EAC: Some suggestions

The government has formed a high-level council – Economic Advisory Council (EAC) – to formulate long-, medium- and short-term plans for important sectors of the economy with a view to achieving sustainable economic development. Prime Minister Imran Khan, in EAC’s maiden meeting, underscored the need for finding out-of-the-box solutions. The Finance Minister, Shaukat Tarin, emphasized the importance of evolving consensus on macroeconomic stabilization measures and reform agenda for an inclusive and sustainable economic growth after taking all the stakeholders on board and by following a consultative process. The important sectors of the economy include energy, construction, price stability, agriculture, social protection, subsidies, SMEs and remittances.

Pakistan is one of the lowest ranking in Emerging Market and Developing Economies (EMDEs) in terms of credit, deposit and tax-to-GDP ratios in addition to lack of clear focus on industrialization and infrastructure development. The poor countries like Pakistan failed to prosper because they neglected the basic development of their people, i.e., capacity building. Which gave rise to social sector issues, including education and planning.

By taking the advantage of consultative process emphasized by the Finance Minister this writer has a few suggestions for the consideration of the EAC.

State Bank of Pakistan’s Annual Report 2019-20 chapter 7 “Understanding of Low Private Credit Penetration in Pakistan” briefly highlighted the important role played by the financial sector in the private credit offtake in Pakistan during the initial years of “industrialization”. Major contribution coming from specialized DFIs and with the steady growth of commercial banking industry private credit rose from 11.1 percent of GDP in 1960 to 25 percent by end 1970.

In this writer’s view, the business model was so eloquently designed that also helped in listing of companies on the stock exchanges, with minimum 10% offer to NIT, at maturity of bridge financing.

That momentum, as per the report, was disrupted by two major policy decisions taken in early 1970s. First, the National Credit Consultative Council (NCCC) was set up to determine real credit needs of the economy within annual development plan and the monetary targets. Mandatory credit ceilings were introduced for commercial banks – practically leaving no room for banks to expand credit at a rate faster than what was stipulated by the SBP. Second, major banks were put under the direct control of the government in early 1974. During the 1960s and 1970s, the DFIs performed appreciably and helped spur the growth in the industrial sector of the country. However, the problems started emerging in the later years, with political interferences, poor governance issues and low recovery rates hurting their efficiency and effectiveness. Foreign aid dependence was another factor, as the DFIs over time were not able to effectively seek out adequate domestic sources to be channelized.

Financial sector reforms in the 1980s improved the efficiency and profitability of banking system; the state of credit remained unsatisfactory – both in terms of penetration and access. The Institutional infrastructure for project and long-term financing turned particularly unfavorable. This was because the lending capacity and portfolio management of commercial banks, which were eventually delegated the responsibility to respond to both the short- and long-term financing needs of the private sector, was strictly guided by their commercial concerns, risk appetite, as well as regulatory restrictions under the Basel Accord.

More importantly, unlike many other emerging markets, state ownership in the banking system as well as direct credit to priority sectors in Pakistan has substantially declined, according to the report.

The report has highlighted that a clear policy approach is needed for development finance. Lesson that we draw from the experience of the Asian economies and other interventionist states is that development finance alone cannot help in the absence of quality institutions and governance frameworks.

Policies to be effective and successful. The country must pursue sound macroeconomic policies and provide an overall conducive investment environment to businesses. All policies must be approved by and/or amended by both the houses unanimously to ensure consistency and give confidence to investors. Similarly, to promote businesses on sustainable basis all relevant laws must be timely harmonized.

In order to develop stronger public-private partnerships, the challenge would be to strike a balance between risk-taking and the guarantees to get the projects timely started and completed. Risks to be tackled head on. All risks must be looked at that worry potential investors–regulatory risk, currency risk and political risk from regime change.

State-Owned Enterprises

The government has approved reforms in State-Owned Enterprises (SOEs). All SOEs need to be consolidated under one holding company like TEMASEK Singapore by following/tweaking their governance framework.

There should be a comprehensive rehabilitation plan for some flagship SOEs such as PIA and Railways. For instance, PIA is required to be split in two companies “good” and “bad”. Any reputable international airline should be invited to invest in the “good” company for at least 10 years under bridge financing arrangements, where their investment to be bought back by the holding company (like TEMASIK) and/or through public offering.

The “bad” company’s assets should be re-evaluated/audited for appropriate remedial action. This way government would at least save the overhead costs, pilferages (being funded in perpetuity), which could be partially utilized in offering separation schemes.

IT parks

Special Economic Zones (SEZs) and Information Technology (IT) Parks: The government is taking initiatives to establish IT parks which would require skilled manpower. Universities vice-chancellors and deans of IT Departments must be invited and advised to meet the human resource requirement in a timely manner. An excellent example is of an IT park in Dalian, China.

Agriculture sector reforms

Zarai Taraqiati Bank Limited (ZTBL) should be converted into a holding company with three wholly-owned subsidiaries:

• A ‘research & development company’ is set up to merge all agriculture universities and centres to formulate policies in research and development (R&D).

• A ‘storage company’ is formed to bring all storage houses under one umbrella to secure timely preservation of different produce. Also establish warehouses, cold storages and silos.

• A ‘finance company’ is created to meet all financial needs of the sector.

Taxation reforms

360-degree view of all formal industrial sectors: This writer’s hypothesis is that in Pakistan formal sectors partially buy their local raw material from informal sector and then their products are distributed for sale in markets, including the informal ones. Broadly speaking, value chain is not totally under taxation regime rather formal sectors are injecting taxable resources into the informal sectors.

The tax law introduced first filer and non-filer concept, which is now the same but converted into those appearing in Active Taxpayers List (ATL) of Federal Board of Revenue (FBR) or not. This list is updated every Monday. Under the withholding tax regime, there’s a need for introduction of a cash payment threshold for deducting tax at source if not appearing in ATL. If data of all banks account holders is analyzed the non-filer class would have more accounts than the formal category.

In order to bring them into the category of filers, non-filers to be segmented in various formal sectors, e.g., ginners to be categorized as sub-sector of textile and their WHT should be aggregated and grossed up to arrive at deemed income in such a way that all the WHT deducted to become their final discharge of tax liability and best judgement assessment order to be issued. Such practice to be followed for at least three years with no questions asked to address the trust deficit. During the three fiscal years, a good data base by segment/sector for such non-filers would be available to study which sector has the major share in informal sector to formulate a sustainable taxation model.

The income tax law needs to be reviewed afresh. It should be simple and based on feedback from people of the country rather to borrow any other country’s taxation laws or their so-called reform measures. Indigenous research and feedback and inputs of all stakeholders alone can help implement the tax laws. As per “Tax Reforms in Pakistan– Historic & Critical View” by Huzaima Bukhari and Dr Ikram-ul-Haq, published by Pakistan Institute of Development Economics Islamabad 2020, the current Income Tax Ordinance 2001 was drafted by an Australian Assistant Professor (Lee Burn) and promulgated at the behest of the IMF, which replaced/repealed the time-tested Income Tax Ordinance 1979 after 22 years when it attained the acceptability and stability after judicial pronouncements.

It is pertinent to mention here that there is no significant increase in tax to GDP ratio since the promulgation of law in 2001. Fiscal deficit is the major obstacle to economic growth.

Regulatory reforms

Speedy decisions by banking courts – banking tribunals must comprise two members; one is legal and the other one as banking member (professional bankers preferably those who have rich experience in assets remediation must be appointed as judges as ‘Banking member”). Appellate tribunal in taxation may also comprise two members – one legal and the other related to accountancy. This would certainly improve the recovery process.

In Pakistan group companies regulations to be further strengthened to review and monitor their affairs on consolidated accounts basis. The Securities and Exchange Commission of Pakistan (SECP) will be required to strengthen the regulation so that all stakeholder including shareholders analyze/review the consolidated affairs of the group. Their board composition should be redefined through introduction of strategic/policy board and executive board concepts.

Centralize data base/big data

Data base management software solutions would let the government integrate data emanating from various sources across the country. Accurate data is of prime importance.

Pakistan has a large number of eminent policymakers. But implementation of policies is a big challenge. This challenge can be overcome through capacity building.

(The writer, fellow chartered accountant & associated with banking industry held various senior positions including CEO in bank(s), with rich and firsthand experience of banking, finance and economy)

Copyright Business Recorder, 2021