The Cherished Dream of Budget

The following article has been published in Daily Nation, dated 1st June 2015

(E-Paper (Print Edition)http://nation.com.pk/E-Paper/lahore/2015-06-01/page-9)

(Onlinehttp://nation.com.pk/business/01-Jun-2015/the-cherished-dream-of-budget)

The cherished dream of budget

 (Budgetary Dreams)

Prof Dp

By: Omer Zaheer Meer

“I have a dream”. These were the famous words uttered at a junction of history which saw a drastic change in the United States of America. With the budget looming around the corner, this scribe too has a dream to share with the readers.

The dream starts with the federal budget of Islamic Republic of Pakistan having just been announced. There are widespread celebrations across the country, for many of the promised reforms have been delivered with path for a longer term change laid down. Pakistan Muslim League’s government has fulfilled its commitments despite some very challenging circumstances. Some of the major reforms and steps taken along-with their justifications, as outlined by the finance minister Mr. Ishaq Dar are detailed below.

Tax Facilitation: Several steps have been taken to reform the taxation system and structures. Firstly the computerized national identity card (CNIC) has been declared as the National Tax Number (NTN) and Sales Tax Registration Number (STRN) for all citizens. This has not only made it extremely easy for any Pakistani to start a business having both the NTN and STRN, hence promoting a culture of entrepreneurship but is also expected to help broaden the tiny existing tax base as the number of filers and ultimately taxpayers are forecasted to increase with the increasing documented nature of the businesses.

Corporate and Agricultural Exemptions: Furthermore exemptions on various businesses as well as the agricultural sector have been withdrawn. This is expected to generate substantial additional revenue as these sectors constitute 30 to 40 percent of national economy as per various studies. These sections have previously been out of the tax net without any substantial benefit to the GDP despite the relaxation. Therefore the Government has now decided to instead facilitate the farmers to increase the productivity as outlined below while ensuring the agricultural sector is brought within the tax-net.

Tax Volume over Margin: Moreover to make taxation less cumbersome and support the initiatives aimed at broadening of the tax base, the strategy of volume over margin has been pursued in that the tax rates have been drastically cut for both individuals and businesses to the lowest level in the entire region. This has not only positioned Pakistan as one of the most tax-attractive destinations in the region with substantial forecasted investments expected to create job opportunities in the country particularly in the power, agriculture and textile sectors but has also created an incentive for businesses and individuals to pay their due taxes, being less cumbersome than the cost of avoiding it with the threat of stringent possible penalties.

Free electricity & water for Agriculture: Another long-awaited major reform to turnaround the ailing economy in an agricultural country has also been taken. Keeping in view of the fact that the Indian Punjab’s output and productivity has been surpassing Pakistan’s and contributing materially to the Indian economic strategy, the Ministry of Finance has given its strategic vision to place Pakistan as the agricultural leader in the region. Water and electricity are declared free for agriculture for those farmers having small holdings or renting the land. The taxes raised from agricultural sector are mostly reserved to fund this initiative.

Further Agricultural Reforms: Furthermore a new body has been created to buy all crops from the farmers at the Government approved rates and supply them to various industries and markets, thereby ensuring the farmers will get their due while the stockists’ induced shortages and inflation can be stemmed out. Furthermore all seeds, fertilizers and other necessities can be brought through this body at discounted rates which has already listed all major quality suppliers in its approved lists. The volume of potential business has motivated suppliers to offer discounted rates in the hopes of additional business increasing their profitability and helping them expand, in turn creating more job opportunities.

HR development & Educational Reforms: To promote the culture of learning and human resource development, the listing criteria of stock exchanges now includes a requirement for the companies to annually spend atleast 1% of their total revenue on the education and/or professional trainings of their workers. Also, new non-corporate businesses spending more than 2% of their turnover on the education and training of their workers are offered tax rebates. These steps are topped up by an increased budgetary allocation of 5% to the education. The impact of this allocation is not very drastic post 18th amendment but is a strong signal and precedent for the provinces to pursue.

Further reforms to support HR development, Education & Entrepreneurship: Supporting the drive for education and entrepreneurship, Government has required all banking institutions to lend interest-free, atleast 5% of their total business to students and startups without any guarantees. To provide assurances to the banks, a fund has been launched backed by insurance to provide monthly returns to the banks to compensate for the loss of interest income while the fund along-with the insurance serves to act as a guarantee for abnormal bad debts in this sector.

Short-term Energy Reforms: Besides the CPEC and other energy projects, to address the severe energy shortage in the shorter term, the solar energy sector has been given a tax-break for five years with a requirement to cap margins at 15%, in order to ensure the benefits of the cost reduction will be passed on to the masses. This step is expected to assist in resolving the severe energy shortage problem in the shorter term as the cost of setting up solar energy systems has been one of the biggest hindrances in its widespread use despite Pakistan’s climate been extremely conducive for it. Furthermore windmill energy sector has also been extended the same favor to capitalize on its potential for cheap electricity generation with minimal initial investment and running costs.

It was here, that this writer woke up. The sadness on missing many more positive reforms engulfed me but the realization struck that this is the same sadness that engulfs every Pakistani post budget every year. Let’s hope and pray that this year will be different.

The author is Director of the think-tank “Millat Thinkers’ Forum”. He is a leading economist, CFA Charterholder, experienced fellow Chartered Certified Accountant and anti-money laundering expert with international exposure who can be reached on Twitter and www.myMFB.com @OmerZaheerMeer or omerzaheermeer@hotmail.co.uk

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Pakistan can’t afford turning CPEC into another KBD (Part II of II)

The following article has been published in Daily Nation, dated 25th May 2015

(E-Paper (Print Edition)http://nation.com.pk/E-Paper/lahore/2015-05-25/page-9)

(Onlinehttp://nation.com.pk/business/25-May-2015/pakistan-can-t-afford-turning-cpec-into-another-kbd-part-ii)

Pakistan can’t afford turning CPEC into another KBD (Part II)

By: Omer Zaheer Meer

Link to Part I (Published): https://omerzaheermeer.wordpress.com/2015/05/18/pakistan-cant-afford-turning-cpec-into-another-kalabagh-dam-part-i-or-ii/

PART II

CPEC is strategically very important for China as it imports 60% of its oil from the Gulf of which 80% is transported by ships travelling over 16,000 kilometers in approximately three months on average through Strait of Malacca to Eastern China. This existing route is not only longer but is ridden with regular attacks by pirates, bad weather and political rivals under American and Indian influence. So the strategic benefits to China can be categorized in four major areas:

  1. China is heavily dependent upon the oil from Gulf for its energy needs. China will reduce the transportation distance from 16,000 km to just 5,000 km resulting in huge economic savings and quicker business all around the year sans the threat of blockade by political rivals.
  2. China will gain access to the untapped markets of the energy rich Central Asian states and Afghanistan which are termed as the next big thing and “Gulf replacement” for coming century. With this early access, developed secure routes and trade ties China can not only secure its energy needs for the next century but place itself as the world leader re energy security by having taps on the future energy sources, a place currently held by the USA.
  3. China will be able to spread its economic development benefits to its lesser developed western areas including the troubled Muslim-majority region of Xinjiang. Furthermore with enhanced security co-operation with Pakistan and economic developmental gains, China hopes to curb its troubles in its underbelly.
  4. Last but not the least, CPEC will not only provide China with an opening to the world from its western side but also ensure that by having a potential naval presence at Gwadar, not only does it hold an additional sea-port but has the capability to blockade the oil supplies to any future adversaries. Any attempts to encircle China such as those currently pursued by USA would become futile in such a scenario.

The benefits to Pakistan are numerous too. Some of the major ones are as below:

  • Uplift and development of badly needed transportation, technical and energy infrastructure.
  • Economic development through industrial and commercial zones setup along the CPEC.
  • Potential to earn billions of $ in transit fees, cargo handling and transportation charges.
  • Becoming economic connectivity hub for the entire region and beyond.
  • Security benefits of Gwadar port as outlined above.
  • With enhanced security ties with China and the economic developmental benefits, Pakistan also expects of stemming out the terror in lesser developed areas of Balochistan and KPK.

Considering all the significant benefits and strategic potential of the CPEC it was unfortunate that it became controversial. The controversy is two pronged. There are those who genuinely felt that the economic benefits of the CPEC were moved away from their provinces to Punjab, being the political constituency of the incumbent Government. However, there are also efforts led by India to disrupt the CPEC as is evident by the recently created desk at RAW with initial allocation of $ 3 billion for this purpose. Furthermore by signing accord to develop Chahbahar port with Iran, India has aligned Iranian interests with itself too. Moreover UAE’s interests also clash with Pakistan’s as the success of CPEC will render Dubai port an invalid. Furthermore, the strategic great game means that USA would rather not have it to see CPEC successful.

None of the external efforts would have been and can be successful without some genuine internal dissent though. Unfortunately the lack of transparency and undue secrecy around the CPEC allowed the propaganda as well as the genuine concerns to grow. Moreover the eastern route was the most talked about during the Chinese President’s visit to Pakistan, further raising concerns of depriving smaller provinces of their due. Absence of KPK, Sindh and Balochistan CM’s while CM Punjab was in attendance didn’t help the situation either. Therefore, KPK Assembly passed a resolution demanding the original route to be retained while Balochistan Assembly’s resolution demanded clarification on CPEC benefits to provinces from the federation. ANP then convened an “all parties’ conference” pressing the controversy and concerns forward.

Though late but some positive steps were taken. A meeting of the leaders of all parliamentary parties was convened to enlighten them on CPEC but the “Safora Goth” tragedy overshadowed the effort. However, the meeting didn’t address concerns with regard to greater transparency as little is revealed regarding the technical and financial parameters of the CPEC projects. The funding sources were also clouded in mystery but it now seems that most of the “investment” is in the form of soft loans with Chinese firms to execute several projects. Federal Minister for Planning and Development Mr. Ahsan Iqbal has claimed that all routes of CPEC are being worked at simultaneously and the western route will be the first one operational. Similarly he has claimed that Sindh and Baluchistan will be the biggest beneficiaries of power generation under CPEC with 36% and 26% shares respectively.

The government should use media to educate masses about the above claims as well as share why the alternate routes were developed. Was it to ensure connectivity across the country with developed areas, out of Chinese concerns for safety of passage in case of trouble on the route via Balochistan (as mentioned by some Chinese scholars in their write-ups in international media), to cater for the huge trade volume expected or some other reasons? Also more transparency such as clarifying that why the current PSDP contains allocations under CPEC only for the eastern route and not the others will help dispel the concerns and negative propaganda. CPEC is a game changer for Pakistan and the Government has the responsibility to ensure its successful completion. Pakistan cannot bear the potential loss and the dire consequences of CPEC turning into another “Kalabagh Dam”.

The author is Director of the think-tank “Millat Thinkers’ Forum”. He is a leading economist, CFA Charterholder, experienced fellow Chartered Certified Accountant and anti-money laundering expert with international exposure who can be reached on Twitter and www.myMFB.com @OmerZaheerMeer or omerzaheermeer@hotmail.co.uk