These circumstances require a 'Balancing Act' that caters for long and medium term financial requirements of industrial units, especially export-based industries. There is a serious need to change the direction. Banking sector would have to play a vital role for economic development not wholly relying on a risk free return on investment in government securities and rate offered on customer's deposits.
Foreign Exchange In 2018 after a period of over two decades some major amendments were made in Protection of Economic Reforms Act, 1992 (PERA). Resultantly, the unholy vicious circle that had been created by way of the introduction of Protection of Economic Reform Act, 1992 has been dismantled the easy, unreported, totally unregulated transfer of untaxed money outside Pakistan. As per one estimate, approximately USD 6 to 8 billion each year were so transferred from 1992 to 2018. After reaching a 'tipping point' of disaster of economic mismanagement on foreign exchange in 2018, there has been some revelation that PERA and other similar laws, such as, Foreign Currency Accounts (Protection) Ordinance, 2001 that were introduced to 'bring in' foreign exchange to Pakistan were used to 'send out' untaxed foreign exchange from Pakistan. If the matter is examined in depth then it can easily be realized that there is an urgent need to completely revamp the present foreign exchange regime which is a strange amalgam of Foreign Exchange Regulation Act, 1947, Protection of Economic Act, 1992 and Foreign Currency Accounts Protection Ordinance, 2001. There are many avenues and matters where corrections, amendments and clarifications are required in addition to change in direction on the policy paradigm with respect to facilitation for documented corporate sector as against undocumented personal (individual) sector.
As indicated earlier PERA in its original shape was, in principle, a defective law for the country. PERA created a parallel system for management of foreign exchange, in complete contradiction to Foreign Exchange Regulation Act, 1947 which is still a valid law. This is totally undesirable for any developing economy. It remains an undeniable fact that on account of these two parallel systems it has become highly difficult to properly manage the exchange regime in the country and the flow of funds from and outside Pakistan. It is now all the more relevant with stringent FATF requirements. Therefore, there is an urgent need to introduce a simple and pro-development foreign exchange regime in the country aimed at promoting documentation, proper facilitation of inward flows. The outflow of funds should only be limited to sums that have been appropriately accounted for under the fiscal regime. There should be an appropriate law for criminalization of transactions where assets have been created out of a 'deemed' receipt of money through 'hawala' type transactions.
Secondly a higher level of confidence, with regard to foreign exchange regime and exchange rate would have to be created within the masses to the effect that assets of Pakistanis are safer in Pakistan than anywhere else in the world. This confidence does not exist at present. Speculation and dollarization is too prevalent in the market and the masses. Unless certain level of confidence is developed, the perennial problem of outward flow of foreign exchange through legal and illegal means would continue to exist. There is no other solution.
Foreign Ownership One of the most neglected and mismanaged subjects in Pakistan's economic policy framework is determination of kind of foreign ownership of entities allowed to operate in Pakistan. In our extraordinary zeal to attract allow foreign investment, Pakistan has allowed 100 percent ownership with unfettered right of repatriation of capital and profits to all such companies. This becomes all the more important as Pakistan is perennially short of foreign exchange. As a consequence, in order to get immediate 'foreign exchange' inflows, we allow investment in every sector without realizing that at the end of the day we have to repatriate profits to the foreign owners in foreign exchange. The exact facts are not available, however, it is almost certain that in the years 2017 and 2018 the net outflow of profits on account of past foreign direct investment (FDI) is more than actual inflows of FDI during this period. The menace has to be stopped with respect to future investments.
Every developing country requires FDI in the sectors where domestic investors do not possess necessary resources and capabilities or there is a need for transfer of technology. FDI is not synonymous with cash flow. Furthermore, as a national policy every country requires participation of local partners to develop entrepreneurial capabilities that ultimately leads to development of locally-owned industrial sector. This trend had been adequately adopted by Pakistan in the 1960s and the 1970s that resulted in development of local industrial clusters and formation of big business groups engaged in manufacturing sector. However in post 1990 period, as already stated, in our zeal of being an 'open' and 'less' regulated economy in every sense, Pakistan as a policy, allowed 100 percent ownership in sectors where there is no such need, such as, confectionary, mineral water, potato chips and many other such items. There is no rationale for the same. We have become a paradise for trading activities. This cannot happen with a country that requires a reasonable manufacturing base, inter alia, to provide employment to its huge population of 200 million people.
Furthermore, in case, if the matter relating foreign exchange referred above is read in conjunction with the policy on FDI there is a serious possibility of abuse. It is unfortunate that such abuse has been widely made in the past. There exists a vicious circle of remitting untaxed money outside Pakistan using the flawed foreign exchange system and then bringing the same back in USD as foreign direct investment causing constant and forever depletion of foreign exchange resources. Throughout the civilized world, there is no regulation/ restriction on foreign exchange movements however in those societies there is no unlicensed possibility of transferring untaxed funds from such jurisdiction. This policy cannot be tolerated in any sense.
In summary, Pakistan is in dire need of FDI, however, there should be an appropriate policy platform for FDI. It is reiterated that our foreign exchange requirements cannot be the basis of any FDI policy. There is a need to realize that whatever we have done between 1992 to 2018 was not good for the country. This should not be repeated in this new paradigm.
Fiscal Policy On the fiscal policy side, in summary there are three primary prescriptions anywhere in the world for sustainable increase in tax collection in the developing countries. These are:
* All efforts for documenting the undocumented sector. Tax is the natural consequence of documentation;
-- Collation and use all economic transactions and their integration with the fiscal base (tax system); and
-- Taxing people on 'income' instead of any other arbitrary or 'ad hoc' basis like presumptive or minimum taxation.
Basic cannons of taxation as discussed by Adam Smith are still applicable in every civilized society.
If we analyze the policies adopted from 1992 to 2018 except for some measures, our approach worked in the reverse direction. Many instances and examples can be laid down in this respect however it would suffice to state that in order to reach a conclusion on this subject, the examination of the gravity of the obtaining situation on ground is the best test. For example there are more than 50 million bank accounts in Pakistan with less than 1.5 million tax filers. Similarly except for some 200 to 300 companies the average tax paid by all business enterprises in Pakistan is around 100,000 to 300,000 per annum only. There is effectively no direct tax collection from major component of economy such as:
-- Sugar and other commodities;
-- Local sale of textiles, leather and other goods;
-- Construction industry; and many others.
This 'tax-free' culture without any fear of accountability creates discrimination, lack of trust and equity in the society. This is not socially sustainable in any sense.
In summary, it is the author's view that in the past years Pakistan has adopted many policies which could have been in line with international best practices, in academic sense, however, whilst undertaking the same we have ignored the primary ground realities and business culture prevalent in the country.
In 2019, the government in power does not carry the 'baggage' of inaccurate actions undertaken in the past therefore it is more suitably placed to make adequate corrections. Any further delay in correcting the direction will not be beneficial for the country. Maintaining a 'status quo' would mean owning the mistakes of others without any reason. This will be totally undesirable for a clean well intentioned government.
(Concluded)
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