This crisis is a moment: Part - I

Survival is increasingly challenging, and an overhaul is possible with a credible roadmap undertaken. It necessitates reengineering, as Pakistan needs deep, extensive restructuring and a deregulated competitive environment to deliver services at a reasonable cost for achieving a sustained 7-9 per cent GDP growth over the next two decades.

Our decades-old approach of not challenging the status quo is no longer sustainable, and structure needs to be in place for elite bargain amongst those with power to change state of patronage to deliver growth and gambling on development to tilt in favour of the people. Stefan Dercon of the University of Oxford articulates that experience teaches that ‘crisis’ can be a moment as it was for India in the 1990s, Indonesia in the 1970s and China in 1979.

Thus, Pakistan’s stakeholders need to coordinate and move beyond point-scoring, not be economical with the truth, communicate the way forward while implementing solutions to our next decade challenges where the norm has to be Pakistan First.

Undoubtedly, the next decade requires tough choices, disruptive inspiration and no business as usual. This necessitates a credible structural reform package and a conducive investment environment that fully encourages regional trade – for starters, in energy.

Importantly boards of directors, individuals, professionals and businesses have to be safeguarded as they undertake their responsibilities diligently while tackling scenarios that evolve during reformation. The protection threshold for them has to be high for execution of the ambitious vision and concerted efforts of the SIFC. The COAS rightly has taken note recently and promised protection to decision-makers.

The post-September 2023 order of the SC, after 53 hearings, requires rebuilding the confidence of decision-makers for 7.0 per cent GDP growth to take place. The next priority requires increased focus on reducing the fertility rate and increasing the standard of living with universal/minimum pay at Rs75000 per month, revised by inflation percentage every July.

Due to increase in tax collection of Rs64 billion against the quarterly target, there needs to be further focus but administrative measures to end speculation in the foreign exchange, 5.0 per cent higher remittance of $2.206 billion in September vs August 2023 with PSX 100 index crossing the psychological barrier of 48,772 points (highest level after six years), higher cash crop produce have all raised expectations that the economic revival plan with its prudent actions will now provide 2.4 per cent growth in FY2024. The role of exchange companies should be limited to tourists only, with banks dealing with the rest. The Exchange Companies Association of Pakistan confirms $800-900 million deposited in September since the administrative measures combined with the following.

A long-awaited crackdown on illegal immigrants is planned to start in November and we need to close the chapter on 1.2 million refugees. The alternate approaches of an ‘iqama’ or citizenship process need evaluation.

It is hoped that this assists in improving the investment climate. The $49.2 million repatriation of profit in July-Aug this year vs the $28.2 million last year during the same period is positive but $1-2 billion still is pending per Bloomberg and needs a nudge to restore confidence.

The PM has said that the smuggling of goods and foreign currency posed an “existential threat to Pakistan”. A 2018 study by the customs department showed that revenue loss of $3.5 billion in terms of duties and taxes was due to only 11 commodities whereas smuggling of POL products from Iran was estimated at $2 billion per annum in 2020. Per the PM, this was at a cost of Rs125-150,000 per vehicle paid by about 27,000 vehicles entering Pakistan daily.

Action against solar equipment importers for Rs 38 billion over-invoicing necessitates action against flying invoice handlers. A further bigger measure is to focus on under-invoicing detected due to the disparity in 2022 alone of $7.5 billion in export value reported by China, Singapore, Germany and UK and the import value as reported by Pakistan Customs to the International Trade Centre.

The scale of crackdown seems larger and deeper, given the steps taken to ban 212 luxury goods, with imposition of 10 per cent processing fee on transit trade and bank guarantee to plug leakage.

The suggestions of the PBC in 2020 on placing qualitative and quantitative limits on Afghan Trade (which has increased to $6.71 billion from $2.5 billion in one year) require diligent evaluation by the government for long-term sustainability.

Implementation of known solutions to our problems means achieving the 25th IMF programme by undertaking measures to document 60 per cent of the economy (Rs8.3 trillion) outside of the tax net, achieving a tax-to-GDP ratio of 15 per cent and 17.5 per cent in the short and medium term, respectively as the present expenditure of 19 per cent of GDP is not sustainable given the ominous end-August central debt.

Transparency of data provided by the secretary of power and access to such data (for a fee) needs to be encouraged and effort confirms that reliance on data analytics is essential to provide focus in achieving results. In this case, that is the Rs150 billion (vs Rs20.277 billion on October 10) power division’s recovery target in the next five months although additional focus on government entities that have defaulted will bring immediate positive results.

“Over the last five years, approximately Rs15 trillion of new money was created. Of this, roughly 80 per cent of the money created is attributable to the government of Pakistan’s needs and around Rs4 trillion out of the Rs12 trillion is attributable to interest”. Government borrowing (additional money creation) has ended up being 25 per cent higher owing to the interest paid. This has added further to inflationary pressures in parallel to exchange rate speculation.

It is critical to tax all businesses and citizens across the board based on the total remuneration received including exempted benefits. There also needs to be severe penalty of denial of services to a non-filer, along with doubling DC value with registration fee at 15 per cent, introduction of wealth tax with targeted subsidies to individual or industry under a performance criteria such as upgrading of skills, reemployment within six months, increase in exports or taxes quantum, and employment generation.

Going forward, it is essential to limit medical facilities to family only – spouse and children – and implement a contributory pension scheme (eg KP, PSO, Engro) to reduce the burden of pension which is to be limited to one scheme: provident fund or gratuity. The last Pay and Pension Commission report should provide further guidance for overhauling the system.

Thus there is talk again of a National Action Plan (devised by political parties jointly) to fetch $50-75 billion per annum, undertaking resolution of structural shortcomings such as retailers, agri, real-estate and wealth tax, capital gains tax, export vs import substitution, abandoning of the old model of export refinance, increasing the tax-to-GDP ratio to Rs13 trillion by 2025, implementing tough IMF conditions by reducing compliance gap. Rs3 trillion in GST, Rs1.8 trillion in income tax and Rs0.8 trillion in customs duty and FED are necessary to avoid the boom and bust cycles experienced in the past due to which the growth trajectory has remained volatile irrespective of the political divide.

To be continued

The writer is an experienced professional who has served as managing director of Pakistan State Oil (PSO) and chairman of the Petroleum Institute of Pakistan and OCAC. He can be reached at: ihaque58@gmail.com