That the role of manufacturing in the economy has been declining, the investment level is half that of our neighbours, the country significantly lags behind the region on the industrial growth rate and the economy is losing its share in world exports are all well-known facts.

Poorly negotiated trade agreements, a static and unrealistic exchange rate, unreliable and expensive energy, a narrow tax base that puts disproportionate burden on manufacturing, rampant under-invoicing and smuggling, and import tariffs that discourage local production have been some of the factors impacting industry.

The PTI government had resolved to undertake fundamental reforms to break the recurring external account crises that force us to go to the International Monetary Fund (IMF). Job creation was a key pillar of its manifesto. The prime minister also declared that wealth creation was the only way to generate employment and raise the level of tax revenues necessary for social development.

So after a year in office, what has the government done to reverse the country’s premature deindustrialisation?

The government deserves credit for starting a journey of reforms. The Ministry of Commerce has successfully negotiated a more optimal trade arrangement with China and is working with other countries along similar lines. The rupee is now more competitive. The energy cost for exporters is on a par with the region.

The government is moving with determination to broaden the tax base. Presumptive taxes are being withdrawn. Steps are in progress to stem under-invoicing. The two major leaks in the economy – the outflow of funds abroad and the escape of wealth into the undocumented real estate sector – are being plugged.

There is, however, a need to do more. The fiscal regime remains complex with 47 different types of taxes and a bureaucracy focused on extracting higher revenue from a narrow base of existing taxpayers. Tax rates remain higher than the regional average, especially GST at 17 per cent that in a largely undocumented economy provides incentive to evade.

The reduction and the subsequent withdrawal of tax credit on balancing, modernisation and replacement are also retrogressive for the upgrade of industrial output. The cost and availability of land and the provision of utilities, even in special economic zones (SEZs), are major constraints. Development finance institutions don’t exist to provide long-term credit while bank lending to small and medium enterprises (SMEs) remains abysmally low.

SMEs are also not properly integrated into the export value chain owing to the complex duty reclaim process and the absence of export funding. The subsidy for sugar cane creates distortion and disincentivises the cultivation of cotton, which is required for value-addition by the textile industry. It does not encourage the cultivation of oil seeds, resulting in high imports of edible oil.

Foreign direct investment policy needs to be directed to export-led or import substitution industries and those for which local investors lack capital and risk appetite, such as oil and gas exploration. One area in which the Ministry of Commerce has successfully prevailed on the Federal Board of Revenue (FBR) is the reduction of duties on raw materials. However, it has not had success with intermediate items.

While the government undertakes policy reforms, businesses must do their bit by investing in capacity, productivity and quality to compete globally

Pakistan has one of the lowest integration rates into the global supply chains. Cascading tariffs will facilitate this. Just as fiscal policy is being separated from the collection of tax, the Ministry of Commerce should set tariffs that are ideally a part of trade policy and not a tool for raising revenue. The customs should remain responsible for enforcement and collection under the FBR.

Encouragingly, a national consensus on the economy is now receiving greater resonance among political parties. This should be seized upon to add momentum to change. Regional trade, another requisite for economic growth, is stalled for want of favourable relations with our eastern and western neighbours.

While the government undertakes policy reforms, business must do its bit to invest in capacity, capability, productivity and quality to compete globally. Unlike Bangladesh, Pakistan has not benefited from the tariff measures taken by the United States — our single largest export destination — against China, Vietnam, India or Turkey owing to capacity constraints.

Even with progress on these factors, it is unlikely that the going will get easier for business in the near future. However, this pain is necessary for sustainable gain. All stakeholders must, therefore, develop the patience and fortitude to bear it. Short-term expediency must not (again) be allowed to compromise fundamental reforms. Failing this, Pakistan will keep knocking on the IMF’s doors.

Without economic autonomy, of which balancing the external account and broadening the tax base are essential elements, the nation will neither enjoy sovereignty nor command the validity, legitimacy or respect in the comity of nations.

The writer is CEO of the Pakistan Business Council

Published in Dawn, The Business and Finance Weekly, July 22nd, 2019

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