Shifting focus towards productivity – Business

Poor productivity is the main reason for the huge imbalance in external trade and recurring current account deficits, forcing Pakistan to rely on successive International Monetary Policy (IMF) bailouts, says an analyst who has done extensive research on governance in both the public and private sectors.

Enhanced, diversified, value-added goods and services produced at globally competitive prices are required to meet the people’s needs, possibly at affordable costs and create a targeted trade surplus for exports. Productivity growth is essential for raising living standards, reducing poverty, and driving economic development.

The need for advancing reforms to raise productivity and competitiveness has also been stressed by the IMF executive board directors who approved the $7 billion bailout.

They have called for creating a more favourable private sector environment by removing state-created distortions and ensuring a fair level playing field with increased competition. They have emphasised the need for streamlining subsidies, improving the foreign direct investment regime, deepening bank intermediation and scaling up human capital investment.

Pakistan was called the worst-performing country in terms of productivity growth within the Emerging Asia group in a McKinsey report

Banks are reportedly trapped in surplus liquidity and are lending at three per cent per annum to avoid paying up to 19pc tax if they fail to raise the advance-to-deposit ratio from 38pc to 50pc by December.

Simultaneously, the government is re-profiling its debts by repaying early short-term loans to commercial banks and plans to raise low-cost, long-term debt. It has repaid Rs351bn to banks by buying back short-term loans.

The IMF directors noted that Pakistan needs to move away from a state-led growth model to give the private sector the freedom to build a competitive economy. The government’s footprint in the country’s economy is estimated by the Pakistan Institute of Development Economics (Pide) at 67pc.

Pakistan’s gross capital formation, averaging a mere 15pc of GDP over the past three decades, is far below the levels of China and India, which have consistently invested 30-40pc of their GDP in capital formation.

Owing to brain drain, according to a Pide research report, Pakistan has suffered a substantial productivity loss equal to $303.4bn in 2023. The figure is arrived at by accounting for migrants’ contribution to global GDP, subtracting remittances received. The study points out that a talent-focused opportunity approach may permit creativity and entrepreneurship to prosper everywhere.

In sharp contrast, a relatively affluent middle class created by workers’ remittances and the country’s socio-economic progress is being impoverished by heavy taxation.

Unless Pakistan follows the principle of equity and restructures the FBR to weed out corruption, punitive actions will not have the intended effect

Nathan Porter, IMF mission chief to Islamabad, however, appreciates “Pakistan’s new approach”, approved by the IMF, to promote productivity and competitiveness by fostering domestic and external competition, creating space for private investment, right-sizing the role of the state, reforming state-owned enterprises, and improving the quality of public services, spending, and infrastructure. Here, one may add, the major issue is to walk the talk.

Pakistan stands at a critical crossroads as it grapples with a deepening productivity crisis that threatens its economic future, says Syed Asad Ali Shah in his The News article titled ‘a deepening productivity crisis.’

Pakistan was singled out as the worst-performing country in terms of productivity growth within the Emerging Asia group in a comprehensive report, titled ‘Investing in productivity growth’, released by McKinsey Global Institute in March 2024.

“Continued strong financial support from Pakistan’s development and bilateral partners will be critical for the (IMF) programme to achieve its objectives,” according to the Fund’s executive board directors.

The inflation-adjusted real tax revenue growth stood at a mere 2pc per year since 2018, and the tax-to-GDP ratio grew to 9.5pc from 8pc in 2000.

In September this year, tax collection exceeded the monthly target of Rs1.098 trillion merely by Rs2bn. The tax filing is stated to have more than doubled to 3.2 million compared to 1.6m the previous year, with over 723,000 new filers compared to 300,000 last year.

Finance minister Muhammad Aurangzeb estimates that non-filers and under-filers were evading taxes of around Rs1.3tr at the individual level, and the amount for cash-in-circulation stood at around Rs9tr. He said Pakistan’s economy was potentially valued at more than $700bn — double the current estimate of $3.25bn — leading to tax evasion worth Rs7tr.

The Federal Board of Revenue’s (FBR) strategy to boost compliance rates, according to Dawn’s analysts, appears to rely solely on enforcement through punitive action against tax evaders and cheaters.

Countries have improved their tax performance not just by taking punitive action but also by making their tax regimes equitable, fair and easier to comply with through wide-ranging policy and administrative reforms.

Unless Pakistan also follows the principle of equity, does away with wasteful Rs4tr exemptions, and restructures the FBR to weed out inefficiencies and corruption, the analysts argue that punitive actions will not have the intended effect.

Nathan Porter, in an article on ‘Revitalising Pakistan’s economy’, says, “Easy stimulus and giveaways is not the route to achieve higher and sustained growth.”

The top 86 companies listed on the share market posted a record net profit of Rs1.7tr for the fiscal year ending June 30, 2024, up by 25pc, despite a challenging economic environment. A news analysis notes that the performing entities sold fewer goods at significantly higher prices, which allowed them to navigate the economic crisis.

Published in Dawn, The Business and Finance Weekly, October 7th, 2024