On chambers’ solutions for economic problems

BR Research September 12, 2019

Last week, the All Pakistan Chambers Convention (APCC) released their White Paper on challenges and the way forward for Pakistan’s economy.  Their good intentions to offer recommendations to solve the country’s economic problems are one thing; the quality and the likely acceptability of their solutions is another.

Consider their recommended policy action for exchange rate. The APCC wants the government to present their projections for next four years about size of economy, per capita income, exports, imports investment flows, inflation, policy rate, etc. That seems like a fair demand to give businesses at least some kind of crude sense of economic direction, albeit anyone who has followed Pakistan’s economy for the last twenty years knows well how unreliable those projections are.

But it is APCC’s demands that the government should announce “an Exchange Rate Band in advance” every fiscal year to “help curtail dollar hoarding and stabilizing the exchange rate market”, that seems untenable. This recommendation is based on their premise that “if the exchange rate is left on the market, it would have negative repercussions for the economy”. Essentially this seems like a proposal to go back to Darnomics, which according to all economically sound stakeholders, including those from within the party that followed Darnomics, is bad economics and bad politics.

Or consider APCC’s proposal that “the government should take steps (through State Bank Interventions) to reduce the interest rate to a single digit,” because ‘borrowing cost would rise to around 18-20 percent by next year”. This too is not a tenable proposition. First, because even before the release of rebased CPI numbers, interest rates were seen peaking by March 2020, if not earlier.  Second, because the government should be in no position to intervene in a matter that should be entirely the central bank’s domain. Besides, as is the case of ‘exchange rate band’, as long as Pakistan is under the IMF programme, such antics to intervene in central bank’s domain aren’t possible.

The APCC’s diagnoses on taxation are also wanting in some respects. For instance, their white paper regrets the fact that the country’s agriculture sector, which is about 19 percent of the GDP, contributes just 0.6 percent to tax collection – implying a tax potential of material amount. This is contrary to various academic studies that reveal that total tax potential from agriculture sector across the country is considerably small, no more than Rs150-200 billion by most estimates, which is really small amount given the scheme of affairs.  Tax collection from agri-related services, such as the business of ‘arthis’ or middlemen, is admittedly huge. But that’s service sector rather than agriculture.

Similarly, their critique that tax authorities are only trying to capture those who are already compliant taxpayers is somewhat misplaced. While that may have been in the case in the past, ever since Shabbar Zaidi took charge of the FBR, the tax body has been going after smuggling as well as trying to bring a wide variety of businesses into the tax net including the once holy cows: doctors and schools. And if the tax body is also targeting under-declaration by already registered tax filers then so be it.

APCC’s observation that the government hasn’t yet laid out a clear plan about state owned enterprises is spot on; so is their critique of the “regulatory guillotine” that negatively affected the investment climate in the country. Given the inadequately staffed nature of research departments and weak secretariat of most chambers across the country, perhaps they could finance local think tanks who could hire economists and business/public policy professionals to conduct studies on various issues identified in the white paper. In the meantime, perhaps the APCC should also present a white paper on chamber and association reforms in the country, and then act on it.

 

 

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