Inflation & trust deficit: PM asks MoF to suggest measures

Prime Minister Imran Khan has directed Ministry of Finance to submit a modular proposal on bringing down inflation and generating activity including factors like demand and supply side measures for food groups and creating an environment of trust to boost investment.

These instructions were issued at a recent meeting wherein directives were issued related to inflation and problems being faced by the investors. The Prime Minister directed that an environment of trust should be created to boost investment, infrastructure investment through private sector, increasing the share of foreign remittances and exports, subsidized loans to SMEs, construction and agriculture sector and reduction of government's borrowing from commercial banks should also be touched upon in the proposal.

In another meeting held on February 10, 2020, Prime Minister Imran Khan was informed that the main reason for the decline in revenue at import stage is due to massive leakage and corruption in customs. Former Special Assistant to Prime Minister on Revenue, Haroon Akhtar Khan also attended the meeting and shared his thoughts with respect to bringing improvement in the economic situation of the country. There is intense speculation in the federal capital that Haroon is tipped as SAPM on Revenue.

The sources said that the Prime Minister was apprised during the meeting that there is trust deficit between the government and the business community/ investors due to which investors are shy to increase investment. It was suggested that those people who want to invest should not be victimized.

The Prime Minister was informed that there is fear factor in the business community due to NAB, SECP and FBR which needs to be rectified to attract new investment. Rather than announcing incentives for private limited companies they should be converted into public limited listed companies, so that they are able to raise money through Initial Public Offering (IPO), though the requirements for public listed companies have become extremely stringent. In fact now the listed companies are moving towards changing their status to private limited companies.

The government should facilitate businessmen to achieve the revenue target. A 19.50 per cent growth will be required for achieving the target of Rs 4.5 trillion, 30 per cent for Rs 4.7 trillion and 60 per cent for 5.238 trillion in the remaining months of current fiscal year.

The Prime Minister was informed that the impression of reduction in revenue because of import contraction is not true. Import contraction is in dollars as imports have increased in rupees. Reasons for the decline in revenue at import stage are the massive leakages and corruption in the customs department. The meeting also discussed the idea to install scanners at green channels at all ports.

It was also emphasized to revive the real estate sector on war footing as it contributes to over 10% of GDP. There is severe liquidity crunch in the country as banks are avoiding to lend more to the private sector. There is no long term financing available except for the export sector and even that is very limited. There are no development financial institutions available anymore. The NDFC was merged with NBP twenty years ago with NBP given the task of playing the role of development which never happened.

Net outstanding private sector credit for the first six months of the current fiscal year was Rs 117 billion which was Rs 503 billion in the same period of 2018. It was suggested during the meeting that banks should be incentivized to lend to the private sector and it should be made mandatory for the banks to lend a certain percentage of their deposits to the private sector. It was also suggested that the previous scheme Locally Manufactured Machinery (LMM) should be restored for 7-10 years. The meeting was apprised that the export refinance schemes limit was not increased in line with the Rupee devaluation.

It was also suggested that mortgage finance scheme should be initiated in the country through the State Bank. It is imperative for the foreclosure law to be enacted to enable the banks to use homes as collateral. Also in absence of bankruptcy protection laws there is no protection to limited companies.

The Prime Minister was also informed that the government is giving 13.25 per cent to foreign investors for hot money inflows through different schemes but Oversees Pakistanis are being offered just over 6 percent. This needs to be revisited.

Pakistan's manufacturing base has eroded from 25 per cent to 18 percent in the last 2 decades due to impact of poorly negotiated Free Trade Agreement-1 (FTA-1) with China. Under the FTA 1 the trade gap with China increased from $2 billion to $16 billion. This will get worse with FTA 2 as the number of tariff lines under FTA2 have increased from 35% to 75% of the total tariff lines.

China, India and Bangladesh increased their growth through exports and if Pakistan follows the neighbouring countries, there will be no need to approach donors. Exporters should be facilitated through subsidy and commitment of cent 7.5 per unit electricity tariff be fulfilled.

The country's agriculture sector, which has had the worst year in decades, needs to be revived through incentives, easy loans and crop insurance, drip irrigation etc.

It was suggested that the export performance limit under the ERF scheme must be enhanced from 6 months to 9 months. It was also recommended that the time for reporting to the credit information bureau must be increased from 90 days to 180 days.