ISLAMABAD: The Pakistan Institute of Development Economics (PIDE) has stressed the need for urgent action to stabilise Pakistan's economy and prevent a crisis as external financial requirements are set to surpass $120 billion in the next five years.
PIDE, the public sector economic think tank, said this here on Tuesday while launching reform strategy, titled, “Islaah: Immediate Reform Agenda - IMF and Beyond,” to propel Pakistan towards economic stability and growth amid its looming financial crises.
“Islaah” the immediate Reform Agenda for Pakistan" addresses the country's pressing economic challenges, including imminent default due to heavy indebtedness and insufficient reserves. During the conference, it was revealed that at the federal level Pakistan has more than 122 regulatory agencies involved in regulating various sectors which resulted in a waste of time and money in getting permissions for the start of any business and these regulations cost the country more than 50 per cent of the GDP.
Moreover, some sectors are over-regulated as a result they are underperforming.
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 IMF Report. PIDE's strategy is a clarion call for a systemic overhaul to ensure economic progress and prosperity, moving beyond the narrow interests that often dominate the discourse on reform in Pakistan.
Former Deputy Chairman of the Planning Commission and Vice-Chancellor (VC) PIDE Dr Nadeemul Haque emphasised the need for a comprehensive approach to address Pakistan's economic challenges.
PIDE has outlined an agenda aimed at tackling key areas such as regulatory modernization, tax reform, market liberalization, 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.
The PIDE VC further added that the agenda outlines a series of innovative reforms designed to rejuvenate Pakistan's economic landscape. These include debt restructuring and intensified cooperation with the IMF, comprehensive tax reforms for a more business-friendly environment, and strategic opening of the economy to prioritize exports and modernize import regulations.
Additionally, it addresses energy sector inefficiencies, agricultural and banking sector improvements, and the development of real estate and capital markets to encourage investment and deepen capital market participation. The anticipated impacts of these reforms are substantial, promising to catalyze investment, foster job creation, and facilitate higher GDP growth.
Addressing the event, Dr Ahmad Waqar Qasim, Dr Afia Malik, and Dr Mahmood Khalid senior research economists of PIDE, who played a key role in outlining PIDE's pioneering study, said that the 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 per cent 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”, they said. To achieve this, Pakistan 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 is evident that piecemeal approaches would not 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, they said.
Dr Haque further stated that amidst the urgent need for tax simplification and policy certainty, this budget season demands immediate attention towards streamlining taxes in a revenue-neutral manner and ensuring stability for a decade, with a commitment to refrain from introducing new taxes in each budget cycle.
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. Harmonizing 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, he said.
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 line with this, suspending tax return audits for first-time filers over the next five years is crucial. Tax simplification demands administrative changes, particularly digitization, and market-driven documentation practices, ensuring policy consistency over a decade. The FBR's attention should be directed towards administrative efficiency while ensuring zero harassment in tax matters.
In fostering economic growth, it is 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 is crucial to address the over-regulation and bureaucratization stifling Pakistan's markets, fostering an environment conducive to investment.
“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,” Afia Malik added.
The PIDE vice chancellor further 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 SECP to treat files as securities, and the separation of regulation from real estate business operations.
Additionally, organizing 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. With thousands of government houses occupying vast swathes of prime land in Islamabad alone, the unrealised, particularly evident in Islamabad where thousands of government-owned properties occupy prime land, 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 Rs58.8 billion in investment, create 351,000 job opportunities, add 44.4 million sqft of commercial space, and generate an annual rental income exceeding Rs446.8 billion.
In the agriculture sector, bureaucratic approval processes hamper the seed industry, fostering the proliferation of low-quality seeds and imposing unnecessary costs on farmers.
Despite the private sector's readiness to lead, inefficiencies in seed testing and approval procedures persist, resulting in limited access to high-quality seeds for small farmers. Addressing these challenges, estimated to yield a potential gain Rs1,722 billion, requires discontinuing commodity operations like wheat interventions, implementing market-driven solutions, and stimulating private investment through tax incentives.
Copyright Business Recorder, 2024
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