Economic and political outcomes are intertwined and mutually reinforcing. And in 2019, the consequences of the bad policies and worse politics of the last six years will come more fully into view. It is for this reason one feels the government’s economic package (announced on last Wednesday) to increase investment and growth of industrial sector in particular, and to introduce some tax reforms in general is a good and timely move. Amidst a noisy protest by the opposition in the National Assembly, the finance minister unveiled the Finance Supplementary (Second Amendment) Bill 2019, claiming that his government is regularly undertaking structural reforms and seeking help from friendly countries; steps that are helping overcome the balance of payment crisis. Boasting that several structural measures undertaken earlier have already started yielding positive results in form of growth in exports and contraction in trade deficit contributing to considerable reduction in current account deficit. He further went on to say that these new measures will increase investment, revive growth of industrial and agriculture sectors and propel the country on path to self-sufficiency, but still if they do not prove to be enough, the government is ready to take the more difficult decisions to fix the economy even if it has to take an IMF program, however, it would ensure that it is the last one. Very well and well done! Still, notwithstanding the fact that some of the measures announced seem rather transaction-specific (no tax on bids for sports franchises until profitability; provisional assessment on undeclared assets; and the reduction of agricultural tax to 20%, whatever this means) and that how any government can say for certainty that a budgetary support program with a global financial institution is going to be the last one of its kind or let alone even imply that seeking a financial program in itself is necessarily a bad thing, let’s take all this on face value and try and assess these announcement to visualise a larger picture on economy that the PTI government perhaps has in its mind or is trying to achieve. Also, to see, whether or not any of these measures need further fine tuning to get to the desired results.

In essence, most of the measures aim at boosting industrialisation and exports in the economy with the most striking being the decision to reduce the tax from existing 39 percent to 20 percent on banks’ income from loans to the following but specific sectors; small and medium enterprises, agriculture, and low cost housing scheme. This is a very welcome move, as it clearly aims to resolve the liquidity problems for the SME sector, which as we know is always the backbone of growth and employment generation in any economy. However, it will be better that when doing so if clear financing targets in this regard are laid down for the banking sector with an independent oversight mechanism in place (and not just by the State bank of Pakistan). Meaning, that annual targets with amounts and sectors should be defined with penalties in place for non-compliance or else simply for the banks to be unable to avail this facility in case of a non-compliance – There is a repeated history on how the banks have hoodwinked successive governments into believing that the required threshold on such schemes in the past was met, whereas, the reality was quite different.

Next, from what one understands, the announcements relating to: Allowing non-filers to buy small and mid-size cars up to 1300CC; low cost housing; allowing non-filers to continue to conduct cash based banking transactions by paying a slightly higher withholding tax; abolishing of 0.02 percent withholding tax on trading in Stocks; and additionally permitting the capital losses from investments in stocks to be carried forward for three years, are all measures meant at freeing up the economy. Fair enough, but the danger here is that while these loopholes do bring about economic activity in the market, it is generally at the expense of the documented sector. Also, the stock exchange in the past has been used as a conduit to whiten money earned through dodging taxes, and yet again by re-introducing such reliefs one may perhaps be only repeating the past mistakes. These loopholes only increase pressure on the honest taxpayers, because the revenue collection authorities invariably come hard on them when their targets cannot be met – already we are seeing a FBR collection shortfall of 175 billion and also its annual target of 4,398 billion seems quite ambitious. While the measures to shift investment from consumer and domestic market driven retailing and wholesaling markets to instead manufacturing and export seeking markets, like: introducing a scheme of issuing bankable promissory notes to the exporters against their accrued sales and income tax refunds to help ease their liquidity; allowing business groups to expand in new ventures and to grow a web of holding cum inter-related companies; encouraging companies to reinvest profits by abolishing tax on retained earnings; abolishing the super tax on non-banking companies by July-2019; and a continuous lowering of income tax in a stage mannered to reach a level of 25 percent by 2023, are all steps in the right direction, one feels the real game changer though is going to be the legislation on the green field investments in the upcoming SEZs – these have been given complete exemption of sales tax and on duties for import of plant and machinery and also there will be no income tax on them for five years from commencing commercial production. Any industry coming in the SEZs would be given special care - no taxation and a smooth implementation process. If this can be adhered to in letter and spirit, this step alone can do wonders for Pakistan’s growth and development in the years to come.

From what one can see, in general the idea or the vision of the PTI government is to - at least once - give the businesses and entrepreneurs what they need and then look to generate sustainable tax revenues from resultant growth. Great, but the government needs to be careful on this as the idea sounds quite ‘Trumpian’ in a culture where generally people and firms avoid paying their legitimate taxes! Even in a mature economy like the US, such measures, recently announced by President Trump, are resulting in the US Department of the Treasury now looking at a $1 trillion deficit for 2018 – the largest single-year non-recessionary peacetime deficit in its history ever. As if this was not bad enough, according to numbers recently released by the economist, Joseph Stiglitz, Trump’s measures have further stoked inequality in the already most unequal of developed economies, and even the promised increase in investment (by Mr. Trump) through these measures has not materialised.

Most US corporations have funnelled excess liquidity into stock buybacks and dividends. But this isn’t particularly surprising, because unless there is an active follow-up and a vigilant regulatory oversight the capital does not always move in the direction intended by the government, in-turn leaving the government with even a larger fiscal hole than what was there to start with - And this is precisely where our government also needs to be careful. Micro-management has never been the strong forte of Pakistani governments and time and again we have seen that measures directed to de-regulate the economy end up in only distorting the market due to unfair practices. For example, regardless of how good the announcements are for the SEZs, it will all depend on who, when and what finds its way into the SEZs and how effectively the industries transition into becoming competitive global players once the holiday period of 5 years gets over. Perhaps the government needs to link its relaxations to an annual performance that calls for a clear progress on indigenisation and self-sustainability, when the governmental incentives are over. For example, in our automobile and motorcycles industries the period laid down for this purpose was never respected and we still import majority of the parts in shape of subsidised SKD Kits!

Finally, there remain some glaring contradictions. If the intent is to enhance national savings, then to do so by way of high interest rates and a devaluing currency is a non-starter to begin with. With such high interest rates and resultant inflationary pressure through devaluation, the growth will inevitably slow down and the jobs in the economy will naturally become scarce. Given a widening governmental deficit, cut in its development spending and an eroding state-support structure (both federal and provincial), the only way is to increase savings is by increasing the net-worth per individual earnings, but going by these measures alone, the government will not be able to bring itself to do this. The missing link in Wednesday’s announcements one feels is taxation as there are no measures to enhance revenues apart from a bit of import compressing duties. Given the ever rising revenue shortfall and as the stabilisation process through these measures (if successful) may take its time to deliver, the fiscal deficit is likely to touch 6.5 percent and the growth rate may fall to as low as 3.5% in the current fiscal year, and to tackle the fall-outs from this slow down would pose as the main challenge for the PTI government in 2019 – The struggle is far from over and there is still a long way to go!


The writer is an entrepreneur and economic analyst.