maintaining a 24-hour help desk to monitor and resolve exporters issues, restoring SRO 1125, zero rating for the textile value chain while collecting sales tax on domestic sales at point of sale. Immediate refund of all deferred sales tax, tuff and other dues and extension in submission date of duty drawback claims for FY21 are all steps in the right direction.

A new export sector working capital lending facility may be established catering to EOU sectors at subsidized rates to tide over the current crises and LTFF be provided where L/C’s already opened and loans approved by banks. Being an energy insecure country and keeping up with ever-rising demand, Pakistan’s only solution to energy crisis is efficient allocation of available resources. It is necessary to accord first priority to export industry on Gas/RLNG and electricity supply and allow competitive tariffs to all new projects and expansions as well as industrial estates. A task force with industry representatives may be made with the purpose of improving supply of grid electricity and all discos should schedule maintenance shutdowns after consultation with impacted industry. The government should provide market competitive rates.

Sr # Country Tariff Rate

1 Bangladesh 10 cents

2 Vietnam 6 cents

3 India (Maharashtra) 8 cents (avg)

4 Pakistan (B3 full tariff proposed) 16 cents

With the latest innovations and upgradation in technology, we can excel in the international market. Bangladesh, India and Vietnam have a lot of advantage over us in terms of exports of ready-made articles. We also need to look into our product innovations so we can access the untapped markets. After the recent cotton shortage, we should have developed strategies for importing important raw materials from the closest neighbors, leaving aside our political differences.

Our institutions and law enforcing departments need to immediately respond to this wakeup call and look into every financial leakage and all the possible ways to prevent rupee from nose diving and holding dollars in our current account. Dollar hoardings should be discouraged. In the wake of the recent changes in the geopolitical situation in the region, transfer of huge amounts of money through illegal channels of Hawala/Hundi has registered a sudden rise.

Currency mafias have also resorted to smuggling US dollars out of the country and hoarding the greenback to create an artificial shortage of the currency by spreading rumors of a devaluation of the rupee. These machinations recently contributed to a decline in the value of the rupee in relation to the US currency. The ministry of interior, customs department and the central bank should collaboratively act against those involved in illegal trade of dollars and illegal transfer of money.

The FIA has so far arrested 88 people on a charge of hoarding and smuggling out dollars. Under new SBP regulations, biometric verification is necessary for those purchasing more than 500 dollars. However, the dollar smuggling is still taking place. Rangers, police and FBR officials should regularly raid markets and confiscate smuggled and contraband items. All confiscated items by Customs should be burned instead of being auctioned.

The government in these crucial times realizing the intensity and severity of the problem should let go off or at least minimize the security protocols, the luxuries/incentives provided by the government and most importantly foreign tours and travels. There should be a proper mechanism for the accountability of the government officials and provision of unnecessary incentives even at the assistant or deputy commissioner level should be restricted.

Moreover, chambers should play a pro-active role in eliminating the menace of smuggling, under-invoicing and miss-declaration. Chambers should institute a scholarship fund with prescribed compulsory contribution of Rs5,000 by members during annual renewal of membership.

Pakistan has been one of the fastest nations to emerge out of two big catastrophes, one being Covid-19 and the other being terrorism. We have fought the toughest and the longest battle against terrorism and have been the quickest to bounce back and recover from Covid-19 when the super powers like China and Russia were still struggling to get rid of this natural calamity. The prescription list from the IMF is in our interest.

Our bilateral friendly nations do not want to dole out dollars either – they want us to reform and have their money repaid. China has been spending money through the Belt and Road Initiative in countries with clear signs of progress. China’s CATL (leading tech giant) is investing $7billion in Hungary to develop a battery plant with Mercedes. It should have been us. Our indiscipline has cost us our next leg of growth. If only we were able to grow exports with CPEC investments! What a disappointment for 220 million odd people! Nevertheless, instead of demonising the IMF, let’s rebuild.

If we can manage only three to five years of debt deleveraging and double-digit export growth, we will be back in the game. Bad weathers do shake the nations but it is through their wisdom, diligence and perseverance any nation emerges victorious out of calamities. We, at this time need to stand together as a nation and be hopeful that even this time too shall pass. We will make through it as we have always and remember what our founder said, with great certainty, faith and belief, “There is no power on the Earth that can undo Pakistan!”