Hope for the best but plan for the worst


WEB DESK: At a meeting with some leading businesspeople of the country on Saturday, Prime Minister Nawaz Sharif reportedly agreed to higher export-led growth instead of consumption-led growth.

The PM also reportedly agreed to a zero-rated sales tax regime for major exports of the country instead of exemption from taxes – which in the past had led to rampant ‘flying invoices’. In fact, the quantum of refunds – under exemption from taxes– was quite high; it also caused more corruption in the country.

Pakistan has to earn dollars to pay for its imports and falling exports are a great cause of concern. Not only are bulk of our exports commodity based – whose prices are falling – our imports are also inflexible. The fall in prices of imported crude oil and POL products has provided us with an opportunity to restructure our economy and this window of opportunity should not be missed as international oil prices will not remain subdued for long. Since Pakistan is indeed an energy deficient country it will always need dollars to pay for its energy imports. Our forex reserves (not from borrowed money) must be enough to cover at least three months’ imports.

At present, our biggest foreign exchange earner is cotton and its ancillary value-added items. Our exporters want the Pakistani rupee to depreciate against the greenback. Is that the sole answer? We fear not. The strength of the dollar is not dependent on our whims. However, we can and should help these exporters in refunding taxes they have paid on inputs in a timely fashion. Successive governments have been accused of delaying refunds because of our fiscal woes. This can be done: (a) by providing government bonds (on over dues) which can be discounted; and (b) by zero-rating all the taxes on inputs paid by exporters.

Export refinance rate has already dropped to 2.5 percent (an all time low) but our trade deficit is still rising as exports have fallen much more than imports. But raising growth is clearly linked to increased domestic economic activity. Construction and agriculture activities need to get a boost. Steps need to be taken to do so. The required steps include quick passage of law on reposition by banks of the collateral pledged. This would lead the banking system to provide more mortgages. The delay in enactment of this law is hurting the economy. On several occasions, both the PM as well as the Finance Minister have received advice on this but to no avail. Provincial taxes can get a boost from periodic (every year) raising of DC value of real estate.

Another area which remains untapped relates to having dollar bonds sold to overseas Pakistanis. These non-resident Pakistanis would be willing to receive profits plus principal in local currency provided that bonds are properly marketed to them. A fund managed by a government concern (such as NIT) would go a long way to bridge the gap in a capital-starved economy. Sooner done – better it would be. Reports of Pakistanis coming back in the wake of economic difficulties in the Middle Eastern countries could materialise due to a continuous fall in oil income of these brotherly countries. So let us hope for the best but plan for the worst.

Source: Business Recorder