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Business

May 29, 2015

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Govt advised to come out of economic stabilisation mode

ISLAMABAD: Economic experts on Thursday advised the government to change its direction from stabilisation to economic growth model that creates new jobs to cater to millions of people. Speaking at a seminar, organised by the Institute for Policy Reforms, they urged the government to take decisive measures for economic revival in the upcoming budget.
They severely criticised the anti-growth policy being pursued by the government on dictation of the International Monetary Fund (IMF).
Ex-advisor to the finance ministry Dr Ashfaque H Khan said Pakistan’s economy slowed down in the last seven years under the International Monetary Fund’s program where the economy grew by an average of 3.5 percent mainly because of IMF’s policies of hard fiscal and monetary stances.
“After pursuing tight fiscal and monetary policies, the economic activities suffocated and it is evident from the tax collection of GST (general sales tax) on domestic front, which grew by 0.7 percent in nominal terms in the first 10 months,” Dr Khan added. “If we adjust inflation, the growth of GST on domestic stage registered negative growth.”
The large scale manufacturing (LSM), he said, grew 2.8 percent because demand sharply dropped. The credit to private sector halved 50 percent compared to the last year. All economic mess resulted in increasing unemployment among youth, which is very dangerous for the social fabric of the country, he added.
Ex-federal minister Humayun Akhtar Khan, chairman of IPR, said the government must not merely give the title of ‘growth’ to the new budget. By accepting IMF’s parameters in the seventh review, the government already seems to have settled for another year of stabilisation.
Khan said government must focus on industrial diversification and growth for sustainable development of the economy. Industry must transit into new technologies and higher value addition. A number of issues stymie industrial development. These include

inadequate private sector credit, an overvalued rupee and power shortage.
Rather than expanding tax base, tax officials take the easy route of harassing the taxpayers. FBR’s new requirement for banks to report transactions is the major cause of shift of capital to Dubai.
Khan called for banks to open special windows for long-term project finance at fixed mark-up and dedicated funds to upgrade technology as well as to acquire foreign brands.
Noted economist Dr Hafiz Pasha, who could not attend the seminar because of his illness but his findings were present during the seminar.
They said the federal PSDP (public sector development program) has been restricted to Rs580 billion for 2015-16 though inclusion of CPEC (China-Pakistan Economic Corridor) projects required a PSDP size of Rs750 billion.
The government has increased allocations for highway and energy sectors projects and reduced these for key sectors like water, higher education, health, and railways.
It is unlikely that the economy will grow at a rate above five percent in 2015-16. Also, unemployment and poverty may continue to rise. Alarmingly, and perhaps for the first time, literacy rate has fallen by two percentage points in 2013-14. Other social indicators are too far from satisfactory. First, the tax policy should focus to broaden the tax base and not raise tax rates. Second, monetary policy should remain expansionary and improve private sector access to credit at lower cost.
The central bank rightly reduced the policy rate to seven percent recently. Third, the rupee is overvalued by about 10 percent. Exports are suffering and import-substituting industries face stiff competition from cheap imports. These measures could stimulate economic growth, at least partially.
Ex-Chairman Federal Board of Revenue Abdullah Yusuf discussed flaws in tax policy and administration.
Yusuf said the government’s inability to fix these known issues is surprising given the importance of tax revenues for the economy.
He particularly referred to weak governance and enforcement by tax authorities.
He said inequitable policies (including exemptions and amnesty) along with an undocumented economy have led to the low revenues.
He called for withdrawal of exemptions and broadening of the tax base. It was important to rationalise corporate and individual income tax rates and to phase out fixed and presumptive tax rates. To improve compliance, the FBR must simplify tax returns. It must make non-compliance expensive. Tax policy must also incentivise investment in the country. He called for a more prominent and rigorous role for provinces. Abdullah recommended conversion of FBR into an autonomous organisation. The FBR must strengthen tax management information system, introduce data warehousing, and a strong audit system through automated systems. There is need also to build human resource capacity.

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