Islamabad: Pakistan faces a significant financial challenge, as its external financing needs amount to $120 billion over the next five years. This figure surpasses the nation’s gross reserves, leading to a precarious situation that resembles a default crisis if the current approach persists.
The core message of the presentation by the Pakistan Institute of Development Economics focused on their comprehensive reform strategy, “ISLAAH: Immediate Reform Agenda – IMF and Beyond.” This ambitious plan aims to guide Pakistan towards financial stability and growth amidst its impending economic crisis.
In response to Pakistan’s urgent need for external financing, exceeding $120 billion over the next five years, as stated in the recent International Monetary Fund report, PIDE proposes a systemic overhaul. This overhaul seeks to transcend the narrow interests that often dominate discussions on reform in Pakistan, ensuring economic progress and prosperity for all.
In the presentation, it was disclosed that Pakistan’s external financing requirements were projected at $22.8 billion in FY23, $24.9 billion in FY24, $22.2 billion in FY25, $24.6 billion in FY26, and $24.9 billion in FY27.
However, unfavorable circumstances have led the gross external financing to exceed the gross foreign exchange reserves. These circumstances include 506.7 percent in FY23, 273.6 percent in FY24, 170.8 percent in FY25, 145.6 percent in FY26, and 126.4 percent in FY27.
The current situation highlights the inconsistent growth pattern, with boom and bust cycles, unmanageable deficits, insufficient foreign exchange reserves, and inflation posing significant challenges. The low investment in terms of GDP ratio further exacerbates these issues.
Dr. Nadeemul Haque, a former deputy chairman of the Planning Commission and PIDE Vice Chancellor, highlighted the importance of a holistic strategy to overcome Pakistan’s economic difficulties. His proposed plan includes tackling significant issues like regulatory modernization, tax reform, market liberalization, enhancing efficiency in the energy sector, and improving agriculture and banking.
A crucial aspect of this approach is the introduction of a ‘Regulatory Guillotine’ to remove excessive regulatory barriers that stifle business expansion and innovation.
Regarding the event, Dr. Ahmad Waqar Qasim, Dr. Afia Malik, and Dr. Mahmood Khalid, senior research economists at PIDE, highlighted their economic reform initiative. This initiative aims to enhance governance by addressing the issue of 122 regulatory bodies operating under the federal government, which contribute to over 50% of the GDP, as revealed by PIDE’s sludge audits.
To promote economic efficiency, they emphasize the need to shift from a permission-based system to clear rules. This change would save time, resources, and documentation costs while eliminating missed opportunities. Priorities for achieving this goal include clear rules, digitization, and market liberalization. By doing so, they aim to put an end to bureaucratic tendencies toward permissions and paperwork, combating the ‘Permissionistan’ syndrome.
Taking inspiration from India’s 1991 reforms, they argue that piecemeal approaches are insufficient. Instead, they propose implementing a regulatory guillotine, a successful strategy adopted by countries like Hungary, Mexico, South Korea, and the UAE, among others.
The significant negative impacts of tax unpredictability and instability, as emphasized in the PIDE State of Commerce report, should not be underestimated. These issues have led to investments being hidden, stunted business growth, and hindered corporatization and public listings.
In order to improve the income tax system, we propose a consistent tax rate for all income sources, accompanied by provisions for carrying forward agriculture income losses and adjustments, as well as the abolishment of the presumptive tax regime and taxes based on turnover.
Moreover, we advocate for consistency in taxation policies for AOPs, sole proprietors, and corporations, along with improvements in corporate dividend income and asset sales taxation. Shifting from withholding taxes to Advance Income Tax systems is crucial.
Unifying the sales tax system across goods and services, swiftly implementing POS through outsourcing within six months, and transitioning to a VAT model with uniform rates are vital steps.
Furthermore, increasing excise duties on products that harm health and the environment, such as tobacco and certain beverages, is necessary to support public well-being and sustainability.
In the realm of taxation and administrative reforms, it is crucial to cease all forms of preferential financing and discriminatory fiscal incentives among businesses. Streamlining tax administration through automation to minimize human interaction is essential, along with the abolishment of the arbitrary ‘filer’ and ‘non-filer’ distinction, and the elimination of ‘FBR Rates’ for property valuations.
The tax administration should evolve towards automation, focusing on accountability and responsibility within a technologically proficient framework. An independent and technologically advanced entity should spearhead revenue collection, leveraging modern auditing techniques.
To foster economic growth, we must embrace openness by revitalizing our import-export dynamics. Currently, import substitution strategies have made all KSE-100 companies inward-looking, a trend that urgently needs reversal. Making exports a national priority demands a shift towards an export-friendly trade policy, encouraging large firms to venture into the global market and aspire to become multi-billion-dollar entities.
Facilitating this transition involves promoting trading houses as intermediaries in trade, potentially offering performance-based incentives such as tax rebates. Simplifying incorporation processes with no fees and facilitating easy listing are crucial steps.
Key decisions include removing additional customs and regulatory duties, phasing out SRO-based exemptions within three years, and eliminating tariff cascading. Export subsidies should be contingent on performance, while corporate exporters could benefit from tax incentives tied to export values.
Recognizing markets as efficient allocators of resources and wealth generators, it is crucial to address the over-regulation and bureaucratization hindering Pakistan’s markets, fostering an environment conducive to investment. Afia Malik mentioned that the power sector crisis in Pakistan extends beyond mere electricity theft or ‘kunda’ connections; it reflects systemic issues rooted in inadequate management, planning, and centralized decision-making. Chancellor Dr. Nadeemul Haque highlighted real estate as a focal point of discussion, but its current state reveals a fragmented market marred by insider trading practices like ‘qabza’.
Reorganizing the market could yield substantial benefits, potentially unlocking a revenue gain of up to Rs300 billion. Artificially administered prices, such as DC rates and FBR valuations, hinder market development, compounded by the obstacle posed by multiple land rates for taxation. Regulatory incentivization of information hiding exacerbates transparency issues with real estate agents wielding significant influence.
Negligence in regulation has caused file trading to become the primary transaction method. Furthermore, zoning rules contribute to urban sprawl and market segregation. Crucial actions include abolishing FBR valuation and DC rates, assigning the SECP to oversee file trading regulation as securities, and separating regulation from real estate operations.
To advance further, organizing the real estate brokerage sector, revising rental laws, and easing zoning restrictions for vertical and mixed-use development across cities are essential steps.
Captured by the state, real estate remains an underutilized yet highly valuable resource, hindering downtown growth and causing urban sprawl nationwide. In Islamabad alone, thousands of government houses occupy vast prime lands, amounting to an unrealized value of Rs2,278.6 billion.
Unlocking this potential through rezoning and market-driven high-rise developments could attract over $58.8 billion in investments, create 351,000 job opportunities, add 44.4 million sq ft of commercial space, and generate an annual rental income exceeding Rs446.8 billion, as stated by the PIDE VC.
