Govt to audit subsidy schemes for exporters

Officials allege traders are misusing incentives to inflate profits

ISLAMABAD:

The government has decided to conduct an audit related to the performance of the export-oriented industry amid allegations that it was misusing the multibillion rupees given to it in form of subsidies. In a recent meeting of the Economic Coordination Committee, the issue of subsidy was presented while considering the Drawback of Local Taxes Scheme for 2021-26.

The finance ministry turned down the claims of the commerce ministry regarding the surge in exports and pointed out that the jump in exports was not due to the rise in quantity rather, it was due to higher prices of products in the international market. The State Bank of Pakistan (SBP) governor and the officials from the Ministry of Finance pointed out the misuse of multi-billion rupees in subsidy that was doled out to the export industry.

They further called for devising an accountability mechanism. Finance Minister Shaukat Tarin was of the view that there should be “some accountability mechanism in place”. The SBP governor pointed out the rapid increase in margins of industries that had availed the subsidies. During the meeting, the committee chairman desired to conduct cost-benefit analysis of the scheme on a quarterly basis, preferably through a third party “and subsequent decisions may be taken up accordingly”.

He stressed that there must be some accountability mechanism in the scheme as well. The SBP governor suggested that an objective study must be conducted to evaluate the benefit of the subsidy on the growth of exports. He said that the subsidy given to the traditional sectors, especially large-scale manufacturers, “has resulted in very high profit margins”. Therefore, the scheme must be reviewed to support appropriate mid-sized industries.

The Finance Division underlined that multiple subsidies, offered under various schemes like lower cost of energy, were placing huge burden on the government. The division said that the rise in exports was not due to increase in quantities, but rather due to higher prices of products in the international market. The meeting suggested to link the subsidies to the increase in the export quantity. The Ministry of Commerce was directed to submit a detailed mechanism for undertaking independent impact analysis on quarterly basis to review performance of the sectors as well as exporting firms availing the scheme.

The Ministry of Commerce will be provided with the funds and budget amounting to Rs50 billion for fiscal year 2021-22 for the clearance of claims in the scheme. While requesting for budget allocation for the scheme for fiscal year 2022-23 and onward, the commerce ministry would submit the detailed impact analysis of the scheme before allocation of the funds, it was decided. The commerce ministry recalled that in 2018, ECC approved extension of the prime minister’s export package for the period of three fiscal years (2018-21) to keep up the momentum of export growth.

The federal government has made all efforts to reduce the cost of doing business and increase competitiveness through the rationalisation of tariffs on raw materials and inputs, regionally competitive energy rates for five export-oriented sectors and market determined exchange rate. Owing to this approach, the country’s export sectors, under the said scheme, posted a positive growth. Based on fiscal year 2020-21 data, exports, under the said scheme, showed compound annual growth rate (CAGR) of 6% during the three fiscal years.

This increasing trend in exports has been demonstrated in the majority of the sectors covered under the incentive schemes. It was mentioned that in order to continue this growth pattern on a sustainable basis, there was a need to further extend the drawback incentive scheme for the period of five years with certain modifications/ improvements for export sectors to address their liquidity issues and ensure predictability.

The scheme would incentivise product diversification within additional sectors, new product development to expand the export basket, geographical diversification to access markets that were not fully exploited and encourage value addition. The commerce ministry further informed that a new Drawback of Local Taxes Scheme (DLTS) for a period of five financial years was prepared in consultation with the Finance Division. Highlight The commerce ministry informed that a new DLTS for a period of five financial years was prepared in consultation with the Finance Division