The yearly Global Competitiveness Report (GCR) compiled by the World Economic Forum (WEF) has ranked Pakistan 129th out of 144 countries in 2014-15, this compares with 133rd out of 148 last year. GCR ranks countries on 15 pillars of competitiveness, the risks include (1) Basic Requirements (2) Institutions (3) Infrastructure (4) Macroeconomic environment (5) Health and primary education (6) Efficiency enhancers (7) Higher education and training (8) Goods market efficiency (9) Labour market efficiency (10) Financial market development (11) Technological readiness (12) Market size (13) Innovation and sophistication factors (14) Business sophistication and (15) Innovation. Among South Asian countries WEF has ranked India, Bangladesh, Sri Lanka, Nepal and Bhutan all above Pakistan.
Eradication of corruption being the key slogan after load-shedding during the last general elections, the absolute apathy towards corruption is inexplicable. Pakistan ranked 126th out of 174 countries in 2014 in the Corruption Perception Index (CPI) of Transparency International (TI) with only Bangladesh in South Asia ranking below us. In WEF’s “Partnering Against Corruption Initiative” (PACI), of which I am a member, Pakistan does not fair any better. The corruption of the Zardari years is well-documented, Mian Nawaz Sharif is not inclined to move against him, is it quid pro quo? Attracting foreign or domestic, investment is impossible in an environment where contracts are not enforced and property rights remain nebulous.
A household survey in 2013 conducted by Sustainable Development Policy Institute (SDPI) revealed that “71% of eligible taxpayers did not pay because of a lack of faith that tax revenues would be utilized correctly and weak administration. The respondents also revealed giving informal gifts to tax officials for: curtailing intrusion and harassment (40%), reducing time towards tax compliance (29%), and preventing arbitrary evaluations and levies (37%).” The number of taxpayers regularly paying taxes dropped by 100000 or so in 2013 from 2012 given that less than one million in Pakistan actively bear the burden of a 180 million plus population.
Delivered rather enthusiastically by Federal Finance Minister Ishaq Dar in the National Assembly (NA), the Federal Budget 2015-16 got mixed reviews. Economists called it “realistic” but remaining concerned whether the govt could meet economic and fiscal targets for the upcoming fiscal year without collecting additional revenues. To deliver on the proposed measures and reforms, the economy must grow faster to enhance exports, industrial growth, investment and employment across the broad spectrum. The govt did received kudos from the IMF, they are at least satisfied that the govt is studiously following their dictates.
Servicing the huge country debt is impossible without burdening ourselves with more loans, implementing sharp austerity measures and/or further depleting the country’s foreign exchange (FE) reserves. No step was taken for substantial debt reforms despite some good initiatives. Deteriorating trade balance, high budget deficit and the instability of the Pak Rupee could be the imminent serious risks. Various budgetary incentives may attract investment in the services sector, but despite the success of Operation “Zarb-e-Azb” security conditions and the energy crunch remain major challenges for investors.
The Tax Reform Commission (TRC) proposals are classified in three broad categories: (a) tweaking of tax rates, rules and procedures; (b) structural reforms pertaining to restructuring of FBR and boosting its IT infrastructure; and (c) a meta reform framework, which included the tax payer “Bill of Rights” and removal of exemptions under income tax second schedule. TRC’s Chairman Masoud, asserts, “tinkering isn’t the objective of the reforms.” Increasing tax collection through existing shareholders and/or indirect taxation will likely have further adverse effects on the formal economy. Giving concessions to selected private sectors will complicate the taxation system. Reducing various duties and taxes on import of agriculture machineries and equipment will enhance mechanisation of farming. Reduction in the rate of capital gains tax on properties and exempting builders from income tax will encourage builders and developers (invigorating the real estate and construction industry) resulting in consolidation of the economy. In their half year report on the economy, SBP suggested the age-old strategy of export-oriented and import-substituting manufacture be the prime directive going forward. Exporters welcomed the budgetary proposals as “an export-oriented with significant cuts in the export refinance rate and interest rate on long-term finance facility, both measures helping to boost exports.” Giving incentives to registered taxpayers, the govt has proposed transferring the powers to issue SROs from the Federal Board of Revenue (FBR) to Parliament.
The govt’s heavy borrowing from banks adversely affected overall economic growth plans because of the lack of liquidity required for the private sector. Given this cheap “source of income”, commercial banks are more and more inclined to do less and less traditional banking. While the banking sector amassed record high profits in 2014 investing in PIBs. Encouraging banks to purchase FIBs by giving attractive returns, how could Ishaq Dar complain of the bank’s interest in govt papers taking precedence over lending to the private sector?
With low spreads and further tightening on deposit return requirements not bringing about a change in banking asset-mix, banks have been shy of aggressive a commercial lending by banks stimulating private sector growth appears quite dismal. An analysis based on the first quarter accounts of 2015 (1QCY15) shows the top nine commercial banks stocking most of their PIBs in their AFS portfolios. Net advances of all but two of these nine banks were down from their end-2014 levels, the exceptions being Allied Bank and Bank Al Habib.
In a further denouement of the banking industry, according to BMA Capital “the downward earnings revision for mid-tier banks far outpaces that for the Big-5 due to their higher administrative expenses, fewer avenues to augment non-funded income and higher risk on asset re-pricing due to their higher advances-to-deposit ratios”. KASB Securities analyst Farid Aliani maintains “This is an opportunity to banks to finally diversify their asset books in favour of advances. Banks with higher zero-cost current accounts, stronger revenue contribution from non-interest components, longer duration asset mix, substantial international book and lower administrative cost burden are likely to prevail much better against the rest,” . Real, not paper, profits are only possible by drastically curtailing expenditure further complicated by “sleight of hand accounting”.
Despite political instability, Zarb-e-Azb and CPEC has positioned the country for economic resurgence. The Army has given great sacrifice for bringing about a semblance of peace not only in the mountains but increasingly in the urban areas, encouraging China to go ahead with the CPEC proposal despite the law and order complications and vociferous opposition from India. The govt must fulfil their budgetary dreams by radical reforms needed badly to stabilize and invigorate the economy.
