ISLAMABAD: Federal Minister for Planning and Development Ahsan Iqbal on Thursday while stressing the need to increase the tax-to-GDP ratio, which previously was around 16-18 percent and has now reduced to nine percent, said that the country desperately needs to enhance exports from $ 32 billion per annum to $ 100 billion for which more investment, both local and foreign, are needed to deal with the economic challenges.
“We have to do a lot of adjustments, but we will take decisions in the larger interest of the state,” he said and hastened to add that “we will try to put minimum burden on the poor and the common people.” He said this while addressing an event arranged by the Pakistan Institute of Development Economics (PIDE).
He said that the government is committed and would meet the conditions set by the International Monetary Fund (IMF) to complete the programme, but the common man would not be affected by the decisions.
He further said that increasing investment was another important factor to ensure sustainable economic development.
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“If the Pakistani investors only bring out their money and invest in the country, we will not need to go to the IMF or any other lender,” he said, adding that foreign direct investment would also have to be increased up to $ 25-30 billion per year.
He said the IMF agreement was hanging over the government which it had to negotiate with the Fund. The previous government, he said had recklessly agreed upon the programme, therefore, the current government has no option but to continue the programme.
The minister said that the only way to come out of the dependency on the IMF loans to deal with the balance of payments related issues is to increase Pakistani exports, saying it was the biggest challenge how to increase exports from $ 32 billion to $ 100 billion per annum. The minister said that the country has the potential to attain the goal but for this, Pakistan needs to find new products and markets.
He also said to analyse how foreign aid is linked with growth previously. During the era of 1980s, Pakistan got many projects and easy money. In the 1990s, Pakistan faced sanctions, and the IMF asked us for commercial borrowing, which escalated the country’s debt servicing. In 2018, Pakistan had debt servicing of around Rs 1,500 billion, which increased to around Rs 4,500 billion recently. It leaves the country no space for a development budget, the minister said.
Vice Chancellor PIDE Dr Nadeem ul Haque emphasised that the regulatory system is the biggest problem in Pakistan such as unnecessary documentation, taxation, and NOCs.
Around 122 regulatory agencies collect taxes and do not contribute to productivity. Corporate governance is not very encouraging, and just 31 families in Pakistan are involved in import substitution, and our industrial policies just protect them. The stock market in Pakistan is not financing exporting industries but import substitution.
Omer Siddique and other researchers from the PIDE focused on the historical trend of exports and economic growth in Pakistan. The reasons for the trade deficit are low export competitiveness and a few product lines.
Both productivity and investment are declining over time. Pakistan in past used development money for consumption, resulting in the lowest productivity in the region compared to Bangladesh, China, India, and Sir Lanka. Although Pakistan has volatile productivity, recently, data shows that the country’s performance is not very impressive.
Data on exports show that Pakistan export mainly primary goods, which disconnects us from the global supply chain. Overall, Pakistan exports textile-related products, and just target a few product lines exports.
He further said that Pakistan has a low score on the economic complexity index, where knives are considered complex products showing poor technological structure, whereas, chemicals and machinery are considered complex products in China. Low geographical coverage does not allow us to expand our exports; around 65 percent of Pakistani total exports are directed to 10 countries. However, stagnant exports and a few product lines do now allow us to increase our export base, Siddique maintained.
The participant of the meeting further added that the lack of competitiveness is another factor, which is coupled with the high cost of commercial energy. Pakistan has the highest commercial energy compared to India and Bangladesh. Another factor is poor logistic performance. Pakistan relies mainly on road transport, and we need to promote railways for freight trade. Poor regulatory structure is another factor; data shows that Pakistan has a low score on the regulatory quality index. In addition, a high regulatory burden due to tax regulations does not allow new products into the market.
They said total factor productivity is low in Pakistan but relatively higher in cotton ginning and internet service providers, indicating more potential for these industries. There is a negative TFP in the textile sector. The ratio of exporting firms is declining in Pakistan due to unstable policy measures.
It was also observed that the Import substitution policy is not effective in Pakistan, and the country was highly dependent on imported inputs. Cascading policy in Pakistan causes export policy bias, and producers just produce for the domestic market instead of export destinations. Policy volatility and uncertainty add to our miseries.
According to the global innovation index, we are second to the bottom. Research and development in Pakistan are not encouraging. Innovation is less protected in Pakistan, and many companies moved to Vietnam and other countries for research and development. There is no link between academia and industry in Pakistan. As a result, large conglomerates invest in the sector where they are protected, such as real estate. Only around 32 percent of total listed industries export and most of the industries have a very small scale of exports.
“The cost of tax compliance is high in Pakistan. A fragmented tax system disrupts growth in Pakistan. Reducing withholding taxes lines can reduce compliance costs and reduces tax evasion. High corporate income tax causes policy uncertainty in Pakistan. Sales tax on import works as a tariff. We need to link the concession in customs taxes with export performance. PIDE is developing a tax commission, which will be helpful in analysing the overall taxation policy in Pakistan. Finally, there is a high cost of sludge in Pakistan, mainly in the health, construction, and education sectors. The total cost of sludge is around 39 percent of GDP. Further, the government footprint is around 67 percent of the total economy in the form of public enterprise and development expenditures,” they emphasised.
The PIDE’s Pro Vice-Chancellor, Dr Durre Nayab, RASTA Director, Dr Faheem Jehangir, Dr Muhammad Zeeshan, Muhammad Armghan, and many other economists and researchers were also present at the meeting.
Copyright Business Recorder, 2023
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