EDITORIAL: Aleem Khan, Federal Minister for Board of Investment, Privatisation and Communications, has issued a series of directives, including resolving all issues facing Special Economic Zones (SEZs), industrial zones especially in Khyber Pakhtunkhwa and electricity connections from the national grid provided to these zones within three days, State Bank of Pakistan to appoint a focal person for investors to resolve their issues, and dealing with the complexities and concerns facing all investors.
These directives reflect periodic pleas for the restoration of fiscal and monetary incentives by exporters (particularly the politically influential All Pakistan Textile Mills Association) and other large-scale manufacturing sectors (the major recipients of concessional private sector credit) in the corridors of power but to date their appeals have fallen on deaf ears.
Two observations are in order: (i) the recent fiasco in Pakistan International Airlines (PIA) bidding for which the Minister perhaps accurately disclaimed all responsibility, reflects the fact that those who hold a portfolio may have the de facto power to issue directives but not to ensure their implementation.
In addition, the fiasco belies the government’s stated claim in documents uploaded in early October 2024 relating to the ongoing International Monetary Fund (IMF) programme loan that “most recently, the government has also made substantial progress on the privatisation of PIA, which is in its final stages.” And (ii) as is usual, no directive to identify and hold those responsible for the PIA fiasco was ever issued that would have been a deterrent to future embarrassingly disastrous faux pas.
Are Aleem Khan’s directives or industry’s demands implementable? The irony behind these directives/demands is that they indicate that neither the minister nor the ministry officials nor the private industrial sector have bothered to read the documents detailing the conditions agreed by the Federal Finance Minister Muhammad Aurangzeb and the SBP Governor Jameel Ahmed with the IMF under the ongoing programme, repeatedly acknowledged by the relevant members of the Cabinet to be critical to defer the still looming threat of default.
This document unambiguously maintains that “subsidies have taken the form of low-cost financing and other concessions, which, although varied across industries, left financing and taxes net of subsidies more favourable than in peer economies and less-favoured sectors.
The tax system has been extensively used to provide non-transparent support through exemptions for privileged sectors like real estate, agriculture, manufacturing, and energy, as well as, through the proliferation of Special Economic Zones (SEZs).
The government’s intervention in price setting, including for agricultural commodities, fuel products, power, and gas (biannual), combined with high tariff and non-tariff protection tilted the playing field in favour of selected groups or sectors.
Despite all this support, the business sector has failed to become an engine of growth, and the incentives eventually weakened competition and trapped resources in chronically inefficient (including perpetually “infant”) industries.”
And the pledge made by the Pakistan authorities in the Letter of Intent (LoI), which triggered the approval for the ongoing Extended Fund Facility programme, was as follows: “The authorities will refrain from providing new fiscal incentives to any new or existing SEZs, and will not renew existing ones, as SEZs are meant to be temporary solutions to pre-existing constraints in the business environment. They will also refrain from creating new SEZs or EPZs going forward (including by provincial governments). In addition, by end-June 2025 (structural benchmark) authorities will prepare a plan based on the assessment conducted to fully phase out all current SEZ incentives by 2035, subject to pre-existing contractual obligations.
During the transition period between 2024 and 2035, the authorities will strive to replace pre-existing profit-based incentives (such as tax exemptions) with cost-based incentives (such as immediate expensing on tangible assets), subject to compliance with existing legal commitments.
For those cases where contractual provisions allow for early termination or renegotiation of existing SEZ incentives, authorities will phase out such incentives insofar as allowed by these legal provisions. Relatedly, no new fiscal or other incentives offered to SEZs should be provided to any firms, sectors or investments.”
The government has only resisted the call to revisit the operation of the Special Investment Facilitation Council, but with the proviso “to ensure a level playing field with regard to the investment environment and avoid a watering down in governance standards.”
Copyright Business Recorder, 2024
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