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Thursday July 07, 2022

25pc companies show up as ‘zombie firms’

November 17, 2021
25pc companies show up as ‘zombie firms’

ISLAMABAD: One-fourth of public and private sector companies in Pakistan are ‘zombie firms’, involved in tax evasion as they are always in loss, a report said on Tuesday.

“Our estimates suggest that approximately 25 percent of firms show up as ‘zombie firms’ in Pakistan” showed a study by Pakistan Institute of Development Economics (PIDE) in collaboration with the Federal Board of Revenue (FBR).

“Furthermore, roughly 47 percent of these nonviable firms exist in textile, 19 percent in chemical, and 10 percent in the cement sector.” It further stated the concentration of these firms was not limited to any particular sector as they existed both in the private and public sectors.

According to the report’s estimates, roughly $3 billion short-term bank credit flows to these firms annually.

It said in a resource scarce country such as Pakistan, it was reasonable to assume the efficient allocation of this credit could improve performance of the industrial sector.

“It raises many important questions as to: is it the regulatory under-sight by SBP or SECP or the tax pressures to report oneself as a zombie or the natural rate of businesses in an economy being above the shutdown point but below normal profits?” Especially, given the phenomenon that firms were reported as running in losses, but they continued to run (survive), the report said adding, second, how were non-profit making firms were making it possible to repay their loans?

“Efficient allocation of capital plays a key role in economic development by nurturing innovation and increasing industrial productivity. However, the reallocation of capital towards less productive firms at the expense of more productive ones harms growth of industries.” According to the study, recently economists have discussed the existence and rise of ‘zombie firms’ which slowed down growth in several countries including some in South Asia.

A zombie firm is characterised as a loss-making firm that has lost the ability to generate enough profits to cover their interest payments. They survive only by repeatedly refinancing their loans. In the competitive market, zombies have to either exit or restructure. The rise of zombie congestion potentially crowds out growth opportunities for more productive firms because banks have to keep financing them to keep them active on their loan portfolios.

It has huge implications for the lost tax potential as well from two channels. The first one was direct where the firms were not earning or doing business at its potential level hence there is a direct tax loss, the study said.

Second is the tax lost in terms of the opportunity cost where the more productive firm is denied the right for financing because of financing compulsion towards these zombie firms, it added. “Hence when these companies are unable to produce what they could have based on the availability of adequate financing it will also create a potential loss of tax resource,” the report said.

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