March 18, 2003	Tuesday	Muharram 14, 1424

ISLAMABAD, March 17: The government is finalizing a major policy package that includes utilization of foreign exchange reserves for project financing, re-introduction of exchange risk cover for machinery import and a five-year tax exemption on investment.

Sources close to the prime minister’s adviser on finance told Dawn the plan was being given final touches on the recommendations of the ministerial committee on “Export-led Growth”, constituted by Prime Minister Mir Zafarullah Khan Jamali, early last month.

Noting with satisfaction that the reserves have crossed the $10-billion mark, the committee of which Shaukat Aziz is also a member, has proposed to utilize the State Bank’s foreign exchange reserves for project financing.

The government would also establish special economic zones (SEZs) on the Chinese model at Karachi and Pindi Bhattian to attract industrial relocation to Pakistan, and these zones would be offered to China, Japan, South Korea and the Middle Eastern countries.

The committee, led by Commerce Minister Humayun Akhtar Khan, comprised advisers to the prime minister on finance and privatisation, besides ministers for industries and food and agriculture, and the SBP governor.

The package would be submitted to the federal cabinet for approval to promote investment in the productive sectors as part of the government’s policy of export-led growth, the sources said.

The committee has so far held two meetings to consider a comprehensive policy plan for the revival of industry. The plan seeks complete revival of 1997 investment policy that also includes 90 and 75 per cent allowances on industrial investment, both in new and modernization plans.

The committee, the sources said, had formulated special strategy for relocation of industries from abroad to attract investors from developed countries, besides reintroduction of exchange risk cover for import of machinery.

The committee has yet to devise a long-term project financing scheme but will finalize in its next meeting a financing scheme which has competitive rates at the global level.

In view of the financial problems faced by the investors in the establishment of new industry, the committee has suggested to reduce spread of banks i.e difference between borrowing and lending rates.

The sources said tax credit would be kept at up to 25 per cent of difference between gross income and cost of funds, to the banks/DFIs for long-term new project financing and the BMR.

The SBP would be asked to reintroduce exchange risk cover for projects to import machinery and rates charged should be closer to the market rates without involving any subsidy. The exchange risk cover scheme was last introduced to launch the independent power producers (IPPs) during the second PPP government but was later withdrawn because of its heavy costs.

The committee has proposed to exempt the investment from withholding tax for five years as a saving instrument and has decided to recommend incentives to develop Term Financing Certificates (TFCs).

The expected incentives would include that 10 per cent of income of corporations from the TFCs be treated as tax credit. Twenty-five per cent tax credit to the banks/DFIs on their net income from the TFCs of corporations be sponsored by these banks.

The government plans to create a technology up-gradation fund for the selected sectors like, textile, engineering, sports goods, etc., that would be sponsored jointly by the government through bilateral and multilateral sources and the private sector.

The committee has suggested to amend laws to encourage the creation of large holding companies. It has also proposed to reduce levies to three federal taxes, namely income tax, sales tax/customs duty and excise duty, one provincial tax and one local bodies tax, in addition to single window collection of the federal and provincial government levies and taxes like Employees Old-age Benefit Institution, social security, etc.

The committee has discussed the ways to reduce up-front investment costs through zero-rating of import duty on import of plant, machinery & equipment for value added export sectors high- tech industries, agro-based industries, infrastructure and social sectors, besides restoration of 90 and 75 per cent first year allowance (FYA) as per 1997 investment policy for priority sectors.

The plan also suggests that equity restrictions from the service sector investment should be removed and higher rates of DDBs should be given to selected export sectors to compensate for exchange rate appreciation.

Determination by the Engineering Development Board (EDB), the Board of Investment and the Central Board of Revenue (CBR) would complete all necessary arrangements before the opening of letters of credit and import of plants and machinery under the concessionary regime.

The government would formulate positive list with detailed specifications of locally manufactured machinery by the EDB reviewed on six months basis.

The committee noted that present rules for the import of used machinery were too old and should be reviewed on the basis of a 3-5 year custom tariff regime to encourage future planning by the investors.

Trade remedy laws i.e. anti-dumping laws and countervailing duties would be used more effectively. The government would provide incentives through tax relief for investment in Human Rights and R&D by the corporate sector (individual through associations, universities) for improving skills and productivity.

Remittances from overseas Pakistanis and the foreign direct investment (FDI) from the Middle East would be channelized into productive investment in the country.

Labour laws would be reviewed to promote contract labour system, right to replace unwilling workers, ban on outside trade union activity as per the ILO agreement, unions getting less than 25 per cent support in a referendum be automatically dissolved. A commission would be appointed to consolidate, simplify and rationalize labour laws.

The government would launch a campaign in the United States, the EU and Japan for image building of Pakistan’s brand. For this purpose a media campaign be launched in target countries in collaboration with expatriate Pakistani community and local experts.

Support would be extended to leading exporters, associations for brand name promotion through the EDF/EMDF. Incentives would be extended to exporters for buying brand names abroad.

TEXTILES SECTOR: The committee proposed that textile sector should be exempted from GST for ginning. Graduated scheme of incentives for selected sub-sectors (high value added content). Inclusion of Polyester Staple Fibre (FSF) in duty and tax remission for exports scheme (DTRE).