THE government has proposed a major fiscal stimulus in its budget for the next financial year to encourage declining private domestic and foreign investment with a view to boosting growth from present 4.1pc to above 7pc in three years to June 2017.
The question now is: do we have the necessary economic infrastructure in place to back the stimulus, and will investors respond to the government’s call? Not only the opinion on effectiveness of the stimulus is divided, many businessmen grudge the ‘preferential’ treatment being given to foreign investors.
The Nawaz Sharif government is targeting to boost total public and private investment from less than 14pc of the domestic output to 20pc in the medium-term to attain higher growth and create jobs. The Economic Survey of Pakistan for 2013-14 says investment is down from 14.6pc of domestic output last year to below 14pc in the first year of the government believed to be a business-friendly setup. The fixed investment is down from 13pc to 12.4pc and private investment from 9.6pc to 8.9pc. The gross fixed investment in the manufacturing fell from 1.7pc to 1.1pc despite a rise in private credit disbursement. Foreign direct investment plunged 12pc.
The proposed stimulus suggests significant increase in public spending on large infrastructure projects like Karachi-Lahore motorway, thermal and hydro power generation, China-Pakistan economic corridor, etc. Many suspect that its financial problems will keep the government from even getting close to its (consolidated federal and provincial) development spending target of Rs1.175t, which is 44pc larger than the revised estimates for the present year.
The incentives for the industry, particularly textile sector, include corporate tax cuts, interest rate reduction on export refinance and long-term finance, duty-free import of machinery for next two years, cash rebates on growth in exports, expeditious refund of local taxes and sales tax to exporters and so on.
The joint ventures with 50pc foreign equity will be eligible for tax holiday for five years and corporate tax of 20pc instead of 33pc (reduced in the budget from the present level of 34pc) for domestic investors — a measure Pakistan Business Council (PBC) chairman Sikandar Mustafa and others described as discriminatory. “The same facility should also have been extended to domestic investors. This policy will encourage people to first take their capital out of the country and then bring it in (to invest in industry) and claim the low corporate tax rate.”
Another businessman, who did not want to be identified, was of the view the corporate tax incentives for foreign capital was in reality meant for the Chinese investors who’re being wooed by the government to invest in textile and other sectors in Punjab. “Or it could be a mechanism to let some big businessmen to launder their illegal money stashed outside the country.
A similar amnesty scheme for the black money holders in the unorganised sector was given last winter. Now is the turn of the government’s cronies in the documented business,” he said.
The Institute of Policy Reforms (IPR) analysis of budget shows the incentives to private sector entail an estimated cost of Rs100b. The combined effect of concessional short and long term financing for exports is Rs75b. Duty drawback will cost Rs5b and cut in corporate tax Rs20b.
A major chunk of the incentives proposed for the textile sector seeks to encourage value addition in the industry’s exports. The low value addition means lower unity price in the international markets and low export revenues. Even Bangladesh fetches double than Pakistan — fourth largest cotton producer — in textile export revenues although it does not grow a single bale of cotton.
Shahzad Ali Khan, a textile manufacturer and solvent extractor, doesn’t believe fiscal and tax concessions alone could do the magic. “Such incentives as announced in the budget work only when you have energy — gas and electricity — to power your factories. Who’ll invest when new gas connections are banned and electricity is in short supply and existing factories are fighting for survival?,” he asked. He was sorry to note that energy shortfalls were being distributed on political basis.
“Instead of giving priority to the productive sectors — industry and agriculture — in energy supplies, the government has chosen to satisfy urban domestic consumers for political reasons.”
Shahzad finds Pakistan an ideal place for investors. “Our annual income per person is one of the lowest in the world; labour is cheapest in the region. What else you want? But this advantage can’t be exploited as long as we have uninterrupted and affordable electricity and gas. Give us energy and we will give you the desired growth in six months without any incentive package,” he concluded.
The pro-industry bias of the budget has generally attracted a lot of praise from the businessmen and their representative bodies. People like Almas Hyder, a plastic auto parts producer and exporter, note the fiscal incentives given in the budget must revive investment and growth. “The incentives have definitely perked up the business mood. Many are considering capacity expansion and new projects; they’re aware that their future is in investment and growth.”
What worries Irfan Qaiser, a former president of the Lahore Chamber of Commerce and Industry, is the fact that the government had failed to treat the different sectors of the economy equally. “The kind of incentives being given to the textile industry should have been extended to the other sectors of the economy,” he contended.
“This will make new investment less broad-based with foreign equity getting big tax break and cut and the textile industry wooing major chunk of new investments.”
Published in Dawn, June 9th, 2014