In talks with the visiting International Monetary Fund (IMF) technical team, the Ministry of Commerce has stressed that Pakistan needs fiscal space for stimulating economic growth and encouraging industries to push exports.

While the need for a sound stability programme for resolving the current crisis largely enjoys a consensus, the view that there is a limit to the price that can be extracted from a sinking economy is gaining grounds.

Taking an overview of the state of the economy, State Bank Governor Dr Reza Baqir has rightly observed: “The balance of risks is shifting as the pace of economic growth slows.” In an interview with Bloomberg, he said Pakistan must balance the risk of a slowing economy with its desire to lower the inflation rate. His statement has been interpreted by analysts as indicating that no increase in central bank policy rate is now on the cards.

Similar sentiments were voiced by the commerce division team led by advisor Abdul Razak Dawood in talks with the visiting IMF’s team in Islamabad. The Fund’s technocrats are reported to have enquired from the division’s top bosses what type of programme Pakistan needs. The Pakistani side responded that it should be growth-oriented. The IMF technical team members did not agree for well-known reasons of their own. The commerce division had sought space to extend tax concessions to the industry to boost exports of manufactured goods.

Whatever may be the ultimate outcome and the time taken to reach the final decision, the relevant ministries and institutions are now engaged in discussing the possible incentive package for encouraging investment in Special Economic Zones (SEZs). To promote industrial investment, the proposals include exemptions from corporate income tax and turnover tax, 100 per cent foreign ownership, no minimum investment requirement and no taxes on non-residents. The incentives would require amendments in the existing SEZ Act.

One window facility — on agenda for some time now — will also be provided for company registration, facilitation for procurement of licences, Federal Board of Revenue registration, employee visas, banking services, access to Board of Investment and for addressing investors’ complaints.

These proposals coincide with a move by the Securities and Exchange Commission of Pakistan (SECP) for promoting capital formation by facilitating issues (share floatation), reducing the cost of Initial Public Offering (IPOs) and safeguarding the interest of the general public by enhancing disclosures. After due consultations with stakeholders, the SECP plans to amend Public Offering Regulations 2017 accordingly.

Given the opportunity, the mutual fund industry can play a much more aggressive role for mobilising savings of small investors

Owing to abnormal capital market volatility due to a limited number of quoted as well as available scripts on the Pakistan Stock Exchange, high risks and uncertain returns, the small investors with little of knowledge of how the market works have preferred to invest in the National Savings Scheme and bank deposits. Over the decades, corporations have also generally shied away from raising funds from the equity market. For instance, the annual number IPOs have gradually fallen to two by April 2018-2019 from 9 in 2014-15.

To reduce their reliance on bank borrowings, the corporate sector needs to be encouraged to access the equity market for mobilising the required funds for new investments. These funds would be available at virtually no cost though the managements will have to share their profits with minority shareholders. That could help broaden the base of industrial ownership.

Industrialisation in the 1960s was supported both by bank financing and equity market for which specialised institutions like National Investment Trust and Investment Corporation of Pakistan (now defunct) were then set up. The government also floated shares of profitable state enterprises for public subscription.

Given the opportunity, the mutual fund industry can play a much more aggressive role for mobilising savings of small investors. That is one of the ways in which the savings rates can be raised for investment, which, according to Dr Reza Baqir, is required to escape the endless cycle of IMF deals. But for that to happen, the small investors should be able to protect their earnings and savings by subduing inflation and shoring up an under-valued rupee.

On the other hand, the Chinese investors are waiting for SEZs to become operational. The Chinese Ambassador to Pakistan Yao Jing says Chinese companies are planning to invest $5 billion over the next two to five years in a variety of small and medium-sized industries to be located in the proposed SEZs.

President of the Beijing-based Asian Infrastructure Investment Bank Jin Liqun told the advisor on finance Dr Abdul Hafeez Shaikh in Washington that his bank was ready to increase the funding for Pakistan’s priority development sectors. He has accepted Dr Shaikh’s invitation to visit Pakistan.

The issue of the implementation of the Fund’s programme to pull Pakistan out of the economic crisis was also discussed between the Pakistan delegation, led by Dr Shaikh, and the Fund’s Director Middle East and Central Asia Jihad Azour.

In resolving the two issues of key concerns to the IMF — the twin deficits — the government has achieved partial success. The current account deficit has fallen following curbs on imports resulting in the decline in manufacturing with hardly any improvement in dollar earnings from exports.

It has yet to be established whether one month’s encouraging data for September represents a continuing trend. In September, the current account deficit dropped by 80pc on the back of the17pc rise in overseas workers’ remittances, 5.9pc rise in exports and 111.5pc increase in the low level of foreign direct investment and 18pc decline in imports — the sole continuing trend — as compared to the same period last year.

The fiscal deficit is stated to have been reduced, critics allege, through questionable means and not by actually mobilising tax revenues as officially claimed.

The five export-focused trade bodies have claimed that that the FBR has held back Rs151bn in sales tax refunds during July-September. This casts doubts whether the tax collection during the first quarter current fiscal year was to the tune of Rs958bn.

Similarly, on the expenditure side, the government did not disburse any supplementary grant during the three months. Such other ad hoc measures are also reported to have been taken. There are complaints about progress on the China Pakistan Economic Corridor projects being held up because of want of funds. For example, the secretary communication informed the sub-committee of the Public Accounts Committee that the Planning Commission did not release any funds for ongoing projects of his ministry in the first quarter. It released Rs0.7bn in the second quarter while payments were already to the tune of Rs20bn.

Such measures may prove useful for window dressing government’s balance-sheet but not for re-balancing the economy. The imperatives of growth must not be lost in the pursuit of a fragile stability.

Published in Dawn, The Business and Finance Weekly, October 28th, 2019