$120bn needed in external financing over five years: think tank

ISLAMABAD: Pakistan’s external financing requirements stand at $120 billion for the next five-year period which exceeds the gross reserves. The country is nearing a default-like crisis with this status-quo approach.

It was the crux of the presentation spelled out by the Pakistan Institute of Development Economics (PIDE) in its ambitious reform strategy “ISLAAH: Immediate Reform Agenda - IMF and Beyond,” to propel Pakistan towards economic stability and growth amid its looming financial crises.

This initiative, embodying the ideals of rethink, reform and revive, responds to Pakistan’s urgent need for external financing exceeding $120 billion over the next five years, as highlighted by the recent International Monetary Fund (IMF) report. PIDE’s strategy called for a systemic overhaul to ensure economic progress and prosperity, moving beyond the narrow interests that often dominate the discourse on reform in Pakistan.

In the presentation, it was revealed that Pakistan’s external financing requirements were estimated at $22.8 billion in FY23, $24.9 billion in FY24, $22.2 billion in FY25, $24.6 billion in FY26 and $24.9 billion in FY27.

On other hand, there are “unfavorable circumstances” under which the gross external financing stood at far ahead than the gross foreign exchange reserves as it was hovering around 506.7 percent in FY23, 273.6 percent in FY24, 170.8 percent in FY25, 145.6 percent in FY26 and 126.4 percent in FY27. The current crisis demonstrates that the growth is sporadic as it is showing boom and bust cycles and deficit are unmanageable. The foreign exchange reserves are insufficient and inflation will pose more challenges. The investment in terms of GDP ratio remained low, so all these circumstances pose serious challenges.

Former deputy chairman of the Planning Commission and PIDE Vice Chancellor Dr Nadeemul Haque emphasised the need for a comprehensive approach to address Pakistan’s economic challenges, outlining an agenda aimed at tackling key areas such as regulatory modernisation, tax reform, market liberalisation, energy sector efficiency and improvements in agriculture and banking.

A central component of this strategy is the implementation of a ‘Regulatory Guillotine’ to eliminate burdensome regulations hindering business growth and innovation.

Addressing the event, PIDE senior research economists Dr Ahmad Waqar Qasim, Dr Afia Malik and Dr Mahmood Khalid stated that PIDE’s economic reform initiative aims to streamline governance by addressing the burden of 122 regulatory bodies operating directly under the federal government, which currently account for over 50 percent of the GDP, as revealed by PIDE’s sludge audits. “In our pursuit of economic efficiency, it’s imperative to shift from a system of permissions to clear rules, as permissions not only consume valuable time and resources but also incur significant documentation costs, both directly and in terms of missed opportunities. To achieve this, we must prioritise clear rules, digitisation and market liberalisation, putting an end to the bureaucratic penchant for permissions and paperwork, thereby overcoming the ‘Permissionistan’ syndrome. Drawing inspiration from India’s successful reforms in 1991, it’s evident that piecemeal approaches won’t suffice. Instead, we advocate for the implementation of a regulatory guillotine, a proven strategy adopted by countries like Hungary, Mexico, South Korea and the UAE among others.

“The adverse effects of tax uncertainty and instability, as highlighted by the PIDE State of Commerce report, cannot be overstated, as they have driven investments underground, hindered firm growth and impeded corporatisation and listing. In addressing the income tax regime, we advocate for a uniform tax rate across all sources of income, with provisions for agriculture income losses carry-forward and adjustment, along with the elimination of the presumptive tax regime and taxes on turnover.

“Furthermore, we call for uniformity in taxation for AOPs, sole proprietors and corporations, alongside reforms in inter-corporate dividend income and asset sales taxation. Transitioning from withholding taxes to Advance Income Tax mechanisms is also essential. Harmonising the sales tax system across goods and services, expediting the implementation of POS through outsourcing within six months, and transitioning to a VAT mode with consistent rates are imperative steps forward. Additionally, excise duties should be increased on products detrimental to health and the environment, such as tobacco and beverages, to promote public well-being and sustainability.

“In the realm of tax exemptions and administrative reforms, it’s imperative to halt all forms of concessionary financing and discriminatory fiscal incentives among businesses. Streamlining tax administration through automation to minimise human interaction is essential, coupled with the abolition of the arbitrary ‘filer’ and ‘non-filer’ distinction, as well as the elimination of ‘FBR Rates’ for property valuations. Tax administration must evolve towards automation, with a focus on accountability and responsibility within a technologically adept framework. An independent and tech-savvy entity should spearhead revenue collection, leveraging modern auditing techniques. “In fostering economic growth, it’s imperative to embrace openness by revitalising our import-export dynamics. Currently, import substitution strategies have rendered all KSE-100 firms inward-looking, a trend that urgently requires reversal. Making exports a national priority demands a shift towards a pro-export trade policy, encouraging all large firms to venture into the global market and aspire to become multi-billion-dollar entities. Facilitating this transition necessitates the promotion of trading houses as intermediaries in trade, potentially offering performance-based incentives such as tax rebates. Streamlining incorporation processes with no fees and facilitating easy listing are vital steps. Key decisions include the removal of additional customs and regulatory duties, phasing out SRO-based exemptions within three years, and eliminating tariff cascading. Export subsidies should be contingent on performance, while corporate exporters could benefit from tax incentives tied to export values. “Recognising markets as efficient allocators of resources and wealth generators, it’s crucial to address the over-regulation and bureaucratisation stifling Pakistan’s markets, fostering an environment conducive to investment,” they added. Afia Malik said: “The power sector crisis in Pakistan extends beyond mere electricity theft or ‘kunda’ connections; it reflects systemic issues rooted in inadequate management, planning and centralised decision-making.” Chancellor Dr Nadeemul Haque stated that real estate stands as a focal point of discussion, yet its current state reveals a fragmented market marred by insider trading practices like ‘qabza’. Reorganising the market could yield substantial benefits, potentially unlocking a revenue gain of up to Rs300 billion. Artificially administered prices, such as DC rates and FBR valuations, obstruct market development, compounded by the hindrance posed by multiple land rates for taxation. Regulatory incentivisation of information hiding exacerbates transparency issues with real estate agents wielding significant influence.

Regulatory negligence has led to file trading becoming the predominant transaction mode. Moreover, zoning rules contribute to urban sprawl and market segmentation. Key decisions entail the abolition of FBR valuation and DC rates, regulatory oversight of file trading by the SECP to treat files as securities and the separation of regulation from real estate business operations.

Additionally, organising the real estate brokerage sector, revising rental laws and relaxing zoning regulations for vertical and mixed-use development across cities are imperative steps forward. State-captured real estate represents an underutilised but immensely valuable resource, hindering downtown growth and contributing to urban sprawl nationwide. Thousands of government houses occupying vast swathes of prime land in Islamabad alone amounting to a staggering Rs2,278.6 billion in unrealised value. Unlocking this potential through rezoning and market-based high-rise developments could attract over $58.8 billion in investment, create 351,000 job opportunities, add 44.4 million sq ft of commercial space and generate an annual rental income exceeding Rs446.8 billion, the PIDE VC added.