Private Sector Development Task Force (PSDTF) of Planning Commission has observed that the government continues to follow an ad hoc approach toward reforming the economy - sometimes taking one step forward, followed by two steps backwards.
The Task Force has recommended the government to produce a full inventory of stock of fiscal and financial subsidies with a view to rationalising the package of incentives it has provided over time to various operators in the economy.
The rationalisation should be done on the basis of five principles: producing a level playing field among different operators, compensating for market failure, provision of public goods, identification of some winners to increase the country''s share in international market, and provision of temporary safety nets.
The Task Force has observed that ''The Life Line for FY09-10'' continues today as (i) subsidies are being provided through the banking system for SMEs (clusters, etc);(ii) government''s inaction on power tariffs means electricity subsidies will remain high;(iii) unfunded expenditure is increasing significantly at the provincial level (income support, wheat, flour);(iv) liberal subsidies are being given at federal and provincial level for agricultural tractors and fertilisers;(v) there is a federal scheme for loans to start small business which will impact on fiscal accounts;(vi) textile Sector subsidies are being continued SROs are the worst offenders; and the political economy of removing subsidies - -even ones with a phased out directive has retarded progress.''
The Task Force has urged the government to pay attention to the following;(i) it should adopt and announce in the budget of 2010-11 a five year target for increasing tax to GDP ratio from the current 9.5 per cent to 17 per cent, increasing by 1.5 percentage points a year;(ii) the National Finance Commission award of 2009 should be revised to increase income tax on agriculture to reach 10 per cent over a five year period;(iii) there should be immediate conversion of the general states tax into a value added tax, the VAT. The first step towards this should be taken in the 2010-2011 Budget. The coverage should be broad including application to those sectors that were not included in the General Sales Tax (GST);(iv) corporate rates for all firms should be lowered starting in 2011-12 tax year. The amount of relief should be less than the increase in government revenues as a result of the broadening of the tax base and conversion of the GST to VAT.
Pakistan kept company with other South Asian economies in pursuing an import substitution strategy of growth in the 1947-91 period. However, while Bangladesh and India have moved towards developing exports to provide dynamism to their economies, no similar effort was made by Pakistan. Pakistan''s share in international trade has declined over the years. This happened during the time when the rate of growth in international trade was outstripping the rate of increase in international output by a wide margin. After the Great Recession of 2008-09 international trade is once again emerging as the driver of growth. According to a recently released report by the WTO, world trade is projected to increase by 9.5 per cent in 2010, twice the rate of growth expected in globe GDP. But large emerging economies will have higher rates of growth in trade than today''s industrial countries, 11 percent as against 7.5 per cent.
Pakistan has continued to rely on foreign capital flows to finance imports. This has meant the government has had to deal with balance of payments crisis when foreign flows declined and the country could not pay for imports. We believe that it is important for the country to move towards an export oriented strategy that will require a number of changes in the direction of public policy. In an attempt to find new markets for exports Pakistan has concluded a number of free trade agreements with the countries in the neighbourhood. The most important of these is the FTA with China.
"Among the recommendations we make the following have particular importance;(i) a trade policy review needs to be carried out over the next one year in order to analyse the impact of tariff, tax and exchange rate on exports. Undertake an exercise to map the costs and benefits of various subsidies being provided for export promotion The government should also review the performance of the FTAs that are in place with a view to gauging their impact (ii) on domestic industry and services, (iii) whether they resulted in trade diversion or trade creation, and what are the (iv) domestic implications of these agreements;(iii) devise an effective strategy for development of regional trade;(v) Rewrite the three year strategic trade policy by focusing it on the provision of public goods for the development of exports rather than relying on subsidies to the industries and services regarded as having a high potential in international trade;(vi) focus on the development of export supply chains using the work being done in the context of the National Trade Corridor Improvement Project, the NTCIP," it added.