How to pull Pakistan out of the current mess

Country’s economy has been run into the ground for the last ten years


Ajaz Ul Haque October 26, 2018
The writer is a financial professional and an independent commentator on finance and politics

Pakistan’s economy has been run into the ground for the last ten years, the rupee has never been this weak and depreciated this fast before. The balance of trade is at its worse with the deficit exceeding $30 billion annually, exports are dwindling, imports are sky-rocketing and foreign exchange reserves are under pressure. Without $20 billion a-year annual remittances from overseas Pakistanis, the country would have been in serious difficulties. The previous two governments quadrupled the public debt in ten years. Loans were borrowed at much higher interest rates than paid by countries that have defaulted frequently, whereas Pakistan has never defaulted.

The poor economic management has brought the country to its knees having to knock at the doors of the IMF once again. The textile industry has been run into the ground and Pakistan’s fastest growing IT Industry has had no help whatsoever from the government.

Pakistan’s solution to energy independence lies in wind & solar energy, developed locally. Solar technology is now available worldwide, China copied US technology and is now the largest producer of solar tiles. Pakistan should obtain one-time technology transfer and produce solar tiles locally. A country that produces nuclear weapons can also produce wind turbines. All future energy projects should be restricted to hydel, solar and wind only to reduce import costs of LNG, oil and gas.

There is an urgent need to improve the balance of trade and the looming deficit. The import of consumer goods is destroying local industry and straining foreign exchange reserves. Every country from Bangladesh to Vietnam is exporting finished garments worth tens of billions of dollars, but Pakistan has failed to capture a meaningful share of this market. The export comparison with upcoming Asian economies puts Pakistan to shame, Vietnam with exports worth $214 billion, Thailand $237 billion, Bangladesh $36 billion and Pakistan the lowest at $25 billion.

Pakistan’s IT industry has potential to become the largest export industry. The Prime Minister should invite the leaders and young entrepreneurs of this industry to determine what help and support they need to lift it from a $4billion a year to a $20 billion a year industry. With enormous expansion potential, this industry could create several hundred thousand jobs.

The SEZs in CPEC corridor offer a huge potential and could add billions of dollars to exports. A competent trade team should be set up in the federal government to help and guide international investors to avail tax and other benefits from SEZs. Meanwhile, trade pacts need to be renegotiated to ensure $1 import is matched with $1 export.

The IMF has recently agreed to lend $54 billion to Argentina — a frequently defaulting country. Greece owes 700 billion euros to the EU. If Pakistan seeks IMF assistance, then it should take a leap forward and ask for at least $30 billion repayable over 20 to 30 years. This will help meet urgent payments and provide funds to invest in education and healthcare. Improved education and healthcare would grow the economy and produce new and young self-employed entrepreneurs.

The income tax regime is dismal with just one million filing tax returns. Pakistan’s tax collection is amongst the lowest in the world. The salaried class pays high tax rates and the common man bears the brunt of indirect taxation while businesses pay little or no taxes.

To increase the tax base, it should be mandatory for every adult earning over a certain amount to file income tax return irrespective of whether the income is derived from agriculture, salary or business. Agricultural income can stay tax free for now, but eventually it must be made taxable. It is unfair that one person deriving income from salary pays 30% tax and another person deriving the same income from agriculture pays no tax. Mandatory filing will enable the authorities to track the source of income and assets and make it harder to conceal income and assets. A single page, easy-to-fill-out tax return should be introduced which can be filed physically in person or online. To encourage non-filers, a 15% flat rate Income Tax should be introduced across the board. The business community has been the most negligent in paying taxes, a one-time window of opportunity should be allowed to everyone to pay 15% tax for each of the last ten years with no questions asked. This opportunity should be widely advertised and publicised and the window should remain open for six months. A well- publicised campaign of benefits for filers and punishment for non-filers could increase the number of tax filers manifold. After the six-month window closes, any non-filers detected should be punished severely and even have their assets confiscated.

Real estate is probably the largest untaxed business in Pakistan, profits are made by buying and selling properties without paying taxes. A five per cent federal property transfer tax on all property transactions above Rs1.0 million should be imposed. Those who buy land to build or buy property to reside in should be given a full refund upon production of completion certificate or proof of owner occupation. This tax can generate billions of rupees and help bring those into the tax net that operate under the radar. A forensic department within the FBR should track transactions from CNIC numbers used in property transfer and registration.

Corruption is rampant amongst tax officials; to discourage this, there should be substantial incentives for tax officials that catch defaulters, so that instead of pocketing money, they collect for the exchequer and also benefit personally. Any tax official caught taking bribes should be punished severely, so others are dissuaded from this practice.

State-owned Enterprises are a constant burden on the exchequer. Political interference, overstaffing and incompetent management has turned PIA from once being one of the best airlines in the world to a barely existing, debt-laden and loss-making one. Better financial and professional management can bring PIA back to profit within a couple of years. Airlines from the Gulf operate over 600 flights a week to Pakistan, whereas PIA and private airlines operate barely a handful of flights. There is an immediate need to revisit the CAA’s open skies policy to a one-for-one flight.

Privatisation should proceed on a fast track basis and dispute resolution with Etisalat relating to PTCL’s 26% sale needs an urgent solution. Sale of the remaining PTCL shares and holdings in already privatised assets can generate several billion dollars.

Pakistan’s economy can be pulled out of its current morass and substantial funds can be generated in foreign & local currency with reforms and better economic management. An honest, hardworking and visionary leadership can turn Pakistan’s fortunes around within two to three years.

The state’s interest is supreme and if we don’t look out for our country’s economic interests, no one will.

Published in The Express Tribune, October 26th, 2018.

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COMMENTS (2)

Arshad Khan | 5 years ago | Reply Great article and perspective on the current state of economic affairs and thank you also for providing tangible solutions. I do not agree with privatization and do think that state corporations can be run efficiently if there is proper oversight. Secondly, the greatest culprits of the financial drain from the country need to be identified and monies properly allocated to social uplift instead of pogroms of war.
Saad Haq | 5 years ago | Reply Sad situation nicely put in words/perspective... everything you have written about each industry/sector is spot on but when you incorporate Opportunity Cost, more billions/prosperity has been lost in the IT sector than any other because of incompetence and lack of implementing the needed policies of the time... when IT had just started to be outsourced back in 2002-2003, Pakistan had a golden opportunity but it was lost to India who had the right strategy to attract and hence get a bigger market share than it would have had previous Governments done things according to the need of time! That would have resulted in things being different today than an average mind/majority can comprehend! I'm sure so is the case with all industries. But IT sector can put the smart/above average brain level youth to work faster than any other sector of Pakistan! Let's see what IK has in store.
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