If the ball isn’t dropped, this just might work
By Nasir Jamal
THE so-called mini-budget, or the economic reforms package, comprising an array of tax incentives and administrative actions placed before the national assembly last week has provoked highly polarised commentary on the suggested measures that seek to boost economic activity and investment.
The supporters of the six-month-old PTI government contend that Asad Umar, the finance minister, who laid down the proposals for the assembly’s approval through the second amendment in the finance bill 2018-19, has ‘nailed it’, arguing that implementation of the package will facilitate industrial growth, and stimulate a sluggish economy and stagnant exports forthwith.
The critics of the government appear to have taken the other extreme position, insisting that the measures will put more money into the pockets of the rich (which government hasn’t done that before?).
They have focused more on what wasn’t part of the proposals: a plan to control growing fiscal deficit, mounting inter-corporate debt in the power sector and widening current account gap.
The government’s economic team took its time in rolling out its economic strategy, but the argument that it does not have a clear policy direction does not hold water
Many have argued that the government of Prime Minister Imran Khan has clearly demonstrated the lack of a plan or direction to address these ‘macro issues’ by not tackling them in the mini-budget. Some say the lack of a strategy to drastically document the economy and increase the tax revenues will hurt Pakistan’s position in ongoing negotiations with the International Monetary Fund (IMF) for a bailout loan deal.
Any government action, policy or decision has to anticipate criticism. Yet the PTI government has attracted more than its fair share of criticism for its economic and financial policies owing to a number of political and economic factors, including growing political division and declining business confidence in the country.
Indeed, the government’s economic team took its time — in certain cases longer than expected — in rolling out its economic strategy, but the argument that it does not have a clear policy direction does not hold water.
Given the fact that the PTI had inherited a broken economy on coming into power — the fiscal deficit was mounting, an external sector propped up on expensive foreign debt was fast unravelling, inflation was going north and so on — it was but natural for it to take some time in rolling out its economic and fiscal policies to stabilise the collapsing economy. Last week’s economic reforms package also needs to be seen in this context.
Ever since it took over the reins, the Imran Khan government appears to have worked on a two-pronged strategy to steer the economy out of the deep mess the previous PML-N government had left behind, without immediately turning to the IMF for its funding needs in an attempt to avoid its strict conditions.
On the one hand, it went out to stabilise the external sector in the short-term by arranging much-needed cash from the Gulf States and China to finance the country’s widening current account gap, and implementing measures to compress aggregate demand in the economy, mainly through new curbs on imports, massive currency devaluation and higher interest rates.
On the other, it is trying to pursue a policy that it believes will help unshackle the manufacturing potential of the country, boost investments in new industrial projects and increase exports, thus unleashing growth in the medium to long term.
The latest tax and administrative reforms package for the industry and agriculture is but a part of the second prong of the government strategy to deploy supply side, business-friendly and pro-growth policies to improve market sentiments and put the slowing economy back on the track to recovery and sustainable growth.
The government has been able to provide some fiscal space for industrial growth and fresh investment because it did not rush for a bailout from the IMF as many of us wanted it to. Had it gone for the Fund programme, it would have found its hands tied as in the case of the previous two governments.
However, it would be naïve to expect the new policies to yield immediate results. Economic growth is unlikely to pick up pace in the next couple of years. Also, it will be wrong to assume that enough has been done to clean up the mess.
The government will have to follow up on the measures so far announced in the next budget through more reforms aimed at pushing investment in the manufacturing industry, broadening the tax net and rationalising unproductive public expenditure, and stabilising the external sector.
A break, however short it is, can reverse the impact of the whole effort.
Firefighting is the new normal
By Mohiuddin Aazim
Finance Minister Asad Umar insisted that the Jan 23 mini-budget was a reforms package. The Federation of Pakistan Chambers of Commerce and Industry (FPCCI) said it was actually a relief package. Critics saw an effective amnesty scheme for defaulters and non-taxpayers — a charge our Federal Board of Revenue (FBR) rejected vehemently.
By whatever name you choose to call it, the Jan 23 mini-budget brought to the fore a big reality: firefighting on the economic front goes on and no one can say when it will stop. We continue to see firefighting on the balance-of-payments front. We saw a third major fiscal firefighting exercise on Jan 23 in the form of a third finance bill in 2018-19.
Net foreign exchange reserves of the State Bank of Pakistan (SBP) declined to $6.36 billion on Jan 18, not enough to cover a month and a half of imports. But we got $1bn from the United Arab Emirates on the same day when reserves data came out. Another $1bn is expected by the end of January.
The current account deficit in the first half of this fiscal year stood at $7.98bn. Exports of goods and services in July-Dec 2018 fetched only $14.44bn whereas imports totaled $31.93bn.
Remittances in July-Dec 2018 stood at $10.72bn. Add this number to the combined exports of goods and services and you get $25.16bn — still far lower than our imports of goods and services.
Tax incentives for the corporate sector and commercial importers are expected to boost the sagging industrial output and expand domestic trade
The government’s claim that it is a reforms package makes sense in view of these numbers. The PTI wants to keep us ready for more reforms. After all, preparing the nation for budgets after budgets is not easy — politically or otherwise.
Tax incentives announced for motivating banks to lend more to agriculture and SME sectors and participate in the Naya Pakistan low-cost housing scheme are quite strong. Banks will now be paying 20pc tax instead of 35pc on incomes arising out of lending to each of these sectors. With such a big incentive, banks should love to increase lending to existing borrowers and reach out to new ones. Since activities in agriculture, housing and SME sectors revolve around a large number of people — unlike in the services or even manufacturing sector — the impact of the incentives will hopefully strengthen the PTI’s political capital.
The government takes credit for the doubling of private-sector credit and 22pc growth in agricultural lending so far in this fiscal year. But to translate growth in private-sector credit and agricultural lending into tangible gains for people, it needs to supplement both achievements with many other things, like an improvement in the federal-provincial political relationship and the removal of fears of uneven accountability from the minds of businessmen.
Some other measures announced in the mini-budget or the reforms package, as the government loves to call it, are also expected to impact banking activities profoundly.
For example, the decision to exempt tax return filers from the advance tax on cash withdrawals from banks means a lot for taxpaying companies and individuals dealing with banks. In the past, a number of them started bypassing banks for part of their cash-payments and that was affecting the expansion of banks’ deposit base negatively and fuelling growth of currency in circulation.
The government has neither lifted the advance tax on cash withdrawals from non-filers of tax returns nor reduced the tax rate for them. The assumption is the pain thus inflicted on non-filers may ultimately compel a number of them to become filers and lead to greater documentation of the economy.
But that is where the will of the government and the honesty and skill of our taxmen will be tested to their limits as powerful people take pride in evading taxes and the tax machinery is perceived as the most corrupt among all government departments. Unfortunately, banks continue to deduct this tax on cash withdrawals by even those who fall below the income tax threshold despite some clarifications issued by the FBR. There are people who ought to file tax returns and they do. But there are those who don’t. There is also a third category of our citizens: tens of millions of people who cannot be asked to file returns as their income is less than the minimum taxable limit. Why is a university student earning money from tuitions required to pay the tax if his annual income is below the threshold level of Rs1.2 million?
The finance minister should sort out this issue once and for all.
In his mini-budget speech, the minister also announced abolition of the advance tax on bank accounts fed wholly on home remittances and on banking instruments bought against cash (like demand draft and pay orders) for filers of tax returns.
Here again, there is a need to differentiate between those who are supposed to file returns but they don’t and those who are not legally bound to file such returns. Why, for example, a college student has to pay advance tax on the pay order she purchases from a bank for paying her fees?
As for the exemption of remittances-fed accounts, the abolition of advance tax should obviously help beneficiaries of those accounts and may act as an incentive for overseas Pakistanis to send more foreign exchange back home via banks.
The mini-budget has permitted non-filers to purchase new, domestically produced motor vehicles of up to 1300cc. This is expected to enhance sales of locally manufactured automobiles and may be helpful for banks in boosting consumer finance.
Other tax incentives announced for commercial importers and the corporate sector are also expected to boost the sagging industrial output and expand domestic trade. Banks stand to gain with an anticipated increase in corporate and commercial loans.
As an additional incentive, the government has also abolished super income tax on the corporate sector, excluding banks. Its removal was a big demand of the corporate sector and its acceptance should help companies perform better.
The introduction of three-year promissory notes for the settlement of overdue tax refunds can have a favourable impact on our domestic bond market. But whether they can be helpful in deepening this market depends on the rate of profit to be offered on them.
Not cool, minister
By Afshan Subohi
FINANCE Minister Asad Umar must be a happy man right now, receiving a pat on the back from all his friends, mostly members of elite clubs, for being a friendlier finance minister. How much longer will it take him to realise that there exists a Pakistan beyond the executive corridors?
Does the minister appreciate the country’s ranking in global monitors which highlights the low perception of Pakistan’s economic performance? Does he mind what the sentiments of the households are? My guess is as good as yours.
People in the street in Pakistan are already feeling the pinch of inflation with little hope for an increase in family income in the current environment of job and salary cuts. The next cycle of inflation — induced by the deficit financing required to support the incentive package in the absence of proper resource provision — will generate more economic stress for families.
The goodies being thrown at the propertied segments will be particularly hard to sell to those displaced people rendered jobless or homeless by the anti-encroachment drive. The middle-class that struggles to make a decent living may also not buy the logic of doling out concessions to the rich and trusting them to act socially responsible and invest in the industrial base to create new jobs.
The salaried class appreciates the exemptions, but will it be willing to pay for the concessions for the rich from its pockets?
The track record of the business community in the country has not been good in this regard. It is a known fact that historically big businesspersons of Pakistan have opted for short-term avenues of quick profit over long-term investment in the industrial base. If the country is de-industrialising, can’t compete in trade and lacks exportable surpluses, the business class shares the blame with the policymakers.
The International Monetary Fund (IMF) and other donors are not expected to approve of the selected generosity of a government facing an acute financial crisis.
Teresa Daban Sanchez, the IMF representative in Islamabad aired her reservations in her comments reported in this paper. In her remarks she reminded that the government will need to mobilise resources through new taxes to cover the cost of the announced measures.
Minister Umar, in his post supplementary budget press conference, expressed confidence that the fiscal deficit would remain within limits.
He based his optimism, despite a stated Rs170 billion revenue shortfall in the first half of the current fiscal year, on the expected recoveries from held-up funds in the Gas Infrastructure Development Cess and other administrative measures, without new taxes. He said he was engaging with multilateral donors but denounced strongly the point raised in this regard.
Some economists who have held senior public positions in the past found the PTI ruling team’s confidence misplaced. They warned that the accumulating steam of discontent because of economic mismanagement can erupt with devastating consequences for the country.
“In a society riddled with countless divides the situation can turn ugly on the flimsiest of pretexts. You do not enjoy the freedom to act on your whims when holding public office. Not sure what are they thinking and why?” a former governor State Bank commented anonymously.
The salaried class appreciates the exemption of withholding tax on cash withdrawal for filers and is happy over the push towards low cost housing loans, but will it be willing to pay for the concessions for the rich from its pockets? No one thinks it will.
The supplementary budget presented by Mr Umar last week was loaded with protection, tax breaks and incentives for brokers, bankers and barons.
To prop-up the capital market the government proposed to abolish 0.02 per cent advance tax on sales and purchase of shares and allowed investors to adjust losses against profits for up to three years for the calculation of the capital gain tax.
To put a smile on the face of barons the government offered to remove taxes on undistributed profit, granted a five-year tax exemption to industries for establishing plants to manufacture equipment for renewable energy units and promised to remove 4pc super tax from the non-banking sector from the next fiscal year.
It allowed non-filers to purchase new cars up to 1300cc, declared the issuance of ‘promissory notes’ against refund claims that can either be encashed at a bank or deposited as collateral to earn 10pc interest after a three year period from the Federal Board of Revenue and tax relief on inter-corporate dividend besides chopping custom duties on industrial inputs.
For banks, tax on income from loans to SMEs, housing and agriculture was reduced by 19pc from 39pc to 20pc.
The confidence boosting measures for the private sector are good only if the economy can afford it. The government has projected a net revenue loss of Rs6.8bn that they think will be compensated by the expected gains in the economic activity.
Some members of the Economic Advisory Council (EAC) were not convinced. A member thought that the current package will be followed by another set of measures to raise resources internally.
“Hopefully the government will not be naïve enough to stop here. This must be the first batch of a two-step strategy of growth revival. Step two is going to be a fiscal plan.
“With half a year in office, the government did need to get people to start talking positively. It will help, but not sufficiently enough to revive business confidence. To gain credibility it is very important to enter the IMF programme. The government hierarchy is probably listening to too many people,” he said over phone.
Salim Raza, former governor State Bank and a member of the EAC defended the package. To a Dawn query he mailed the following comments.
“The measures announced are not expected to affect the overall targets for revenue and deficit, but may strain development spending. They provide signals for SME, agriculture and housing credit. A strategy for a more substantive, overall tax policy realignment may still be work in progress.
“It is less a fiscal exercise and more measures for industrial revival through supporting exports and domestic businesses by promoting ease of doing business,” he concluded.
Clutching at straws
By Khaleeq Kiani
Without changing revenue and expenditure targets, the PTI government expects its revenue shortfall of almost Rs170 billion in the first half of this fiscal year to be recouped over the next five months. Hence, it hasn’t announced any change in the fiscal deficit limit of 5.1 per cent of GDP for 2018-19.
The government has three bets to bank on: lower or stable international oil prices, favourable response from the judiciary on the tax on mobile phone services and an out-of-court settlement of the dispute with various industries over more than Rs400bn relating to the Gas Infrastructure Development Cess (GIDC).
While announcing the first supplementary budget as a “bypass surgery” in September 2018 involving a steep GDP adjustment of 2.1pc, Finance Minister Asad Umar had promised the reforms would follow in about a month to put the economy on the road to recovery. It took him more than a quarter of the year to roll out “a package of investment and export promotion for industrial revival and job creation”.
The government criticises the last government for ruining PIA, Pakistan Steel and the power sector. Yet the reform package hardly touches upon their revival
Most of the incentives for small and medium enterprises (SMEs), housing, agriculture, fresh industrial investment and the stock market will come into force with the start of the next fiscal year ie July 1. Hence, the mini-budget appears to be an attempt to inject a feel-good sense in a market depressed by “drawing-room discussions about economic uncertainties”.
Yet the more pressing dilemma facing the country was the dilapidated condition of state-owned entities. The last government failed to deliver amid an adverse political environment. The government leaves no opportunity to criticise the past government on account of PIA, Pakistan Steel and the power sector. Yet the reform package hardly touched upon their revival.
In fact, its plan for the creation of a wealth fund — Sarmaya Pakistan Fund — to take care of the loss-making entities is yet to come into play after almost six months of the PTI government. The SME revival project should have taken priority over the “investment and promotion package” because of continuously accumulating losses.
The power sector’s total circular debt has gone up from Rs1.1 trillion to Rs1.4tr while PIA and Pakistan Steel keep accumulating their losses without any accountability. On top of that, the expert opinion that the government is drawing from the private sector may be raising the question of a conflict of interest. People with direct stakes in different sectors of the economy are advising the government, which should be avoided.
The economic team plans to engage with the changed leadership of the Supreme Court of Pakistan for a way out of the phone tax imbroglio, which has reportedly cost Rs30bn to the kitty. It has already started increasing general sales tax on oil products as the international market went down after losing over Rs70bn in populist mode. Last month, it generated over Rs4bn in additional revenue on this count and expects it to double during the current month as it keeps increasing tax rates.
More importantly, the biggest hope is the GIDC where the government expects a recovery of no less than Rs200bn even though it has not stated a target pending parliamentary approval. This remains a big question mark in view of the adverse atmosphere that the government has created in parliament. This is tricky because the GIDC recovery is not being routed through the supplementary finance bill that has to be passed by the National Assembly. In fact, the amendment to the GIDC law requires approval from both houses of parliament.
The industries have been making provisions for the ultimate payment in the case of an adverse outcome, even though they have secured stay orders from court and been able to hang on to them for almost six years now. The offer approved by the federal cabinet for the amendment to the GIDC law is to provide a 50pc discount on future rates to industries that are ready to pay half of the past arrears. This can be beneficial to both the government and gas consumers.
Meanwhile, additional expenditure will accrue on account of the higher debt servicing cost. Banks have been reluctant to invest more in government papers for almost a year amid a low policy rate environment. They have recently started responding to the double-digit interest rate. The likely policy rate appreciation may be helpful in raising more funds to roll over maturities from banks. Some of the banks may have been earning more from their foreign exchange business than interest on loans, which is their core business.
The government’s borrowing from the central bank has already quadrupled to almost Rs4tr so far in this fiscal year against Rs1.1tr a year ago, which carries a direct cost for the people.
The entire government machinery met a shortfall of about Rs170bn in revenue collection in six months and remained on whirlwind tours to secure financial support from global friends. But Rs160bn or so appeared to have already been lost in 25 days as the custodians of foreign exchange reserves spent $1.147bn trying to maintain the exchange rate after last month’s controversies. Official reserves that stood at $8.05bn after initial Saudi injections on Dec 14, 2018 were down to $6.9bn by Jan 10.
Happy, yet unsure, at the PSX
By Dilawar Hussain
IT looks like the efforts of some big brokers to befriend the government have finally paid off as the finance minister proposed a number of incentives for the capital market in the mini-budget or, as it’s formally known, the Economic Reforms Package (ERP).
Brokers claim that the abolition of advance tax of 0.02 per cent on brokers after Jan 31 will reduce the cost of doing business for the fraternity and enhance volumes.
Another major demand of the market that has been conceded is the capital losses for trading in shares to be carried forward for three years. Currently losses for just one year are allowed to be carried forward. Traders believe this will help investors save taxes when the market provides positive returns.
It remains to be seen whether the IMF will see eye to eye with the government on the ERP, but investors are unsure
A salutary measure is the removal of the super tax from all non-banking sectors from July 1, something traders hope will improve corporate earnings.
Tax on undistributed profit levied at 5pc on corporations in instances where 20pc of earning have not been distributed as dividends has been abolished from FY2020. By this step, company boards have again been empowered to decide upon profit retention or distribution which, though good news for directors, could leave investors fuming.
Richard Morin, CEO of the Pakistan Stock Exchange (PSX) expressed satisfaction over the measures announced by the finance minister, terming them helpful in developing a vibrant stock market which will attract new investors and encourage a larger number of companies to float Initial Public Offerings.
He stressed that the PSX was attractively priced at around 7.5 times price-to-earnings multiple and with a dividend yield of 6pc. “Where in the world do you get such mouth-watering returns?” he queried.
Arif Habib, a former chairman of the bourse also visualised the budget as one that would create confidence in the minds of investors, industrialists and traders since most of the demands put up by the PSX, the Pakistan Business Council, the Federation of Pakistan Chambers of Commerce and Industry (FPCCI) had been met.
Of the six major proposals that were forwarded by the PSX, four were granted: abolition of advance tax on brokers, carry forward of capital tax loss, the concept of a holding company and curb on over-regulation.
The listing of government bonds required resolution while the government had promised to consider one of the major demands of the PSX which related to rationalisation of capital gains tax in the next annual budget.
“The government has a good ‘pitch’ as it managed financial packages from friendly countries and enjoys the support of “institutions”, which raises hopes that it will be able to put up a big score on the board,” Mr Habib said.
Most market participants reckon that the ERP is generally ‘positive’ for autos, IT and textile, ‘neutral’ for banks and fertiliser and a ‘non-event’ for E&Ps, power and OMCs.
Amin Tai, a veteran value investor at the PSX proclaimed the ERP as ‘growth oriented and a step in right direction’. He said that by abolition of advance tax of 0.02pc on brokers, a great wrong had been corrected.
Mr Amin believes that non-filers should not be kept out of economic activity as doing so would be harmful. “Let non-filers first enter the economy as it will make it easier to trace and pull them into the documented economy,” he suggested.
Other measures include relief from sales tax (for five years) for all upcoming Greenfield projects which will encourage investment by industrial undertakings.
Each time the finance minister has visited the FPCCI he has been met by strident demands, mainly from textile exporters, to help release the huge sales tax refunds. The minister has now proposed to clear it through promissory notes for exporters.
“A promissory note will resolve the liquidity problem of the sector as it could be accepted by banks as collateral. A profit rate of 10pc for a maturity of three years will be paid and the Note can also be traded in the secondary markets,” said an analyst.
“Though the announced reforms will be positive for the local stock market in the short-run, the lack of measures to address the burgeoning fiscal deficit (6-7pc of GDP expected in FY19) will likely limit any upside in the medium- to long-term, we believe,” wrote Topline Securities in its early note.
And for all that, it remains to be seen how the foregone revenue from various tax exemptions will be replaced and if the International Monetary Fund (IMF) will see eye to eye with the government on the ERP.
Investors are unsure about the IMF’s response, the first indications of which were provided by the trading session last Thursday when, after an initial euphoria that tossed the KSE-100 Index up by 551 points, the Index succumbed to profit-taking, reducing the day’s upside by 231 points at close.
By Amjad Mahmood
THE farmers’ community seems to be dissatisfied with the measures announced in the second mini-budget of the fiscal year.
In his speech, Finance Minister Asad Umar announced a few steps to help the agriculture sector. He incentivised banks to offer agricultural loans by reducing the tax rate from 39 per cent to 20pc on their interest income. The proposed measures include reducing the Gas Infrastructure Development Cess (GIDC) for fertiliser units by half and the duty-free import of diesel engines for irrigation purposes.
The farming community believes the mini-budget will not benefit small landholders and that the “economic reforms agenda” is bereft of measures needed for a turnaround in the sector.
“The sector needs a reduction in the cost of production and an increase in the small farmers’ access to financing in the short run. The government should subsidise farm mechanisation as well as fix support prices at least for major crops in the long run,” says Khalid Mahmood Khokhar, president of the Pakistan Kissan Ittehad, the representative body of small landholders.
The agriculture sector requires policy-level interventions, like aggressive diplomacy to find new international markets’
Quoting a document of the Punjab government, he says the cost of production for basmati rice in Pakistan is 34pc higher than India. It is 37pc, 57pc, 44pc and 34pc higher in the cases of wheat, cotton, onion and gram.
Mr Khokhar argues that the country needs to allocate at least 1pc of the agricultural GDP against the present 0.2pc for research because the sector is prone to natural disasters and requires continuous research to improve farm yield and ensure protection from pests and diseases.
He notes that the two commodities that enjoy the support price facility — wheat and sugar cane — are in surplus.
His point is endorsed by Ebadur Rehman Khan of the Farmers Associates Pakistan. He says the growers need a better price for their produce more than they need subsidies on inputs. “Reducing the farm inputs’ cost is a good but temporary step. The sector requires policy-level interventions, like aggressive diplomacy to find new markets along with the revival of old ones on the external front and ensuring a fair and better price to the farmers on the internal front,” he says.
He says that even a reduction of Rs500 in the price of a bag of fertiliser will bring the small farmer a relief of only Rs1,000-1,500 per acre. But if the government ensures a stable market through a support price-like mechanism, the same farmer may increase his per-acre earnings by around Rs10,000.
Despite being uncompetitive internationally because of its higher production cost, some of the local produce may still find clients in the world market because of the unavailability of alternatives, he insists.
In reference to the lifting of ban on Pakistani rice by Qatar and China agreeing to import our rice and potato, Mr Khan says the government should continue its aggressive diplomacy to open new markets and revive the lost ones. “Our produce like basmati rice, kinno and mango are unmatched in the world because of their taste,” he says.
The Kissan Board Pakistan (KBP) believes a fair and just agriculture marketing system along with the timely payment of official rates to the growers is essential for the agriculture sector’s development. “Eliminate the role of the middleman by allowing the growers to directly sell their produce in the market. But no such step was taken in the two mini-budgets,” says KBP Punjab President Amanullah Chathha.
He says the authorities expect the farmers to turn to high-value crops like oilseeds without extending any guarantee about the procurement/marketing of the yield. At the same time, the government is allowing unchecked imports of poor-quality palm oil, he adds. “The government needs to revisit its palm oil and dry milk import policies to help the overstressed oilseed growers and livestock farmers.”
Some observers challenge the veracity of the projected relief to the farmers’ community.
“The tax incentive for banks won’t improve the farmers’ access to finance. Loans for agriculture production and agriculture processing units have been brought under one head since Dr Ishrat Husain’s stint as governor of the State Bank of Pakistan (SBP). In the name of agriculture, loans are now being offered to feed mills, hatcheries and other processing units,” says Kissan Rabita Committee Pakistan General Secretary Farooq Tariq. The duty-free import of diesel engines will likely be misused because such engines are already being manufactured locally, he adds.
Published in Dawn, The Business and Finance Weekly, January 28th, 2019