Govt accepts IMF bar on new SEZs

Will not set up new special zones, withdraw existing incentives after expiry

ISLAMABAD:

In a major development, Pakistan has accepted the International Monetary Fund (IMF) condition that it will not establish any new special economic or export processing zone and tax incentives already availed by the existing zones will not be extended after expiry.

The IMF's condition under the $7 billion Extended Fund Facility (EFF), which is yet to be approved, will immediately hurt the government's plans to establish an export processing zone (EPZ) on a piece of land of the closed Pakistan Steel Mills (PSM).

Government sources said that the IMF had asked Pakistan that it would not create any new special economic zone (SEZ) or EPZ. The condition will be applicable to both federal and provincial governments. However, Khyber-Pakhtunkhwa has refused to accept it.

Such conditions underscore how deeply the IMF has captured Pakistan's economic and industrial policies, which could adversely impact future growth prospects and the desire to bring Chinese industries to these zones.

The government has accepted scores of IMF conditions, including the imposition of a record Rs1.8 trillion in new taxes and the increase in electricity prices up to 51%. However, despite these harsh measures, along with the conditions that will give control of industrial policies to the IMF, Pakistan has not yet been able to secure a date for approval of the $7 billion bailout package.

Talks for the EFF had begun in May this year, which culminated with a staff-level agreement in early July. But despite the lapse of two months, there is no clarity about the date of IMF's executive board meeting.

SEZs and EPZs are entitled to special facilities and tax incentives aimed at encouraging businesses to establish clusters of commercial activities. Finance secretary said last month that Pakistan's unemployment rate was over 10.3% while poverty grew to 40%.

Sources said that the IMF condition would adversely impact the government's earlier decision to establish an export zone on PSM land. The Special Investment Facilitation Council (SIFC) has already approved the idea of setting up an EPZ over the land of steel mills.

However, the government of Khyber-Pakhtunkhwa has refused to accept the ban on setting up new economic zones.

Industrial expansion is a provincial subject and backward provinces like Khyber-Pakhtunkhwa need cheap industrial zones, economic zones and export zones to lure industries, Muzammil Aslam, Adviser on Finance to the Chief Minister, told The Express Tribune.

Aslam said that even in the developed world every state had different tax policies and provinces needed to compete with infrastructure and taxation. "The IMF cannot dictate on this front," said the adviser.

The dominance of finance ministry in negotiations with the IMF at the expense of planning ministry's role has led to the acceptance of such conditions that may appear fiscally prudent but carry huge socio-economic costs.

In the past, the Planning Commission used to play an important role in IMF talks but the Ministry of Finance has now sidelined the commission, which is resulting in acceptance of conditions having serious economic implications.

Sources said that the government also agreed that Pakistan would not provide any new fiscal incentives to the new and existing economic zones and would not renew the existing incentives.

Under the SEZ Act, investors are entitled to exemption from income tax for 10 years for zone developers, co-developers and zone enterprises.

There is also a one-off exemption from all customs duties and taxes on the import of capital goods for zone developers, co-developers and zone enterprises.

During the last fiscal year, the government gave Rs7 billion worth of exemptions to the zone developers.

Pakistan had planned to set up nine SEZs under the China-Pakistan Economic Corridor (CPEC). So far, it has begun work on two zones – the Rashakai Special Economic Zone in K-P and the Allama Iqbal Industrial City in Faisalabad.

The Dhabeji Special Economic Zone, Sindh and the Bostan Special Economic Zone, Balochistan are at various stages of planning.

The new IMF condition will hit the ICT Model Industrial Zone, Islamabad, Industrial Park on PSM land, Mirpur Industrial Zone, Mohmand Marble City and Moqpondass Special Economic Zone.

Pakistan is still keen to attract Chinese industries to these zones as part of the second phase of CPEC. This IMF condition may further deepen suspicions that the global lender is targeting Pak-China relations, said government sources.

The SIFC division on Tuesday stated that a high-level Chinese business delegation, comprising representatives of Xinjiang Iron Brothers Co Ltd and four other prominent Chinese business entities, visited the SIFC.

The delegation was given a briefing on investment opportunities in priority sectors including agriculture, livestock, information technology, energy, minerals, tourism, industry and the policy-level measures being undertaken to improve the overall investment climate, it added. "The delegation was also briefed about the salient features of industrial development in Pakistan and it showed keen interest in investment in key sectors under the SIFC and the relocation of Chinese industries to Pakistan including Gilgit-Baltistan," said the SIFC.