Reversing Pakistan’s premature deindustrialisation

By Ehsan Malik

It is natural to start a new calendar year on an optimistic note. Pakistan’s macro economy has stabilised. However, there is a fundamental issue that Pakistan needs to tackle urgently if it is to accelerate and sustain growth. On reversing the premature deindustrialisation which has impacted jobs, value-added exports and tax revenue, there should be a national consensus.

The growing global tide of protectionism does not bode well for exports. Developments in the Middle East and downturn in the oil economies will impact remittances. The recent OPEC move will raise the oil import bill by up to 20 per cent. FDI has declined sharply. Pakistan faces significant balance-of-payment challenge. Substantial room remains to broaden the tax base but the will to do this and manage the fiscal deficit will get tested as elections approach.

For years, we have underinvested in social development. Pakistan’s ranking on the Social Development Index lags all our neighbours. Half of Pakistan’s children do not attend school, many are stunted and literacy remains low, reflecting in the quality of human capital. Two million young people that come of employable age annually need to find gainful employment as do millions others underemployed due to years of power shortage.

The three critical imperatives that require urgent attention therefore are: employment; value-added exports; and taxes.

A strong domestic industry, leveraging scale and competitiveness off a consumption base of 200 million can deliver all three of the imperatives with the right policy framework. Manufacturing, the key employer, exporter and tax generator has been severely undermined by a liberal import regime and poorly negotiated trade agreements. The problem is accentuated by the tolerance of smuggling, under-invoicing and other forms of tax evasion. Together these are turning Pakistan into a nation of traders, mostly in the informal sector. Power outages and uncompetitive energy have also contributed to slowing the growth of the manufacturing. Its share of GDP declined by over five per cent in the last six years. Large-scale manufacturing, with the greatest scope to generate jobs, value-added exports and taxes has fared even worse. Private sector credit is down to 15 per cent vs 53 per cent in India and 44 per cent in Bangladesh. Many units have closed. All this whilst the trade deficit with the largest FTA partner, China, grew from $3 billion in 2008 to over $14 billion in 2015. Our exports to China are mainly commodities, which add few jobs. Imports from China undermine domestic industries and the tariff relief they enjoy impact the tax revenue. Surprising then to find Pakistan pursuing FTAs with Turkey and Thailand whose ability to export to Pakistan is more than three times Pakistan’s ability to reciprocate.

Global trade recession is only partly responsible for the poor performance of exports. The disparity in input costs is significant. For example against Bangladesh, Pakistan’s cost for gas, steam and labour is two and a half times higher. Over the last five years, the Rupee’s value declined by 19 per cent, considerably less than the 44 per cent depreciation of the Indian Rupee. Consequentially, our exports are less competitive. Since 1998, Pakistan’s share of world exports has declined, whilst Bangladesh’s doubled and Vietnam’s grew seven-fold. The longer term solution is an integrated manufacturing and trade strategy which seeks to maximise local jobs through more value addition for exports and which also promotes import integration into exports.

CPEC will no doubt be a game changer. However, it is critical to avoid it hurting existing industry. The concessions must be for projects that incrementally add to Pakistan’s exports and employment. Indeed, we should make attracting jobs to be displaced by rising labour cost in China an integral part of CPEC.

Tax reforms foremost require political will. The FBR lacks talent and technology to broaden the tax base. Tax rates are uncompetitive and tax policies do not encourage capital formation and consolidation necessary for global competitiveness. Only by broadening the tax base will the government gain space to avoid resorting to knee-jerk reactions such as Super Tax and tax on reserves, bonus shares and inter-corporate dividends. Businesses pay 47 different types of taxes. There is considerable scope to unify and simplify returns and collection system.

Our investment incentives need to encourage the Information, Communications and Technology (ICT) sector to position Pakistan better in the digital economy and create more jobs. Connectivity is the essential driver of ICT. Yet, 80 per cent of Pakistanis do not have access to broadband, mainly due to the incidence of high taxes. Tax on export of services is three to four times the rate on export of goods. There is also scope for the government to digitise large parts of its processes to ease doing business.

Pakistan should take control of its destiny. Premature deindustrialisation must be reversed. The Pakistan Business Council advocates a national consensus in the lead up to the general elections.

Published in The Express Tribune, January 10th, 2017.

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