KARACHI, May 23: The State Bank of Pakistan wants the Government to “shift slightly”, away from merely encouraging growth and focus more on improving delivery of the basic services and target interventions towards the poor. “While in the long-term this will require larger spending and policy focus on health, education and infra-structure, in the short term this implies the introduction of policies encouraging the growth of the sectors with a greater absorption of relatively unskilled labour such as agriculture and construction,” stresses the State Bank third quarterly report for the year 2004-05 released on Monday.
Now that an 8 per cent plus growth rate in the national economy during the current fiscal year is in sight, the State Bank wants the government to concentrate on the second generation economic reforms that are further needed to build on the gains.
It makes a case to revamp the government’s revenue structure as the State Bank finds the sectoral incidence of taxes is highly skewed as the burden falls disproportionately on the large scale manufacturing. “The object of fostering high tech industries and exports cannot be achieved if this burden remains unabated,” the State Bank report points out. It finds the services sector and the marketable surplus in agriculture still remains lightly taxed.
The report takes notice of the “recent mammoth gains in the equity as well as real estate markets” remaining outside the tax net as there is no system in place. “A realignment of tax burden across the sectors and extending it to untaxed income is highly essential to mobilise additional taxes while minimising the evasion from excessively taxed sectors and segments,” the State Bank suggests.
A 13.5 per cent growth in Central Board of Revenue taxes during July 04 to March 05 “is acceptable by historical standards” the receipts have not kept pace with the growth of the economy” the State Bank makes a candid observation to stress that tax buoyancy has remained low. The report urges the government to address this issue urgently if it wants to increase development spending to sustain long term economic growth of the country.
Making a strong case for reforming the CBR, the State Bank mentions the following arguments. (I) Despite the exceptionally strong GDP growth, high inflation and higher than anticipated rupee depreciation of the rupee, tax collections are barely keeping pace with nominal income growth, indicating poor buoyancy. (II) The heavy reliance on petroleum development levy meant that government’s revenue suffered substantially when high international oil prices forced it to increase domestic prices less than proportionately to protect the domestic economy and (III) the shift from indirect taxes to direct taxes will lower the incidence of tax burden on the lower income groups.
A third area, the report points out where the government intervention can pay rich dividends is in policies of improving the country’s competitiveness, to enable exports to benefit from the opportunities offered by increasingly globalized markets. This is true for textiles following the end of quota regime. The policy options here are myriad, ranging from reducing cost of production by lowering red tape, reducing utility charges, improving infrastructure enabling more flexible textile labour markets.
The report suggests the replacement of existing “outdated labour laws and investment in a trainable labour force.”
The State Bank has also suggested the following fiscal and administrative measures to counter the rising inflationary trends which emerged due to supply shocks. It wants the government to preferably eliminate or at least reduce development surcharge on POL and other key fuels. It also wants reduction on sales tax on POL due to strong trickle down impact of their prices on inflation, because the POL products are a major input of transportation and industry.
The government has been urged to take effective steps to curb cartelization and a specific reference has been made of cement. The report has made a case of intra-group cartels that are exploiting the consumers. An individual is unable to book a car with a dealer directly as the consumer is directed towards the leasing company or bank to do so. Thus the individual buyer has no option but to pay either premium on cash purchase or avail some auto-financing. There are organized pressure groups in form of trade associations dealing in milk, bread and transporters who are responsible for inflationary pressures. The State Bank wants the government to enforce strict regulations at retail and wholesale level.
The report takes notice of speculative hoarding of grains that include wheat, sugar and pulses and non-perishable vegetables potatoes and onions and urges the government to take proper action against the hoarders and speculators. It suggests the formation of consumer associations. The government has been asked to arrange for direct sale of certain items through utility stores.