DEPARTING from the usual practice, the construction industry package offers tax amnesty, but this time it is linked with investment. Builders will primarily be enabled to whiten their money 10 times the fixed tax they pay, notwithstanding the income generated from the project.

Offering tax amnesty for investment to the sector that has so much unexplained wealth is a better way to simultaneously document and stimulate growth rather than the earlier model, however essential it was considered, that had an adverse impact on business sentiments in an economy going downhill. The outcome was not commensurate with the huge government efforts mounted to document the economy.

Critics say the package is ill-timed. The builders have hailed it but for one particular point. The industry says that the amnesty available from mid-April up to June 30 is far too short a period because it may take builders more time to initiate a project, given the current business environment: scarce labour availability owing to lockdown, wheat harvesting and the holy month of Ramazan. A very large number of rural labour working in urban areas left for their villages just before the lockdown was enforced. Builders employ labour contractors. The issue needs to be addressed by the authorities on merit.

Will an empowered wing of the Ministry of Finance succeed where fiscal responsibility and debt limitation law have failed?

Similarly, other hurdles that the construction industry may encounter in implementing projects needs to be removed as soon as possible. As it is, officials expect industry including large scale manufacturing to record negative growth with marginal reduction in targeted agricultural output in the remaining months of the current fiscal year. Services sector growth will also slow down. The slide needs to be checked.

But at some point of time, the practice of offering amnesty to businesses must come to an end because it pollutes the tax culture by penalising the honest taxpayers and encourages people to stay out of the tax net.

The policy shift envisaged in the package was made possible by the International Monetary Fund’s (IMF) flexibility following the economic fallout of the global coronavirus attack. Federal Minister Asad Umar revealed that Prime Minister Imran Khan took the IMF managing director on board before approval of the package. IMF Resident Representative in Islamabad Teresa Daban Sanchez clarified that the Fund’s advice to all member countries including Pakistan is: “whatever policy action the government implements has to be targeted, temporary and focussed on providing support to the most vulnerable segment of the population.” The severity and nature of the current global crisis has disrupted the reforms agenda. The IMF is, however, ready to lend more money to debt-ridden economies including Pakistan.

The building of houses is a highly labour-intensive activity and the need for new housing units in the country is swelling. Given the potential of the sector’s expansion, it could also be a rich source of tax revenue in the future.

There is a limit to which taxes can be extracted from an economy facing recessionary trends. Despite strenuous efforts put in to document the economy, cumulatively, tax revenue fell short by a whopping Rs470 billion during July-March. The total collection stood at Rs3.05 trillion the revised target of Rs3.52tr

Though seen inadequate by many, and issues in implementing the proposed measures apart, the PTI government’s policy decisions following the Covid-19 sparked crisis are a step in the right direction. It is all aimed at restoring business confidence and spurring investment on the back of stimulus/relief to vulnerable firms and households. Complementary measures have also been taken by the State Bank of Pakistan (SBP). However, the double-digit discount rate and depreciating rupee exchange rate are still haunting both running businesses and investors.

With the external sector coming again under severe pressure, it would also be prudent to accord priority to the ‘Make in Pakistan’ policy as demanded by the industrial lobby. The use of indigenous material and local talent should be maximised to step up industrialisation. But for the acquisition of the latest technologies and related expertise and ideas, foreign dependence should be drastically reduced. Measures to curb domestic demand should be gradually relaxed.

Pakistan’s total foreign debt has soared to about $107bn and debt repayments are mounting. External debt repayments of $4.5bn are due for repayment during April-June and $13.5bn in the next fiscal year. Owing to the Covid-19 impact, says the advisor on industries and commerce Razzak Dawood, the country’s exports will decline up to $2-4bn this year. And despite the decline in imports by 19.5pc in March compared to the same month last year, foreign reserves are falling. The situation has become more problematic because of the low level of global foreign direct investment inflows in view of the prevailing domestic as well as international situation.

To tide over its increasing difficulties, the government has sought IMF assistance of $1.4bn under the Fund’s Rapid Finance Instrument while also looking forward to securing more credit from other international financial institutions. It is also striving to get external debt relief and loan repayments rescheduled.

Apart from surfacing joblessness and poverty, a no less worrying issue is the country’s growing appetite for both domestic and foreign debt. Cumulatively, pubic debt is estimated at around 75pc of the GDP, much above the ceiling of 60pc set by the Fiscal Responsibility and Debt Limitation Act 2005.

To finance its Rs1.2tr stimulus and relief package, the Finance Division has decided to raise Rs700bn by issuing Ijarah Sukuk in the domestic capital market by pledging assets of Jinnah Airport, Karachi. Sukuks have two distinct advantages over conventional bank borrowings. They are a cheaper mode of borrowing than Pakistan Investment Bonds and Treasury Bills and do not create a charge on the government’s consolidated fund. The weighted average interest cost on earlier Sukuk transactions was 1.9pc lower than conventional bonds (8.3pc against 10.2pc).

The Debt Policy Coordination Office (DPCO) in the Ministry of Finance (MoF), with the support of World Bank financial and technical assistance, is to be turned into a single agency for managing the country’s entire debt. This will be done by integrating three entities – DPCO, Ministry of Economic Affairs, SBP and six cells within MoF. It would be responsible for policymaking and determine the overall level of debt, its cost and structure. Without improving the fundamentals of the economy, the question arises: will an empowered wing of the MoF succeed where fiscal responsibility and debt limitation law failed? Pakistan’s overarching problem in this regard is to boost domestic savings, investment, indigenous production and job creation.

Published in Dawn, The Business and Finance Weekly, April 13th, 2020