SEZs a remedy for balance of payments woes

Investors should get attractive tax, safety and regulatory incentives

DR NADIA FAROOQ April 16, 2018
Investors should get attractive tax, safety and regulatory incentives PHOTO: AFP

KARACHI: The China-Pakistan Economic Corridor (CPEC) has scores of mega projects. It has a unique value in the economy of Pakistan.

We have a chronic trade imbalance as exports are too low, which needs massive improvement. So, the Special Economic Zones (SEZs) are a key remedy to improve the trade imbalance.

An SEZ means a geographically defined area that has been approved and notified by the competent forum. Success stories of SEZs had started emerging in the late 1970s.

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The model of Chinese SEZs gained popularity among developing countries as a remedy that would help increase the pace of growth and put them on the path where they will be able to catch up with developed countries by means of development and enhancing living standards of their nationals.

China, Vietnam, Malaysia, Bangladesh, etc are the prime examples of stimulating huge investments for the SEZs where investors are given incentives in the form of tax break, duty-free machinery imports and others.

The purpose of SEZs is to attract foreign direct investment, eliminate large-scale unemployment, support a wider economic reform strategy and apply new policies and approaches on an experimental basis.

The SEZ Act was passed by Pakistan’s parliament in 2012 and amendments were made in December 2015 to make it more business-friendly. SEZs can be developed by the public sector, private sector and through public-private partnerships.

The SEZ Act provides for the establishment of such zones anywhere in the country with a minimum 50 acres of land. Of this area, 70% is to be used for processing while the remaining 30% is considered a non-processing area for establishing hospitals, residences, vocational training institutes, etc.

Priority zones

Forty-six SEZs had been identified under the CPEC umbrella, but nine of them were picked as priority zones during the sixth CPEC Joint Cooperation Committee (JCC) meeting in December 2016.

SEZs are more important for indirect benefits including the transfer of advanced technology, managerial techniques, skills upgrading and export diversification. A strategic approach is required to cash in on the existing and potential opportunities offered by the SEZs.

By looking at SEZs of other developing countries like China, Myanmar and India, the country can draw lessons and undertake evidence-based research to address the grey areas. For instance, the SEZs must be in growth areas, not in far-flung areas.

A strong management with a realistic incentive package and strengthened institutions are required to turn SEZs into a success story.

Pakistan can easily asses the difference in incentives by comparing them with those offered by other countries in the region.

China had relaxed its policies for SEZs in the 1980s, but now they are developed and no longer need the incentives that we need today.

Raw material has immense importance in the production process. In Pakistan’s incentive package, either there is no tax exemption for raw material or it is less attractive.

In many countries, no tax is imposed on raw material in the Export Processing Zones (EPZs) and the SEZs, but in the local market, they pay the tax.

If Pakistan wants to attract a large number of investors to the SEZs, policies should be focused on the important issues related to the production mechanism.

The protection of business community is very important as it creates confidence in investors. If the investor thinks that his assets are safe, then he will pour more capital. Some specific safety rules are required for the protection of investor assets.

The incentive package must address the challenges linked with the ease of doing business ie transparency in business regulations and duration of court proceedings in cases of financial disputes.

The difference between customs and non-customs zone is very important. Mostly, where SEZs are considered as customs zone, the incentive package is quite superior compared to other areas.

Expert opinion

In important decision-making meetings, the public and private sectors take part, but space is always left for experts.

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Whether legal, economic or financial, experts are key players in these meetings where they can help policymakers to make right decisions by sharing their vital opinion.

The developer can rent the sheds, but it causes conflict because it is a commercial activity and the Act states that the commercial activity should not exceed 30%.

The manufacturing activity has been set at 70%, therefore, if the developer will give the sheds on rent, then the commercial activity will increase, which will be against the Act.

So, the challenges and their solutions are very important for the policymakers to look at and frame policies accordingly for receiving maximum benefits with the establishment of SEZs under CPEC.

The writer has a PhD in economics

Published in The Express Tribune, April 16th, 2018.

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