Promises Exports al Deficit Overview
One year of PTI Government
Economy
Sta
A Business Recorder Perspective
Ali Khizar One year is gone. There is not much to take home about the PTI economic team’s performance. The team came totally unprepared, and on job training wasted some time, and additional cost incurred to an economy which was in an urgent need of stabilization measures. There is no doubt that the mess they inherited was big, but yet, the timely resolve was missing. There were more talks and less substance. The team lacked professionalism, and adhocism is one word to best describe earlier decision making. There were too many management changes. There was no clear direction from the start. A few policies were contradicting, as the demand slowdown, revival of manufacturing sector, restoring domestic investors confidence and accountability efforts all were attempted to be implemented simultaneously. The focus on any one agenda was missing, and in the process, economic management lost credibility and domestic investor confidence came to a new low.
Too many committees, advisory councils and task forces are there where services of experts are provided voluntarily. The volunteers either lack incentive and authority to bring any change or they have vested interests. The task forces are fatigued. Housing was on the top agenda of the government, but the task force has yet to come to with concrete plan to crack housing financing and low commercial viability puzzle. The agenda of civil service reforms and fiscal austerity is not even now talked about. Energy task force could not present a viable plan to reduce circular debt or to solve the riddle of growing capacity payment. The economic advisory was formed and all it discussed –IMF or no IMF; but no alternate plan was presented. Now it’s nowhere in sight. Later another business advisory council was formed, but was short-lived. Now the IMF is at the helm. The existing team has nothing much to do with the core of PTI and its ideology. The
technocrats are running the show, and the focus is to bring macroeconomic stability- by having undervalued currency and high interest rates to curb demand and attract non-banking government financing. The economic demand is curbed, and fiscal debt servicing is growing – side effects of stabilization. Fiscal performance in the first year was poor. Two mini
spending – that further hampered growth. Only talks were on reducing PSE losses – privatization was not the agenda, and by the time Sarmaya board was formed, team was changed. Back to square one, as current finance advisor is pro-privatization. Government does not have money and the concept proposed by PTI is of public
budgets were presented, but nothing substantial was done to jack up FBR revenues or to cut down administrative expense. The only cut was in development
private partnership. But there is no capacity in ministry of finance to make and implement PPP models. Even, if someone has an idea, he or she would not
implement due to accountability fear of NAB. The decision making is at standstill. The FBR performance was below average in the first year. Despite presenting two mini budgets, revenues fell short from the previous year. The chairman was sacked and now a doer from the private sector is in charge. This year target is impossible, but a decent growth in FBR revenues is likely. FATF compliance and documentation are not mutually exclusive. The money laundering and terrorism financing cannot be traced without documenting the whole economy. The government has a clear direction on documenting the economy and to expand the tax base. FBR collection to improve in the process. Traders, retailers and other services groups will resist change. There will be strikes and shortages. The investor confidence will likely erode further before improving. The other problem is that NAB is not in control, and its investigating a
few big business groups as well. None of the big business is fully clean in Pakistan, the business accountability is not helping restore confidence. Anyhow, any shift in economic direction will restore the investors’ confidence. The immediate problem is balance of payment – foreign obligations financing. The SBP is eyeing on attracting foreign portfolio investment, and other form of foreign flows – be it by exports, tourism or FDI. The relationship with the US is of utmost importance as CPEC is on the back burner. The PTI has secured a good grade in foreign policy. Celebrity status of PM Khan amidst civil-military leadership on the same page are improving Pakistan image internationally. The dividends from it may start coming in 6-24 months and that may jumpstart the economy. But the core of the fiscal problem is related to energy, and that requires serious reforms; otherwise the efforts will be of little use.
Adil Mansoor What should an ideal farm policy consist of? According to OECD’s ‘Policy monitoring and evaluation’ for 2019, efficient policies “clearly separate targeted measures that provide income support to farm households in need, from measures that support increased farm productivity, sustainability, resilience, and overall profitability”. Surely not a herculean challenge if goals of policy design are clear from the onset. It may be unfair to measure ruling party’s maiden year agri-goals against above definition, since it had failed to draw this distinction in its manifesto either. In a single breath, the manifesto spoke of “gross neglect of small farmers, need to make inputs cheaper to make farming more profitable, while retaining control on commodity prices to fight inflation”. The document was a partial disappointment as it lacked any path-breaking proposals, despite bragging to have been prepared by country’s top progressive-farming brains. But given its agri-czar’s pre-election dual role as kingmaker, the manifesto may be forgiven for lack of detail. Nevertheless, if there is any deadly sin that PTI’s agro-reform agenda may yet be held accountable for, its sloth. Not only did the manifesto mention need to impose an ‘agriculture emergency’, the term began to make rounds as early as last August as soon as it took
power. Yet, it took another 11 months before the plan could be finalized and taken to the PC-1 drawing board for feasibility approval. The argument that interventions under ‘agriculture emergency’ had to be clubbed with annual budget does not hold because the scope of the program is not limited to a single fiscal period anyway. The Rs309 billion outlays are planned over four years and hinge upon federal and provincial governments splitting the bill equally. Much has already been written about the weaknesses in the agriemergency program; but from a representative democracy lens, party’s real test is whether the plan measures up against its electoral promises, even if belatedly. In line with party’s commitment to “drastically cut water losses in agriculture”, the largest outlay is for water resources – a total of Rs220 billion. Over 80 percent of this has been earmarked for conserving water
through lining half of country’s total watercourses length, along with installation of fourteen thousand water storage tanks. Water conservation? Check. It is no surprise that the incumbents have failed to earmark funding for Diamer-Bhasha, despite tall promises. While it may be convenient to blame it on IMF-imposed austerity on development budget, given the dam’s $14bililion cost it was never going to see light of the day – whether under PTI, PML-N or even military rule. If there is one sub-sector within agriculture that fails to act like a lobby, its livestock - despite over fifty percent contribution to sectoral GDP. Just Rs5.3billion have been set aside over four years (remember, 50-50 cost-sharing!) for increasing livestock productivity through “save and fattening of calf” program. This is against Rs14billion for fishery alone – commendable in its own right – but that goes on to highlight the indifference to livestock, its high fragmentation and lack of organization keeping it from fighting for itself. The agenda is lacking in scale and scope despite manifesto promises of sustained interventions in feed quality, vaccination, genetic improvement, and enforcement of standards in dairy and meat industries. The country is on the verge of facing a creeping livestock crisis, and like
many others before it may only become primetime fodder once its too late. Any comment on cropping sector depends on readers’ expectations of PTI. No reference is made to any minor high-value low-delta crops such as fruits, vegetables, pulses and legumes, indicating that when it comes to farming, fixation with major crops is a hard-drug addiction to give up, even for party of ‘change’.
But even within major crops, the policy has pulled off a sleight of hand; while Rs19billion is set aside for increasing wheat productivity, cotton has been ignored wholescale. Instead, Rs15billion shall be spent on sugarcane and rice, crops already doing nominally well. So far, the “Agriculture Emergency” program remains the only salient program to measure party’s performance against in a sector that contributes up to 60 percent directly and indirectly to total
GDP according to Hafiz Pasha, and more than three-fourths of exports. With close Rs80billion set to be spent in first year, the proof of the pudding will lie in the eating. Given agriculture is a provincial subject, it remains to be seen whether project’s execution will witness major teething issues. It helps that Punjab’s provincial government is not seen to be too independent of the bosses in Islamabad, given the province is responsible for more than two-thirds of agri output. However, Sindh’s lack of participation in the design and subsequent approval of national agri-plan was highlighted even in the media talk by Minister of MNFS&R. It remains to be seen whether the funds for projects earmarked for the province shall be allocated elsewhere or will simply dry out. Though, as an unintended consequence, Sindh’s performance in agriculture over the next four years, financed by its own budget, can prove to be a good litmus test whether agriculture and irrigation can do well as provincial subjects, with little intervention from federation. Despite being out of power at national level for over six years, it is ironic that the burden to prove ‘devolution project’ a success may once again fall to PPP.
Exports
bility Promises Economy Fiscal Deficit Stability
Overview
A Business Recorder Perspective
One year of PTI Government
Sidra Farrukh Over decades, where foreign direct investment in the country has been fickle in nature, worker remittances have been the reliable alternate source of non-debt creating foreign inflows. The same continues even today. But what role has Pakistan Tehreek-e-Insaaf played in boosting these inflows if any, since coming to power? Central bank’s data can show their one-year performance in the office starting August 2018.
Remittances buoyed
With Imran Khan as the Prime Minister of the country, workers’ remittance is an interesting data-point as a lot was expected in terms of Khan’s popularity and support among the overseas Pakistanis. A one liner: the love did not translate into any gigantic increase in inflows in FY19. The year-on-year growth in remittances for the year remained in single digits – 9.68 percent. But it has not been gloom and doom for remittances. The inflows have been crucial during the last fiscal year as slow growth, lifeless exports, depreciating currency and falling reserves have hit the economy hard. Growth during the government’s one year in office was largely seen coming from UK, USA, Malaysia, and primarily due to the religious months and festivities. Also, the increase in remittance from these countries during the year is attributed to better economic growth in the West, increase in the number of people going to Malaysia for work, and efforts made by Pakistan Remittance Initiative (PRI) and SBP. And despite the declining stock of immigrant workers in key remittance corridors like Saudi Arabia, UAE and the other GCC countries, remittances from these countries in FY19 have depicted year-on-year growth versus a decline in FY18 due to increased PRI activity; the recent incentive schemes announced for the exchange companies, government’s crackdown on hawala/hundi and corruption evident from thinning spread between kerb and inter-bank currency rates- and awareness campaigns in the labour camps in these countries. In relative terms, PTI’s first year has also been better than PMLN’s lukewarm tenure for
Remittance from keycorridors- $(mn) USA
U.K.
Saudi Arabia
U.A.E.
Other GCC
6,000 5,000 4,000 3,000 2,000 1,000 0 FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
Remittance & Growth Remittance-$(mn)
Growth (RHS) 20%
23,000 21,000
15%
19,000
10%
17,000 5%
15,000
0%
13,000 11,000
FY13
FY14
FY15
FY16
FY17
FY18
FY19
-5%
Source: SBP
remittances, which might suggest that Khan’s charm did have a share in the growth Remittances grew at a CAGR of 17 percent between FY08-13 and they slowed down to 7 percent in PMLN’s time from FY13-18.
FDI abysmal
On the other hand, there is not much of a good news on the foreign direct investment side. For long, the country has missed
and construction. PTI’s first year performance spelled bane on FDI. With China Pakistan Economic Corridor, the previous government had put all eggs in one basket. CPEC has been a hallmark for investment in infrastructure and energy sector particularly power. And now that the early harvest projects are complete or near completion, the slowdown is dragging overall FDI
Focus on CPEC has been accompanied by waning investment in other sectors where some sectors like telecom and financial businesses have hit saturation while others have been unable to attract foreign investors’ as well as the government’s attention. Some other factors under the PTI government like uncertainty over the economic policy, political instability, delay in going to the IMF, and depreciating currency have also kept investors sitting on the fence. There is a clear lack of seriousness from the government is correcting the foreign investment situation in the country. It might rightly have decided to shift focus to export oriented areas and Special Economic Zones (SEZs) under CPEC to attract FDI, and FY19 data does show that the share of manufacturing sector has increased during the year; but problem is the shrinking pie. What is even more alarming yet ignored most of the times is the increase in profit repatriation. Now FY19 might have seen a decline in profit repatriation of FDI, but it doesn’t mean that the investors are reinvesting earnings in Pakistan. It is primarily because the FDI for FY19 is dreadfully low – so much so that FDI net off profit repatriation stood at only $159.7 million for the entire fiscal year against $1.462 billion in FY18.
The way forward
While remittances grow with increase in economic growth where factors like better education of migrants, better employment opportunities for local labour force at home as well as abroad, better dividend from investment in human capital pay
In relative terms, PTI’s first year has also been better than PMLN’s lukewarm tenure for remittances, the FDI goals and is marred by lack of diversification and lack of aggressive policy stance. The previous government was lucky that CPEC was signed and foreign inflows started pouring in from China in sectors like power
numbers. In FY19, not only the inflows from China have been down by 47 percent year-onyear, outflows have risen by five times as well leading to a 50 percent year-on-year decline in net FDI for the year.
off in the long run – the relationship between economic growth and FDI is a little complex. Empirical evidence from “Role of Foreign Direct Investment and Remittances in the Economic Growth of Pakistan” by Fatima
FDI and Profit Repatriation -$(mn) FDI Net of Profit Repatriation
FDI
Profit Repatriation 3,500 3,000 2,500 2,000 1,500 1,000 500 0 FY13
-500
FY14
FY15
FY16
FY17
FY18
FY19
Source: SBP
-1,000
Key FDI sectors and source Manufacturing Sector FDI China
Power
Non Manufacturing Sector FDI Construction
3,300 2,700 2,100 1,500 900 300 - 300
FY13
FY14
FY15
Shahid, Sarfraz Hassan, Khuda Bakhsh and Nazia Tabasam also suggests that ‘the host country should fulfill certain prerequisites and conditions e.g. financial development, macroeconomic and political stability, better law and order situation, educated and skilled labor force and supportive infrastructure for FDI to be positively related with the economic growth.’ While it is important to explore new corridors, PTI needs to strengthen and revive the traditional corridors by matching the skills requirement with changing job demands in these countries as that’s where the juice is. After all, skills development was something that they vouched for in their agenda. But call it wrong timing, or the state of the economy, or the overestimation of investment by PM Imran Khan, or halfhearted promotion
FY16
FY17
FY18
FY19
attempts, the launch of diaspora bonds – Pakistan Banao Certificates also spelled out in PTI’s 100-days agenda before election to tap diaspora savings to bring much needed foreign exchange has not hailed success. There is a need for a sustainable solution, more than such short or one-time solutions. At the same time, much more effort is needed on the FDI front. FDI right now is less than one percent of the country’s GDP. Not only is there a need to diversify in terms sectors and countries, changes in taxation, energy, skills, and sector-specific policies along with reinvigorating Board of Investment to do its job of FDI promotion and encouraging foreign investors to reinvest in the country must be undertaken at priority if PTI wants to revive foreign investment in the country.
Promises Exports Fiscal Deficit Review Overview
st 1One year year of of PTI-Led PTI Government Government
Economy
Stability A Business Recorder Perspective
Huma Sattar Amidst resounding voices prescribing import substitution and “Make in Pakistan” as the ultimate long-term policy solutions to the country’s perennial current account deficit and growing imports crises; local manufacturing has plummeted. So has current and expected business confidence in Pakistan’s economic future. Everything that could go wrong, did. Provincial figures of the PBS till May-19 show large scale manufacturing (LSM) had a negative growth of 2.1 percent in FY19, against a 5.1 percent during the period last year (5% is also the average growth in the past five years),
Plunging Business Confidence in Naya Pakistan Jun-19 (over 400 firms surveyed) Overall Business Confidence (Industry) Overall Business Confidence (Services) Overall Business Confidence (Overall) Purchasing Managers Index (Industry) 58 56
IK comes to power
54 52 50 48
IMF prog. is penned
46 44 42 40
Jun Aug Oct Dec Feb Apr Jun 2018 2018 2018 2018 2019 2019 2019
Source: SBP Pakistan's Business Confidence Survey
against a target of 8.1 percent. How the mighty have fallen! The economic austerity measures and ensuing slowdown was necessary to rein in the twin deficits. As the SBP third quarterly report argues: “the industrial sector, particularly manufacturing activities, bore the brunt of these measures”. The report further contends: “It is important to note here that businesses have been navigating through challenging times from the start of this fiscal year, as sharp depreciation of the rupee, rising input costs, flagging domestic demand, PSDP cutbacks, regulatory tightening, and unintended inventory accumulation, were all taking toll on industrial volumes”. While monetary policy was tightened, rising costs also pushed businesses to raise working capital based lending that further escalated costs. Evidently, the resultant manufacturing stalled while cost of doing business grew. Nearly all segments under the Large Scale Manufacturing Index (LSM) computed by the Pakistan Bureau of Statistics (PBS) have contracted. High weightage groups such as textile and food saw manufacturing drop 0.3 and 5 percent respectively. Meanwhile, steel, cement and automotive sectors also witnessed substantial production slowdown between 5 and 11 percent. Bank credit is a reliable barometer for the performance of the formal sector, but its composition matters too. High input costs and cash flow constraints led to increased appetite for short term borrowing (working capital had 70 percent share in total lending to businesses) while long term borrowing in the form of fixed investment loans
Other manufacturing exports ($mn) (Including SME groups such as leather, carpets, sports goods, footwear, surgical, cutlery goods)
FY18
FY19
390 370 350 330 310 290 270 250
July Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun
Source: SBP
segments. These numbers can be used as proxy for SME production as those figures are not readily available. Textile exports still reign supreme with big ticket items such as cotton cloth, cotton yarn, knitwear and bed wear reflecting growth as other manufacturing segments reclined (see table). The depreciated rupee should have made exports more competitive in the foreign markets but clearly didn’t make a dent. All of this is also manifesting in business confidence. Immediately after Imran Khan came into power, business confidence soared, only to plunge in a few months. Since then, businesses have complained not only about rising costs, but also of uncertainty in policy. According to the survey conducted by the
Textile exports ($mn)
declined. Overall increase in firm credit did not coincide with increased production. According to the Pakistan Economic Survey for the period Jul-Mar, fixed investment’s share in total credit fell from 37 percent to a mere 15 percent year on year. Any CAPEX is noticeable in the energy sector, power transmission in particular. Businesses in general are not taking a long term view on the economy. Rising interest rates has also made it difficult for firms to “roll over their bank debt”. Demand on the other hand is not on their side, and as the economy trudges forward, credit off-take will decline as production takes considerable backseat. Cumulative exports fell by 1 percent during FY19 in which the decline is most pronounced in the SME
FY18
FY19
1,250 1,200 1,150 1,100 1,050 1,000 950 900 850 July Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Source: SBP
Central Bank in collaboration with the Institute of Business Administration (IBA), the growing sentiment amidst the business community is that of despair (see graph). Businesses are not optimistic about production or employment. Though with the IMF program penned, and the painful budget now out, the private sector should be relatively more certain about the future. Ironically, that certainty is not helping, and certainly pointing toward a somber next year, particularly in the industrial sector of the country. According to the latest survey conducted in Jun-19, “firms in the industry sector are expecting to decrease their employment in the next six months”. Businesses—industrial sector in particular—are bracing themselves, and for good reason. The next year will not be easy. However, this also presents to them an opportunity to change the lens. They need to prepare better for the worst to come and produce smarter for the best they could achieve. They also need to really think about what it means to “make in Pakistan”. In a world that is fast automatizing and transforming production, is “make in Pakistan” just an ability to merely substitute imports or is it to create world class competitive products that they can put brand Pakistan’s name on? The PTI is a new government which while inexperienced is more open to new policy ideas. Businesses need to ask themselves if business-as-usual is what they aspire to. So here’s the silver lining for the eternal optimist: if everything that could go wrong actually did in this past year, surely the only way is up.
We congratulate the PTI government on the completion of its first year in office. Let us use this occasion to renew our resolve for a better and happier Pakistan
Let us use the occasion to renew our hope that the PTI Government shall honor all its promises to the people of Pakistan Let us use the occasion to urge the Government to help Business, the Exporting Industry in particular, make the kind of contribution it can for the greater glory and prosperity of Pakistan.
Promises Exports Fiscal Deficit Review Overview
st 1One year year of of PTI-Led PTI Government Government
Economy
Stability A Business Recorder Perspective
in numbers
Performance GDP & Sectoral Growth (%) Agricultural Sector
Industrial Sector
LSM
Services Sector
FY15
GDP
FY16
FY17
FY18
FY19*
40.00
7.0
6.5 5.7 5.7
6.0 5.2
5.0
4.4
4.0
30.00 5.5
5.2 4.6
4.1
6.3 4.9
4.6
20.00
4.7
10.00
3.9 3.3
3.0 2.0
2.2
2.1
0.00 10.00
1.4
20.00
0.9
1.0 0.2
0.0 FY15
Textile
FY16
FY17
FY18
FY19
Food, Coke & Beverages Petroleum & Tobacco Products
Iron & Non-Metalic Steel Mineral Products Products
Automobiles
Fertilizers
Pharmaceuticals
Source: Pakistan Bureau of Statistics (PBS)
Sector Contribution to GDP Growth Services Sectors
Industrial Sector
6.0
1.18
0.45
1.0 0.0
0.43
0.76
0.95
1.02
1.06
3.35
2.55
3.84
2.79
FY15
FY16
FY17
FY18
FY19
33.4
30
20
Machinery Food Transport
10
FY15
CPI
Others
19.54
9.0
80
5.89 5.59
6.63 7.04
6.29 6.35
7.21 6.03
5.63 5.88
7.0
11.61
10.17
10.34
14.33
14.67
15.98
22.22
19.03
16.28
18.73
20.65
23.74
26.35
FY16
FY17
FY18
FY19
10.97 16.35 16.18
12.06 16.17 19.18
20 0
25.74 FY15
Export Composition by Group Textile 100
Food 7.60
90 80 70
16.27
19.28
Other Manufactures
WPI
SPI
7.32
Petroleum & Coal & other
3.0
1.78
3.92
0.26
1.0 3.0
FY15
3.46
1.57
1.34
1.0
Net Reserves with SBP
7.31
6.44
25,000
15.56
15.16
14.63
14.64
20,000
20.06
20.67
18.17
4.16 4.05 2.85
5.70
19.19
5.16
4.56
5.0
5.37
50
30
0
FY19*
0.88
1.03 FY16
FY17
FY18
FY19
Liquid Foreign Exchange Reserves
60
40
FY18
11.0 19.16
10
FY17
11.96
18.56
30
FY16
13.0
20.18
40
40 20
19.27
50
60
27.4
26.6
24.2
90
60
80
38.6
65.2
Price Indices
100
Percentage
73.9
35
15
Petroleum / Gas Agricultural & Chemicals Textile
70
100
83.5
25
3.74
Import Composition by Group
Percentage
95.2
40 0.20
120
105.8
45
0.30
2.0
as percent of GDP
50
56.85
59.88
60.97
58.00
58.25
FY15
FY16
FY17
FY18
FY19
US$ (mn)
Percentage Points
3.0
External debt & liabilities (RHS)
Agricultural Sector
0.03
5.0 4.0
External Debt & Liabilities (billion US$)
15,000
Net Reserves with Banks
4,956
5,258
5,174 6,618
10,000 5,000 0
18,143 13,526
FY15
7,196 16,145 9,765
FY16
FY17
FY18
7,280 FY19
Promises Exports Fiscal Deficit Stability
Review Overview
A Business Recorder Perspective
st 1One year year of of PTI-Led PTI Government Government
Economy
Current account balance (billion US$)
FBR : Tax Collection
Customs
Current Account Balance (LHS)
4,500 0
4,000 608 497
1,344
1,537
FY15
FY16
FY17
FY18
(25)
(4.0) (5.0) (6.0) (7.0)
Total Public Sector Expenditure on Health
Export
Current
60
Development
Total
400 336
350
50
4.746 4.055
7.195
5.132
250
34.580
37.056
40.315
45.893
30 20
292
300
4.664 Rupees (bn)
40
35.399
Metric Tonnes (mn)
(3.0)
(13.6)
1,329
1,217
FY14
Cement dispatches : Local & Export
150
248
225 199
200
100
10
190
173 147
130
115
69
59
FY15
FY16
FY17
FY18
0
FY19
78
102
88 24
FY14
FY15
FY16
FY17
FY18
Workers' Remittances USA
U.K.
Saudi Arabia
UAE
Others
Honorable Prime Minister of Pakistan
25
Big congratulations on your fantastic one year! In just 1 year you’ve shown that how capable you are. May the years ahead bring more success and achievements for our country.
20
5.40 4.48
3.78 15
4.36
4.33
10
5
-
Thanks to your leadership and dedication combined with your teamwork and energy, we are now enjoying the result of the work. You and your ministers should take great pride in this accomplishment.
4.62
4.37
4.23
Good leaders create a vision, articulate the vision, passionately own the vision, and relentlessly drive it to completion.
4.97
4.76
5.00
4.86
5.63
5.97
2.38
2.58
2.34
2.70
2.52
2.45
2.84
3.41
FY15
FY16
FY17
FY18
FY19
5.47
PTI government promised spanning reform of primary, secondary, tertiary, vocational, and special education. The education budget allocation remains well below the prescribed 4% of GDP and poor education planning results in supply and demand mismatches. Nearly 22.5 million children are out of school in Pakistan because they cannot afford expensive books & copies. Paper & Paper Board the basic raw materials are levied with the discriminated highest custom duty & additional customs duty. Coated Paper & Paper Board entirely not produce in Pakistan also levied with highest duty, additional duty & regulatory duty. Pakistan deserves the best; please rationalize duty /taxes on paper.
3.41
2.89
Try to be a rainbow in someone's cloud
Automobiles Production IS
T
Trucks & Buses
PA K
81.8 71.5
186.3
179.9
0
FY15
1,362.1
1,131.2
1,000
FY16
1,633.0
152.5
500
ALL
209.3
FY17
FY18
1,766.4
'000
1,500
217.8
1,928.8
78.2
81.9
FY19
S O C I AT I ON
114.7
2,000
NTS
2,500
AS
LCV
PA P E R M
CHA
Cars
AN
ER
2/3 Wheelers
204
180
50
0
US$ (bn)
0.0
(15) (20)
Local
FY19
(1.0)
(10)
1,034
0
FY18
(2.0)
877
1,000 500
1,302
1,500
306 1,088
2,000
243
FY17
(19.9)
2,500
FY16
(12.6)
405
FY15
(5)
1,491
3,000
996
Rupees in bn
3,500
FY14
Current Account Balance (% of GDP)
(4.9)
Excise
(2.8)
Sales
(3.1)
Direct Taxes
APPMA
ALL PAKISTAN PAPER MERCHANTS ASSOCIATION
FY19
Promises Exports Fiscal Deficit Review Overview
st 1One year year of of PTI-Led PTI Government Government
Economy
Stability A Business Recorder Perspective
Hammad Haider
One year on, foreign policy is the area where critics should give the Khan government a better grade. An A minus, for effort! A good mix of strategy, goodwill and luck has placed Pakistan on a better footing abroad. Just a year ago, serious foreign policy challenges existed, threatening Pakistan’s economic and geopolitical interests. On one end was a supposedly non-political FATF going out of its way in making Pakistan comply. And on the other, the US administration was hinting that it might use the IMF platform as well to squeeze Pakistan. Soon after the Khan administration took over, it became obvious that the main foreign policy objective was to placate the United States in order to create some breathing room to resolve immediate issues. And the road to a reset in US-Pak relations went through the Gulf. No wonder PM Khan ended up visiting Saudi Arabia and the United Arab Emirates thrice each in a year. It helped that the premier struck a personal rapport with the Saudi Crown Prince, who is said to have played a leading role in getting Khan an audience
with Trump last month. The two GCC majors also helped Pakistan financially as they provided $5 billion in assistance in the entire fiscal year 2018-19. Some investment deals are also in the pipeline. As always, for Pakistan to work to its advantage the diplomatic see-saw that it has long been playing between China and the US, it had to let one side down a bit. So it was for all to see that China wasn’t the PM’s first overseas visit – in fact, it was the third overseas trip, taking place in November 2018. Before the visit, the Pakistani leadership looked a little hesitant in praising CPEC’s virtues and didn’t project the same confidence it used to display in 2016-18 that CPEC would help transform Pakistan’s economy. Beijing, however, seemed to understand Pakistan’s predicament and allowed a mutual understanding to take root through measures like revising the Pak-China FTA. In fact, China continued to assist Pakistan in FY19, with foreign assistance of over $2 billion. The PM visited China again a few months ago, as a special guest at the Belt and Road Forum.
While that diplomatic dance was underway, the overtures to Malaysia, Turkey and Iran helped rekindle the brotherly ties Pakistan has historically enjoyed with these countries. The balanced foreign policy also helped revive Pakistan’s historical stance of being a neutral friend in
the face of regional rivalries. Hence, Qatar became curious as well – PM Khan visited Qatar and the Qatari Emir visited Pakistan in June. The immediate consequence was the Qatari deposit of $500 million with Pakistan out of a $3 billion assistance package. As with the Saudi and Emirati packages, the Qatari assistances also lacks a public disclosure of
Sohaib Jamali One idea still missing from barber shop conversations, however, is the taxation of the barber shop itself and other small businesses like restaurants, grocery chains etc. In what could turn out to be a politically hot decade for Pakistan, the good thing is that public clamouring has begun,’ so concluded this newspaper’s Fiscal Review published in August 2011. The story since then has somewhat followed the script but the climax is still to take shape. Public clamouring on taxation affairs has only now begun to heat up, following the announcement of budget FY20, which is when PTI’s tax reform plans were really put into action. The party had inherited the budget FY19 when it really formed the government in late August 2018, and chose to play along with it, sans a few changes such as pro-Make in Pakistan revisions brought about through two mini budgets. Ideally, the government should have started rolling out tax reforms through its first mini budget because the earlier any ruling party sows the seeds of
reforms, the earlier it reaps the harvest, and the better its re-election prospects. But until as late as May 2019 the party could not find anyone suitable from within the Federal Board of Revenue, and eventually the government reached out to Shabbar Zaidi, senior partner at accounting firm A.F. Ferguson & Co. And thus began the real story of PTI’s tax reform – nine months after coming to power. How has been the government’s performance so far? Well, obviously it’s too early
to write a report card – except for pointing to the clear absence of a dream team as Imran Khan had claimed and lack of preparation to deal with the economic situation upon coming to power. But as far the
recently rolled out reformoriented steps, it’s really been just two months since the budget FY20 was proposed. Even the much-expected public furore hasn’t abated as yet. But furore aside; as far as specific reform measures are concerned there has been some noticeable progress. Granted that on some accounts, the government hasn’t moved much. This includes the effective implementation of the separation of tax policy from administration. In late CY18, the government separated policy from administration, but so far, the policy board is wanting, inter alia, in terms of structure, secretariat, and provincial representation. Nor has the government has moved towards getting professionals in FBR by delinking the tax body from federal Public Service Commission system. The very appointment of Shabbar was challenged, which is why he was appointed on honorary basis.
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what kind of quid pro quos have been agreed or expected. Meanwhile, the foreign policy highlight of the political year was the post-Pulwama spike in tensions between India and Pakistan. While the hostilities conveniently suited the BJP government’s bid for what looked like a close re-election campaign, the response from the Pakistani side was regarded internationally as far more measured and mature. International news media wasn’t eager to accept the Indian version of the “Balakot strikes” and the Indian evidence of the IAF-PAF “dogfight”. Instead, it debunked some of those myths and highlighted Pakistan’s actions that carefully de-escalated the crisis. As for PM Modi, he continues to resort to ghosting when it comes to Khan’s mantra of talking for peace. That diplomatic episode was upended in significance only by the PM’s recent US visit. The three-day tour generated enough sound bites and photo-ops to help Khan and co persuade folks back home that they had Mr. Trump right where they wanted him to be. After all, the US President suggested as much
that without Pakistan there was no resolution to America’s longest war; he hinted on a restoration of aid and also argued for increasing bilateral trade; and as luck would have it, President Trump ended up offering to play a mediating role on Kashmir, something which has caused alarm bells in India. While all those nice things can change in a Trump tweet, it seems as if Pakistan has again been able to remind the US of its geopolitical importance. And Trump would like to “extricate” from Afghanistan before the 2020 elections. While the chips may now be firmly in place, now comes the time to deliver results. In that context, the timelines matter. Pakistan has a critical FATF review due in October and a satisfactory progress is dependent on how accommodative will the hitherto-aggressive US representatives be on that forum. If Pakistan has indeed secured a transactional fair play with the Americans, the latter would likely want something in return before October. In that context, the Doha talks are expected to provide a breakthrough on a preliminary deal in September between the
American and Taliban negotiators. Both sides – Pakistanis and the Americans – are expected to exercise their respective leverages in installments. What that might look like is the US getting an initial deal in September that is contingent on an intra-Afghan dialogue and Pakistan getting a conditional reprieve from FATF in October. On the economic front, Pakistan has every reason to continue the accommodative foreign policy in order to keep bilateral inflows coming. In FY20, the government is expecting to receive over $6 billion in external assistance from China, over $6 billion from Saudi Arabia and $1 billion from the UAE. Though it would be hard to fulfill the IMF’s structural benchmarks, most of which are due in FY20 and early FY21, there is enough incentive to do so in order to comfortably secure multibillion dollar injections from multilateral bodies like the World Bank and the Asian Development Bank. Securing both bilateral and multilateral assistance is essential to finance the current account deficit for some more years to come.
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Stability A Business Recorder Perspective
>> Continued: Govt’s tax effort deserves a cheer However, on other accounts, the government has moved quite fast; faster than many people would like even among PTI’s inner circles. This includes the removal of zero rating on domestic sales of top exporting sectors. The move, aimed at both revenue generation and documentation, has been received with great deal of criticism over concerns of tax refunds. But so far, the government hasn’t budged. Kudos for that, and for increasing the valuation rates of immoveable property. The implementation of Benami law is another aspect. Following the end of this year’s amnesty scheme, the tax body has started already sending notices to those who hold immoveable benami assets, while the government has increased the incentives for whistleblowers who identify benami assets. The FBR is still struggling to figure out a way to get banks to
provide data of benami accounts. This will be a tricky move given the secrecy laws that give legal cover to banks. But it’s a matter of time before laws may be changed. A 2006 OECD survey titled 'Tax Co-operation Towards a Level Playing Field', reported that most of the 82 countries it reviewed have some access to bank information for tax purposes and "50 countries give their authorities access to bank information for all tax purposes", i.e. for the consumption of local revenue authorities as well as for exchanging information under bilateral tax treaties. And this is despite the fact that in all of these countries surveyed by the OECD, banks were obligated by law to treat customers' affairs as confidential. Ergo, if not this year, then next, the legalities could be sorted out here at home as well. The government has also started taking steps to
increase the number filers in a manner that was only paid lip service to in yesteryears. Notices to around 100,000 non-filers are in the process of being sent to those who own a house/vehicle above certain threshold. Notices are being sent to hospitals and doctors in Karachi, and there are reasons to believe that courtesy data analytics, this time will be different. Other measures of bringing more people into the system include simplified tax regime for traders, fixed tax regime for small shopkeepers, and submission of CNIC of unregistered non-ordinary buyers required for purchases above certain threshold. It is feared that these measures will hurt economic growth this year and the next. But then economic growth has already been hit so hard that actually now may well be a good time to cast the net as do fishermen when the tides are low.
Moves to increase the tax base would always hit economic growth and be politically difficult – so best to take those hits now when things are already bad and get it over with, rather than disrupting the growth phase as and when it begins. In other long pending areas, the government has just begun to make amends, and it’s too early to say whether these will bear fruit. This includes initiating discussions with Chinese state authorities to sign an MoU to fix the issue of misdeclarations in Pak-China trade, and the review of Pak-Afghan trade regime as well as Afghan transit trade where under invoicing and smuggling respectively has led to loss of customs revenue. This list also includes baby steps being taken towards automation, taxpayer education and facilitation. In summary, three failures stand out from PTI’s performance on taxation so far. First, the failure
to start fixing the institution of taxation, if not the whole institutional structure ala a national tax agency. Second, the failure to provide evidence behind the policies or the reform measures being implemented. And third, the failure to create a buy-in for reform measures. On all these accounts, the government may be given a benefit of the doubt on the premise that the first year was all about crisis management. But with the IMF programme now signed, and immediate crisis averted, one expects the government to start working towards institutional reforms. As far as the specific measures are concerned, things have begun to move in the right direction. There is of course public furore - some because of genuine troubles, some just crocodile tears. While the IMF does not have a huge list of structural benchmarks for taxation (just two really), the crisis
itself demanded urgent actions that the government took without due consultation and research. Going forward these shortcomings need to be addressed by resorting to evidence-based policy making, creating a healthy debate and using strategic communication tools to create a buy-in for all the painful changes it is trying to bring out. If the government fails to take steps to address these concerns over the next twelve months, then its seriousness to fix the country’s tax system would be called into question. But as far as specific measures are concerned, it’s good see those steps being taken, although of course it can be hard to spot stealthy change especially when one lives through it. There hasn’t been a revolution in tax reform yet; but the implementation of politically difficult measures in budget FY20 deserves a small cheer.
Zuhair Abbasi Of all the problems inherited, energy was the most complex, when PTI assumed office in August 2018. One year on, things have not moved at an ideal pace, and from what it looks, tough two to three years are ahead in terms of power sector. First things first, the ability to generate power was not a problem when the government took office. The previous government had added close to 12000 MW in the system, most of which were under CPEC. The demand was not growing exponentially, and with the economic slowdown kicking in almost as soon as the PTI came in, pumping in power was always going to be easy. The electricity generation in FY19 grew barely 1 percent year-onyear to 122 billion units, which translates into 103 billion units of actual consumption, after factoring in the system losses. The losses have continued to be high, close to 20 percent, and in cases of some discos, even higher than easier thresholds. The regulator’s inability to have a tighter control and instead allowing far more than threshold losses as part of final tariffs, has been a massive problem, and there was no progress on this front. The government claims credit for a much improved power generation fuel mix. Only that it should not. If the previous government can claim any credit on the power front, it was the ability to add more capacity in the system aimed at improved fuel mix. Nonetheless, the improvement did come in FY19 as the share of furnace oil based generation was reduced to single digits, while that of imported LNG
and coal based generation reached new highs. It would have been much nicer, had the benefit of a much improved generation mix been transferred to the consumers. But in fact the tariffs kept on increasing as Pakistan entered yet another IMF programme. The tariff increase was made a structural benchmark, in order to reduce the cost differential and put a lid on the ballooning circular debt, which had crossed Rs 1 trillion. The tariffs have been increased across user categories, barring domestic consumers using up to 300 units a month. This in itself is more of a problem, as nearly 80 percent of domestic power consumption is exempt from tariff increase, and the allocated subsidy of nearly Rs150 billion in the budget, does not cover up for the same. The rise of unfunded subsidy has been a major problem, and the issue exacerbated with the government’s relief scheme for industrial users in general and export industries in particular. That takes out another 25 percent of total power consumption out of the tariff hike, instead this requires room for more subsidies, which have not been allocated. Either the government will have to roll back some of it, or will end up running higher subsidies, or in case of delayed payments, another round of circular debt may well be in the offing. And we have not even talked out the biggest issue yet, and that is the elephant in the room, the capacity payments. Not that the government is not looking to recover the difference between price and cost, but there is
little debate on the elephant in the room, that is the capacity payment component. The amount of upwards adjustment that may be required for FY19 determinations for respective discos, could be too hot to handle. The IMF is not the worry as far as the power prices are concerned, capacity payments are. The capacity payments in FY16 were Rs280 billion or Rs3.4 per unit sold. This increased to Rs644 billion or Rs6.2 per unit in FY18, constituting almost 60 percent of the power purchase price. Much of it has to do with CPEC related power projects, as lopsided take-or-pay contracts were always going to cause trouble. The dependable generation capacity in FY19 went up by almost 20 percent year-on-year to 31000 MW. The demand did not grow. The RLNG plants are fully available, among many others from the CPEC projects. No demand growth and higher generation availability, with contracts based on take-orpay, it is estimated that the capacity payments component for FY19 would be north of Rs900 billion. The currency devaluation has also played its role. Now with almost Rs9 per unit as capacity payment, it is obvious that the benefit of lower fuel price and improved generation mix was never going to materialize. And there is more to come in lieu of tariff adjustments. The latest IMF programme, like any other IMF programme, is overly focused on price as the key to reforms. Yes, price is an integral part of the power sector reforms, but it is surely not the only one. It did not work back then, it will not work
Iftikhar Ali Malik It will be one of the biggest achievements of PTI Government if it is able to create harmony among the SAARC member countries to work for achieving the basic object of regional cooperation, in trade technical cooperate in Agri. & Industry, free movement of goods and services, in culture and tourism. Ground Work has been done. SAFTA has already been signed. South Asian Association for Regional Cooperation (SAARC) was founded to enhance regional economic cooperation through trade and joint ventures of foreign investment on the pattern of European Union (EU). Success of EU was on the basis of common political will to enhance cooperation, while this spirit is missing in SAARC, consisting of Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan & Sri Lanka. Pakistan has played dynamic and objec-
tive role in making SAARC a successful entity. Head Office of SAARC in Islamabad has been built. It is a state of the art building to accommodate representative offices of all member countries as well as facilitate to arrang'e meetings, receive delegations, and holding seminars. Most of the members are willing to work together. Scope of cooperation is tremendous. Honourable Prime Minister of Bhutan in 2012 at a seminar stated that shared vision and collaboration efforts at public & private sector level can mitigate the impact of climate change. And cooperation in energy could help South Asia in its transformation from energy constraint to energy surplus region. Similarly, Honourable Minister Rishad Bathiudeen, Minister of Industry & Commerce, Sri Lanka on the occasion of the completion of 25 glorious years of
SAARC Chamber stated “There is no doubt that SAARC CCI is a platform that helps the region to advance in many aspects, including socio¬-economic development SAARC is not just important but essential for its people to advance regional integration. It is always a win win for all stakeholders”. The writer (Senior Vice President) on this occasion of Silver Jubilee said “Despite almost three decades - expected results are not visible. It is not for lack of ignorance or lack of creativity of its leaders, but it is political will that determines what member wants. In the end I will request the PTI Govt. to persuade the member countries to set aside the differences and make this cooperation activity successful, which is in the interest of the people of South Asia Region.
The writer is the Chairman, United Business Group, Senior Vice President & Incharge Headquarters SAARC CCI Pakistan, Former President, FPCCI & LCCI and Chief Executive, Guard Group
now. The government is due topayments Fear files: Capacity announce the revised tariffs for FY19 by September end, as per the IMF’s Rs (bn) Rs/unit (LHS) structural benchmark. And the 8 budgeted subsidy may not be enough to cater for the increase. The governance reform, the focus 6 on transmission, privatization of DISCOs and commercially opening up the market are all key component of the reform, which have sadly taken a 4 backseat, as price becomes the focus. The first year was a missed opportunity; the second could be a disaster, if they 2 don’t look beyond pricing as means of reforms.
900
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Source(s): BR Research, Nepra
now. The government is due to announce the revised tariffs for FY19 by September end, as per the IMF’s structural benchmark. And the budgeted subsidy may not be enough to cater for the increase. The governance reform, the focus on transmission, privatization of
DISCOs and commercially opening up the market are all key component of the reform, which have sadly taken a backseat, as price becomes the focus. The first year was a missed opportunity; the second could be a disaster, if they don’t look beyond pricing as means of reforms.
Promises Exports Fiscal Deficit Review Overview
st 1One year year of of PTI-Led PTI Government Government
Economy
Stability A Business Recorder Perspective
Great Expectations People have shown patience realizing the economic strains faced due to serious balance of payment situation and depleting foreign exchange reserves. The government’s response took long to take shape, giving rise to extended uncertainty which had its impact on the stock market operations and at the same time concerns about currency’s stability
Kalim Farooqui Great Expectations is a novel written in the 19th Century by Charles Dickens that depicts the personal growth and personal development of an orphan nicknamed Pip and contains some of Dickens's most memorable scenes. Dickens's themes include wealth and poverty, love and rejection, and the eventual triumph of good over evil. Upon its release, the novel received near universal acclaim. In the 21st century, the novel continues to retain good ratings among literary critics and is still a popular prescribed text in schools and colleges globally. Essentially it describes the journey of Pip which travels in conflict amongst hope and despair but eventually succeeding in the mission he sets himself to. Pakistan’s journey ever since its creation in August of 1947 has been no different. The roller coaster ride it has witnessed between civil and military rule with highs and lows at different points for different reasons seems to have tapered off with the third consecutive civilian government at the helm of affairs and with an agenda for a “Naya Pakistan” This very terminology has given rise to great expectations by the public and perhaps earned the popular vote for the present government to come into power having struggled for over 22 years. The 82-page document titled “ONE YEAR OF NAYA PAKISTAN” released by the government on the 18th of August conveys details on the aims and objec-
tives as also achievements of some 41 areas under the control of the Federal Government. The pages take you through each ministry and their divisions elaborating upon their different programmes and performance during the first year. To the common man on the street and more so to the daily wage earners, such details do not convey the thinking the government envisages for progress in the long term. They understand the rise in prices related to their daily use items while the government seems to be concentrating more on what they see as the more pressing issues of national debts, balance-of payments crisis, depleting foreign currency reserves, and the like. If it was not for the help by friendly countries like China, Saudi Arabia and the United Arab Emirates helping with over seven Billion Dollars, Pakistan would not have been able to meet the country’s essential imports much less service the maturing critical debt financing. The government was able to avoid a default which otherwise would have sent inflation spiraling having an adverse effect on the economy and its financial standing internationally. The lengthy negotiation with IMF further helped with a commitment of nearly six-billion-dollar bailout package of which nearly a billion has already been received. The package, which supports the government’s efforts to revive
the country’s ailing economy also helps as an endorsement giving way to other multi-lateral donor organizations like the World Bank and the Asian Development Bank the confidence they require. However, a year into its term in power, the government has much to deliver what was assured during their election campaign. People have shown patience realizing the economic strains faced due to serious balance of payment situation and depleting foreign exchange reserves. The government’s response took long to take shape, giving rise to extended uncertainty which had its impact on the stock market operations and at the same time concerns about currency’s stability. In both cases, speculation took its toll which further aggravated the situation. The real panic situation, more so in the business circles, now seems to be easing out. The stock market has improved considerably while the currency is holding ground. Securities and Exchange Commission (SECP) reports that in July more than 1,500 new companies have been registered, an increase of over 40% as compared to last year. Pakistan’s ranking in World Bank’s Ease of Doing Business Index has improved from 147th in 2018 to 136 in 2019. The government’s battle against swollen trade deficit is bearing fruits as it shrank by 29 per cent in the first month of this fiscal year, driven largely by a decline in non-essential luxury items. The
The writer is a member of several Bi-Lateral Business Forums in Pakistan and the Managing Director of Technology Links.
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All Pakistan Timber Traders Association
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completion of first year of Government. Our heartiest congratulations to the government on succesful completion of the first year in the office. Arguably challenging, yet the government showed enough to sail through difficult times, making unpopular but necessary decisions. Hoping the journey towards prosperity continues without hiccups and the government’s aim to make Pakistan stronger and its economy sustainable, sees the light of the day.
Due to the dire need and non availability of Wood & Timber in our country we strongly request you to please consider our request for Wood & Timber HS-Code 44.01 to 44.07 to abolish 2% Additional Customs Duty. We are hopeful to get your valued cooperation
All Pakistan Timber Traders Association
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trade deficit decreased 28.84pc to $2.27 billion in July, from $3.19bn over the corresponding month of last year. The decline in imports is mainly due to the imposition of regulatory duties on luxury items and automobiles. Remittances from overseas workers increased 24 percent to $2.039 billion in the first month of the current fiscal year from $1.645 billion in the previous month. The filing of income tax returns for tax year 2018 has reached the total number of 2,404,371 as compared to 1,486,756 returns filed for the tax year 2017 indicating a growth of 62 percent over the last year. Such optimistic situation has come about from several policy
interventions by the government including improved energy supply, import substitution drive, incentives for the export-oriented industries, economic stabilization, and by the effect of currency devaluation as well. Great expectations though, are still in place as employment situation is far from satisfactory and the same applies to poverty alleviation, corruption, inflation, safe drinking water and housing which was time and again assured before coming into power. Presently the country is facing several challenges as the economy has weakened, inflation and unemployment are
on the higher side and the masses are facing uncertainty. This was admitted by no less than the State Bank Governor while addressing the flag hoisting ceremony on the eve of 73rd Independence Day of Pakistan at SBP head office. The government must seriously work on a long-term economic growth plan which should benefit low income and middle class whose hopes and expectations were repeatedly raised during the election campaign. Like Pip, the orphan nicknamed by Charles Dickens in his novel, people are hopeful of a change in their lives from the “Naya Pakistan” promised.
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