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EDITORIAL: The economic growth outlook is getting bleaker. Both the World Bank and the Asian Development Bank have revised the growth rate downwards to below 1 percent.

However, the decline is getting steeper and recent high-powered numbers suggest that the GDP might contract in the current fiscal year.

This has significant implications for businesses, particularly those which are heavily dependent on raw material imports. In a recent report carried by this newspaper, the documented steel sector has urged the prime minister to rationalise the turnover tax rate.

The premise is the reality that the steel industry is on the brink of closure. And the documented sector is at a disadvantage on two counts — first, it has to pay turnover taxes whereas the bottom line is in red; and second, import of raw material through legal channels by it is obstructed.

With import restrictions, businesses that operate informally have adequate room to flourish at the cost of formal businesses. Steel sector is one example where turnover tax is making life difficult for formal businesses.

In another case, mobile phone assemblers are losing out to CBU phone importers. Raw material imports are not allowed while phone imports are growing where payments are made through hundi/hawala. The result is that some phone assemblers are considering moving towards the informal segment to stay afloat.

The undocumented or informal economy is already quite large in Pakistan and its size is bound to grow with distortionary and discretionary policies for imports and the players in the formal sector of the economy that religiously operate under the lofty transparency ideal of documentation.

A couple of months ago, the State Bank of Pakistan (SBP), on the request of businesspeople, allowed importers to bring goods if they have deferred payment facility for 365 days or more.

It’s, however, hard to comprehend that any supplier would offer credit to buyers in Pakistan, given the precarious balance of payment situation where large Multinationals (MNCs) are facing numerous difficulties in repatriating their profits while global banks are reluctant to confirm Letters of Credit (LCs) from Pakistan.

The most likely outcome is that the buyers are paying through informal hundi/hawala channels and getting the supplies through intermediaries that are either their sister concerns or companies of acquaintances in a third country such as the UAE, after which the supplier can give credit to the buyer in Pakistan for 365 days or more.

The catch is the question: what happens when the payment date becomes due? At that time either the company must pay through a formal channel or have higher tax liability as the cost is not fully reflected in its books.

And the payment depends upon the PKR value and forex reserves’ situation. All these factors are keeping the formal sector away from such transactions, and that is resulting in a huge incentive for informal segment to grow further.

There is a possibility that in order to muddle through successfully the formal sector may be constrained to shift its area of activity to the informal domain.

This phenomenon has already materialised (2015-16) when there were talks that FBR (Federal Board of Revenue) could gain access to people’s bank account information.

Meanwhile, the discrimination between filers and non-filers has also begun to accelerate. This is evident from the growing amount of currency in circulation. Therefore, the situation is ripe for this transition to gather further momentum.

The federal tax collection was 9.2 percent of GDP last year and given the fact that GDP is often under-stated, the tax-to-GDP ratio is even lower. And this is expected to worsen further if the imports are not normalised for the formal sector.

This is a dangerous trend for the country’s formal manufacturing sector. Legal formalities constitute an implicit pre-condition to attain scale and be competitive in the global markets to boost exports, and if firms move toward informal practices, it would not bode well for anyone, least of all the economy at large.

The government is, therefore, required to revisit import restrictions or curbs without any further loss of time. Fortunately, the country’s economy is still not beyond repair.

Copyright Business Recorder, 2023

Comments

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KhanRA Apr 07, 2023 09:55am
This is due to Nawaz Sharif selecting the father of his son-in-law for the job, based solely on those credentials alone. Everything Dar touches becomes wasted. He follows one bad policy with an even worse one. He think he has solutions, but all he has done is poison the economy and sent this beautiful country into a dark abyss.
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Mohammad Apr 07, 2023 02:27pm
@KhanRA, Government is loosing tax revenues and Afghan transit business increase rapidly but present Government doing nothing.
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KU Apr 07, 2023 05:15pm
They are not interested in reviving the economy, but isn't this expected from the incompetent? The hopefuls and their companions were betting foolishly on their ability to turn around a miracle. Anyway, a government formed after a no-confidence vote, and which did not get votes to form a government in the first place, is adamant to hold elections and it is clear that they only want to benefit themselves with wealth and power. That's called democracy in our part of the world.
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Farooq Khan Apr 08, 2023 08:17pm
3rd time he has come and failed
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Tulukan Mairandi Apr 10, 2023 05:13am
Daronomics at play. First he flopped by dissing IMF, and now we are all paying the price. Then he flopped by propping up the PKR, exhausting all the USD we had. The other major flop is to stop imports, which has all but destroyed industry. Together, with his actions, he will cause the country to splinter following hyperinflation, default (early May 23) and a mass famine, And the word "Daronomics" will be known all over the world as an economic method to destroy a developing country with abundant resources and 220 mn young enterprising people.
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