Immovable Property Gambit: Impact on Stakeholders

The above titled article was published in the renowned Blue Chip Journal as an Op-Ed in it’s Oct – Dec 2016 edition.

Link to e-edition of the (Blue Chip) publication

Immovable Property Gambit: Impact on Stakeholders

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By: Omer Zaheer Meer

The recent developments in the Federal Budget and later on in the Finance Act 2016 regarding immovable property shook the realty sector within Pakistan which was taken by surprise. Taxation is not just a mean to fund a Government but also a policy tool to impact the national economy, social behaviors, trends and developing institutions. Unfortunately, in Pakistan the impetus has mostly been on using taxation for filling up the coffers of treasury with seriously negative consequences.

Before proceeding with our topic, this writer will briefly define some of the vital concepts and then move onto the core issue; cover the current taxation regime for the realty sector particularly as governed by the Federal Government before concluding with an analysis of the major impact on key stakeholders including investors, property dealers, general public, traders and the Government.

Key Concepts:

Following are some of the vital concepts which are important to understanding the topic of this write-up:

  • Income Tax – a tax levied on the income of an individual or organization which varies with the level of income and is subject to local laws and regulations.
  • Capital Gains Tax – a tax levied on the gains accumulated on the sale/disposal of capital assets subject to certain conditions
  • Capital Gains – a gain arising on the disposal of a capital asset by a person in a tax year.
  • Depreciable Asset –means any tangible movable property, immovable property (other than unimproved land), or structural improvement to immovable property, owned by a person that —
  • has a normal useful life exceeding one year;
  • is likely to lose value as a result of normal wear and tear, or obsolescence; and
  • is used wholly or partly by the person in deriving income from business chargeable to tax,
  • Filer – a person who has filed his income tax return irrespective of the income and/or tax declared.
  • Non Filer – a person who is not a filer.
  • Capital Assets: – Section 37(5) of Income Tax Ordinance 2001 states:

 “capital asset” means property of any kind held by a person, whether or not connected with a business, but does not include —

  • any stock-in-trade [ ], consumable stores or raw materials held for the purpose of business;]
  • property with respect to which the person is entitled to a depreciation deduction under section 22 or amortisation deduction under section 24; [or]
  • any movable property [excluding capital assets specified in sub-section (5) of section 38] held for personal use by the person or any member of the person’s family dependent on the person[.]

Tax Avoidance Culture:

Unfortunately there is a widespread tax-avoidance culture in Pakistan with people not seeing value or duty in paying due taxes. To put things in perspective, out of a population of 200 million, just over a million taxpayers file returns in Pakistan which comes up to about 0.5% of the population. Even out of this, a large number files Nil tax returns.

Salaried individuals end up paying their due taxes, not by choice but as a result of being bound by the law requiring their employers to deduct the due income tax on their salary in advance.

On the other hand, the rich and powerful segments are either exempt by law (large landowners) or pay miserly taxes as compared to their lifestyles and incomes. This includes influential people from almost all segments of society be it politicians, bureaucrats, journalists, generals, professional or others. This leads to a culture where tax is seen as an unnecessary and avoidable burden instead of a duty and cost of living/doing business.

Reasons for the Prevailing Culture:

There are many reasons for this unfortunate prevailing trend. The key ones are listed below:

  • lack of trust in Government
  • lack of public facilities
  • lack of quality health, education and law and order facilities
  • corruption of Government officials
  • harassment by taxation officials
  • structural issues within the taxation system
  • regressive taxation policies
  • high incidence of taxes on a very low tax base
  • no or minimum tax paying culture by the rich and the powerful
  • culture of law violation
  • perception that it is better and easier to remain outside the documented economy

 

Filer and Non-Filer Differentiation:

To address some of the above issues and in order to entice masses to become part of the documented economy, the FBR and thereby the Government came up with a productive and results-oriented strategy. For the past two years, there’s been a growing policy of differential tax rates for filers and non-filers.

This introduces an incentive for the people to start filing their income tax returns. Moreover, as even a nil return (where no income is reported and/or no tax is due) serves the purpose, this further increases the incentive.

However, due to the issues listed above, a majority of the people believe it to be better to avoid filing returns and becoming part of the system, more so for the fear of harassment by tax officials. So, as outlined many times before, unless structural reforms are carried out within the taxation system, such measures will not achieve the full results they’re aimed at.

The Issue:

Despite the presence of the concept of Fair Market Value in the taxation laws, for too long immovable property has been valued in Pakistan at the rates commonly referred to as the “DC Rates”. These rates are heavily undervalued. For example a property in DHA Lahore maybe selling for PKR 25,000,000 but the DC rates would be around PKR 6,000,000.

As a result of this, the capital gains taxes were either avoided or paid on extremely low values at low rates. This led to the creation of an attractive opportunity for undocumented, untaxed and black money to be “parked” in the realty sector which led to large-scale trading of properties rather than actually building houses and property units despite a serious shortage of over 9 million housing units as per State Bank of Pakistan presenting a huge business opportunity. Although local investors and families did construct housing units but the bulk of the investment went to mere trading to drive up property prices and create non-sustainable profits for the investors.

The size of the black money involved is conservatively estimated at PKR 6 to 7 trillion. Unsurprisingly, due to heavy investments in realty sector, property prices for the past many years sky-rocketed, growing at astronomical but non-sustainable rates, lacking economic fundamentals. This, coupled with the “tax-efficient” black money parking, created a very alluring and largely undocumented investment opportunity as people even started trading “files” without transferring properties in their names to avoid the taxes altogether.

The Initiative:

In view of the issues and strategies discussed above, this year the Federal Government on behest of the FBR decided to move a step further, this time targeting the real estate sector.

Furthermore, with the idea of a massive increase in tax revenues, possibility of bringing part of the seven trillion Rupees wealth within the documented economy and most importantly the pressure for international lenders providing the necessary motivation, the Government decided to take an initiative.

The Finance Act 2016 made an amendment in the Income Tax Ordinance 2001 by introducing the concept of Fair Market Valuation of immovable property by a panel of valuers notified by State Bank of Pakistan, one of the stronger regulators in Pakistan, as taxable value.

Moreover the requisite holding period for Capital Gains Tax exemption was increased from 2 to 5 years and higher rates of Capital Gains Tax were introduced.

Outcry:

This caused severe panic and fear amongst investors, property traders and dealers. Most important for them was the message and the manner in which the new taxation policy was decided without taking them on board. They feared that the intense focus on realty sector would lead to them being asked about their existing wealth and past transactions and consequently they anticipated heavy penalties and tax liabilities on account of the past transactions.

The key issues which made the realty sector anxious were as below:

  • higher taxation
  • hassle and harassment by FBR
  • a valid concern that the valuation by SBP’s valuers would be highly subjective and non-standardized.
  • Section 111 of the Income Tax Ordinance 2001 regarding unexplained income and assets may be invoked regarding past transactions.

This resulted in almost a suspension of property trading and protest preparations across the country.

Capital Flight:

As one would expect, the situation resulted in a capital flight. Besides other destinations, most of the capital flight was destined towards UAE by some of the investors. To put things in perspective, as per Dubai Land Department, Dubai had already seen Pakistanis investing US $ 4.9 billion in last 2.5 years. Now with this increase flight and market panic, the Government feared a melt-down not previously taken into account properly.

Negotiations:

This led to the Government initiating a series of negotiations aiming at reaching a middle ground with the key stakeholders as the consequences seemed to be more than those predicted by the decision makers.

After a series of repeated rounds of negotiations, a compromise was reached between the Government and the key stakeholders, which was implemented by way of an Ordinance.

Settlement:

The compromise reached resulted in the current position which is as below:

  • FBR in consultation with the representatives of various organizations from the realty sector has agreed valuation for major towns. These valuations are above the DC rates but still much below the current market valuations.
  • These FBR valuations will be used as a basis for taxation of immovable property. Where these are not available, the DC rates will continue to be used. FBR will revise these rates from time to time.
  • The holding period for exemption from CGT is reduced from 5 to 3 years with the CGT charged at different rates in three slabs for each of the holding period.
  • A differential treatment has been introduced for immovable property acquired before or on and/or after 1st July 2016.
  • Exemptions from CGT and Advance Income Tax on immovable property, for families of Shahuda and Government officers have been introduced.

Compromise on Fair Market Valuation:

The amendment to introduce State Bank of Pakistan’s approved valuators has been amended in favor of valuations issued by FBR in consultations with key stakeholders and giving FBR the powers to revise these rates in future too.

FBR issued 22 SROs covering valuations for residential and commercial properties in Karachi, Lahore, Islamabad, Gujrat, Jhang, Bahawalpur, Sahiwal, Hyderabad, Jhelum, Rawalpindi, Multan, Sukkur, Quetta, Abbottabad, Peshawar, Sialkot, Mardan, Gujranwala, Sargodha, Gwadar and Faisalabad effective from 31st July 2016.

These have been divided into 3 categories:

  • Residential (including flats)
  • Commercial Area
  • Industrial Area

4 measuring parameters have been used for different areas based on per:

  • Acres
  • Marlas
  • Square Yards
  • Square Feet

Compromise on Holding Period:

The holding period required for exemption from Capital Gains Tax has been reduced from the proposed five (5) years to three (3) years.

Compromise on CGT Rates:

The new table of Capital Gains Tax rates is as below:

Exemptions and Reductions:

For immovable property allotted to the following persons, the CGT would be 0% irrespective of the holding period:

  • A seller, if the seller is dependent of:

(i) a Shaheed belonging to Pakistan Armed Forces; or

(ii) a person who dies while in the service of the Pakistan Armed Forces      or the Federal and Provincial Governments; and

(b) to the first sale of immovable property which has been acquired or allotted as an original allottee, duly certified by the official allotment authority.”

Moreover, Capital Gain Tax have been reduced by 50% in case of first sale of immovable property acquired or allotted to ex-servicemen and serving personnel of Armed Forces, Federal and Provincial Governments, being original allottee of the property and duly certified by the allotment authority.

Calculating CGT:

Gain arising on the disposal of immovable property by a person in a tax year (none after holding for three years), shall be chargeable to tax in that year under the head Capital Gains at the rates specified in Division VIII of Part I of the First Schedule.]

The gain (and thereby the CGT) arising on the disposal of a capital  asset by a person shall be computed in accordance with the following formula, namely:–

(A – B) x T, where

A         is the fair market value as determined under sub-sections (4) or (5) of Section 68 of INCOME TAX ORDINANCE 2001; and

B         is the cost of the asset.

T         is the applicable CGT rate

For the purposes of determining component B (the cost of the asset) of the formula amount shall be included in the cost of a capital asset for any expenditure incurred by a person –

  • that is or may be deducted under another provision of Income Tax Ordinance 2001; or
  • that is referred to in section 21 (Deductions not allowed).

NB: Any selling expenditures and ancillary costs of acquisitions are included in B.

Current Immovable Property Taxation Regime:

Currently both federal and provincial governments have levied their taxes on the realty sector.

The federal taxes (impacted by the changes introduced) are as below:

  • Advance Income Tax (Adjustable) on Buyer (Section 236K of INCOME TAX ORDINANCE 2001)
  • Advance Income Tax (Adjustable) on Seller (Section 236C of INCOME TAX ORDINANCE 2001)
  • CGT (Section 37 & 38 of INCOME TAX ORDINANCE 2001)
  • Fair Market Value (Section 68 of INCOME TAX ORDINANCE 2001)
  • Unexplained Income or Assets (Section 111 of INCOME TAX ORDINANCE 2001)
  • Valuation of Assets (Rule 228 of Income Tax Rules 2002)

The provincial taxes (unaffected by the changes discussed) are as below:

  • CVT (Capital Value Tax)
  • Stamp Duty
  • Property Registration Fee
  • Transfer of Immovable Property Tax (TMA)

Federal vs Provincial Domains:

The matter of levying taxes on realty sector is controversial as post 18th Amendment Capital Gains Tax has effectively fallen in the Provincial domain whereas trading income remains in the Federal domain. However, FBR is of the view that this is well within their domains.

The matter is currently in litigation and decision of the honorable courts will have a serious impact on the future outlook.

Out of Sight Real Issue:

More important than CGT rates or holding period is the classification of income earned from the realty sector. Investors frequently trading properties may find themselves in a tougher spot re taxation as their gains will likely be classified as income from business which is taxed at much higher rates.

Therefore, the classification of the gains from realty should have been taken up as a more important priority than Capital Gains Taxes.

Clearing Misunderstandings:

  • While proceedings cannot be initiated under Section 122 of the Income Tax Ordinance 2001 as per decision of Honorable SCP (2009 PTD 1279), Commissioners Inland Revenue can ask to explain the source of any explained income or asset (investment made in immovable property) on the basis of other information (undisclosed bank account, property, e.t.c.)
  • Hence this section can be applied and is a major concern for those affected.
  • Opportunity to be heard and provide and explanation are given
  • So practically, section 111 of INCOME TAX ORDINANCE 2001 may still be invoked.

Valuations for the Purposes of Section 111 of ITO:

FBR’s valuation tables are to be used for the purposes of Section 111 (Unexplained Income or Assets) of Income Tax Ordinance 2001. Where not notified by FBR, the valuation of Immovable property for the purposes of Section 111 shall be as below:

in the case of open plot, the value determined by the development authority or government agency on the basis of the auction price in respect of similar plots in the area where the plot in question is situated or in case where such value is not determined, the value fixed by the District Officer Revenue or provincial authority authorized in this behalf for the purposes of stamp duty;

in the case of agricultural land, the value equal to the average sale price of the sales recorded in the revenue record of the estate in which the land is situated for the relevant period or time; or

in the case of constructed immovable property, value shall be determined at the fair market value as defined in section 68 or the value fixed by the District Officer (Revenue) whichever is higher.

Income Tax on Builders:

The taxes on builders and developers by FBR are different. A tax is levied on the profits and gains of a person deriving income from the business of construction and sale of residential, commercial or other buildings at the rates  specified  below (Division VIIIA of Part I of the First Schedule):

(A) Karachi, Lahore and Islamabad (B) Hyderabad, Sukkur, Multan, Faisalabad, Rawalpindi, Gujranwala, Sahiwal, Peshawar, Mardan, Abbottabad, Quetta (C) Urban Areas not specified in A and B
For commercial buildings
Rs. 210/ Sq Ft Rs. 210/ Sq Ft Rs. 210/ Sq Ft
For residential buildings
Area in Sq. ft Rate/ Sq. Ft Area in Sq. Ft Rate/ Sq. Ft Area in Sq. Ft Rate/ Sq. Ft
Up to750 Rs. 20 Up to750 Rs. 15 Up to 750 Rs. 10
751 to 1500 Rs. 40 751 to 1500 Rs. 35 751 to 1500 Rs. 25
1501 & more Rs. 70 1501 and more Rs. 55 1501 and more Rs. 35


Income Tax on Developers:

Similarly a fixed tax is levied on the profits and gains of a person deriving income from the business of development and sale of residential, commercial or other plots at the rates below (Division VIIIB of Part I of the First Schedule):

(A) Karachi, Lahore and Islamabad (B) Hyderabad, Sukkur, Multan, Faisalabad, Rawalpindi, Gujranwala, Sahiwal, Peshawar, Mardan, Abbottabad, Quetta (C) Urban Areas not specified in A and B
For commercial Plots
Rs. 210/ Sq Yd Rs. 210/ Sq Yd Rs. 210/ Sq Yd
For residential Plots
Area in Sq. Yd Rate/ Sq. Yd Area in sq. Yd Rate/ Sq. Yd Area in Sq. Yd Rate/ Sq. Yd
Up to 120 Rs. 20 Up to 120 Rs. 15 Up to 120 Rs. 10
121 to 200 Rs. 40 121 to 200 Rs. 35 121 to 200 Rs. 25
201 and more Rs. 70 201 and  more Rs. 55 201 and more Rs. 35


Common themes of Tax on Builders & Developers:

  • It shall be computed by applying the relevant rate of tax to the area of the residential, commercial or other plots for sale.
  • The above tables applies to projects undertaken for development and sale of residential, commercial or other plots initiated and approved after the 1st July, 2016.
  • The aim is to introduce an “incentive” to declare real value of immovable property as the taxes by builders and developers are “fixed” by area, though one can argue as to the attractiveness of this “incentive”.

Major impact on key stakeholders:

As a result of the measures introduced by the Federal Government discussed above, the realty market in Pakistan has become stagnant. There has been capital flight and some correction in prices in a few areas. Let us briefly analyze the impact upon each of the major stakeholder group identified in the beginning:

Investors:

The investors are the one hit hard if not the hardest. They’ve virtually stopped further investments into the realty sector and most are holding onto their existing investments, pursuing a wait and see policy in the hopes of an impending amnesty scheme, expected to ease off the fears and therefore the pressure on the real estate market.

Property Dealers:

The magnitude of the property deals and thereby the business, for property dealers fell significantly. There are still some needs based transactions but not at the levels prior to July 2016.

Moreover, as many property dealers were also acting as investors or partial investors, they’re also negatively impacted in that area too.

General Public:

The impact on general public is more complicated. There are those that were involved in the business of or held immovable properties and are negatively impacted by the current situation.

However, with a shortage of nine million housing units as per SBP and the bulk of realty investment going in trading rather than actual construction, further fuelling the price bubble of property beyond economically justifiable fundamentals, the current pressure on realty sector is viewed with a sense of relief.

The masses hope that if the trend continues, ultimately the trading investors will have to liquidate their investments and move away which can lead to a down-ward correction in the property prices. Furthermore, hopefully atleast part of the investment may end up in the actual construction sector addressing the severe shortage of housing units in the country.

Traders/Businesses:

Ordinary traders are also impacted in more than one ways. Firstly the drop in realty sector’s attractiveness may open up more capital access for other business opportunities.

However, as there is a possibility of a snowball effect in the economy, if not properly managed the negative effects can spillover from the realty sector into other economic areas too.

Last but not the least, many of the traders are themselves invested in the realty sector too which makes them exposed to the same concerns as other investors.

Government:

The Federal Government is hoping to achieve several goals. They believe if there is a proper implementation, their initiatives can lead to the following:

  • down-ward adjustment in immovable property prices making them relatively affordable for masses
  • increased taxation revenue for the Government
  • investment diversion towards more “productive” segments such as construction and other businesses within the country due to the realty sector losing its’ previous attractions and the other sectors becoming more economically viable for investors

Proposal:

In order to achieve the desired purposes of an increase in the tax base and a better documented economy along-with a focus on actual construction of housing units rather than just mere trading of plots, the Federal Government should:

  • bring structural reforms within the taxation regime
  • do away with the overwhelmingly subjective powers of tax officials in favor of objective ones
  • follow volume over margin policy by introducing a single digit tax rate to minimize the cost of tax avoidance
  • introduce tax rebates and a tax-free period for the construction sector
  • address the fears of the stakeholders positively to bring them on board
  • run a campaign to educate masses about the importance of taxation backed by actions to tax the rich and the powerful

Another Amnesty:

There’s been news of another impending amnesty scheme doing rounds in the power corridors. The aim is to address the concern of the property investors re past transactions and unexplained income and assets. The basic structure of such a scheme is proposed to allow whitening of the past wealth by paying a meager single digit tax.

However, it may meet the same fate as the now infamous “Voluntary Tax Compliance Scheme” launched for traders earlier this year if it does not address the key concerns of the realty sector stakeholders. They are currently more in favor of the new law applying to future transactions and blanket amnesty re all past transactions without any cost to them.

How things pan out in the future will depend a lot on this scheme and how things shape up. Only time will tell if the boom in the realty sector is over or the powerful investors and stakeholders in this key sector of economy will be back with a bang!

The author is Managing Partner of Millennium Law & Corporate Company and 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 and can be reached at ozmeer@mlcc.pk

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Budget: An Objective View

The following article has been published in Daily Nation, dated 08th June 2015

(E-Paper (Print Edition)http://nation.com.pk/E-Paper/lahore/2015-06-08/page-9)

(Onlinehttp://nation.com.pk/business/08-Jun-2015/budget-an-objective-view)

Federal Budget: An Objective View

By: Omer Zaheer Meer

The wait is over. One of the most awaited events of year, the federal budget was announced on Friday, 05th June 2015. The incumbent government has claimed it to be a historic one as all governments do while the opposition saw only red as the oppositions normally do. The reality however lies somewhere in the middle. There have been some positive steps that should be appreciated while others are left to be desired.

To understand the current budget better we need to review the performance of the last fiscal year as per the Economic Survey 2014-15 released by the finance ministry. As per the data released, inflation has reached the lowest level of this decade with substantial improvements in the foreign exchange reserves. This has resulted in State Bank of Pakistan reducing the discount rate at 7%, the lowest in last four decades.

While the issue of sukuk bonds and receipt of loans and donations were a direct result of governmental decisions, the improvements mentioned above were largely due to a key factor not affected by the governmental policies, that was the reduced oil import costs and resultant reduced inflation in the country due to material reduction in oil prices in the international market. Furthermore, manufacturing and agriculture sector which are the prime drivers of economy and employment opportunities haven’t shown the improvements expected. Private sector is sluggish and the cherished dream of the Tax-GDP ratio in line with the developed economies remained a dream.

With this backdrop and an economic growth rate of 4.24% the federal budget 2015-16 was supposed to overcome the shortcomings mentioned above and in several article before. Some key proposals were provided on these pages on Monday, 1st June 2014 in an article titled “Budgetary Dreams”. It was good to see some of the proposals getting implemented like the announcement of rebate on solar-panels and provision of concessionary loans to small farmers for some solar-powered projects. Similarly the incentives to the construction industry and rebates announced for the rice manufacturers are positive steps too. What’s interesting is that incentives announced has been for small farmers owning less than 12.5 acres of landholding, thereby substantiating the perspective that those over this threshold should have been brought within the tax net.

On the other hand, the critical proposals including bringing agricultural sector within the tax net and using the proceeds to subsidize provision of free or low-cost water and electricity to the sector has been ignored. Creating a new body for providing seeds, fertilizers and all other necessities to farmers at discounted prices due to the volume of business with the mandate of buying all crops from the farmers at the Government approved rates and supplying them to various industries and markets, thereby ensuring the farmers getting their dues while the stockists’ induced shortages and inflation getting stemmed out has not been implemented either.

While almost a 14% increase has been announced in the federal budget for education, which must be appreciated, the promised level of 5% of budget still remains a dream. Similarly the research and human resource development proposals have not been incorporated into the budget despite their importance for a modern national economy. As elaborated in previous write-ups, the impact of this allocation may not have been very drastic in terms of volume post 18th amendment but it would have been a strong signal and precedent for the provinces to pursue.

There was a hue and cry over a paltry 7.5% rise in the salaries of federal employees particularly considering the inflation levels. While the finance ministry has defended this citing certain limitations, there is much left to be desired and an increase of at-least 15% was very much realistic and achievable.

However the most shocking oversight was yet again ignoring the proposals of broadening tax base that has been presented to the various ministry officials for over a decade now. Once again the computerized national identity card (CNIC) has not been declared as the National Tax Number (NTN) and Sales Tax Registration Number (STRN) for all citizens. This could not only have made it extremely easy for any Pakistani to start a business having both the NTN and STRN, hence promoting a culture of entrepreneurship but would also have helped 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.

Continuing from this, the proposal of focusing more on a progressive direct tax regime is deferred once again. While there is no substantial change in the ratio of the direct taxes to indirect taxes, the positive reductions on the focus on indirect taxes is missing. The current policy of relying more on indirect taxes in the shape of customs duty, sales tax, federal excise duty, petroleum levy, gas infrastructure cess, natural gas surcharge and others will give rise to inflation and increased productivity costs leading to lower exports and purchasing power. The costs of this policy certainly outweigh the benefits. Similarly the volume over tax rate policy could have helped increase the tax net and the tax to GDP ratio by substantially reducing the tax rates, making it economically feasible to pay taxes instead of using the costly means to avoid them.

Although the budget is supposed to be a benchmark to act as both a planning and a control tool, this has not been the case for quite some time now. With all sorts of mini-budgets and flexible forecasting, the budget has been reduced to a mere constitutional formality that is met every year. Let us hope that the most important proposals not incorporated in the proposed budget may get the attention of our lawmakers and make way into any policy changes.

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

Yemen Conflict: Potential Economic Catalyst for Pak

The following article has been published in Daily Nation, dated 06th April 2015

(E-Paper (Print Edition)http://nation.com.pk/E-Paper/lahore/2015-04-06/page-9 )

(Onlinehttp://nation.com.pk/business/06-Apr-2015/yemen-conflict-potential-economic-catalyst-for-pak )

Yemen Conflict: Potential Economic Catalyst for Pak

Prof Dp

By: Omer Zaheer Meer

Strategic decisions by modern states are based on either some principles, agreements, vested national interests or a combination of the above mentioned. A confusion and lack of clarity often results in ruining of opportunities which could otherwise turnaround the situation of a nation. By now, you’d have most likely heard about the conflict in Yemen, a regional dominance affair portrayed as a Shia-Sunni sectarian conflict by the script writers of the new world order for their own vested interests. While a lot has been written on the Yemen conflict in the past few days, a focus on economic prospects of the potential decisions has been somewhat lacking. We’ll address it in this write-up.

Pakistan currently has a vital economic dependency on Kingdom of Saudi Arabia (KSA) led Gulf coalition. The aid provide during sanctions and the $ 1.5 billion “gift” to Pakistan during current Government just last year maybe one-offs but the continuous provision of oil on “deferred payment” and employment opportunities for millions of Pakistanis in KSA and the Gulf region are of a permanent nature helping sustain Pakistan’s economy. Similarly, Pakistan share important economic ties with United Arab Emirate (UAE) whose companies often invest in Pakistan, albeit of extremely favorable terms in semi-Government or Government owned enterprises. Furthermore Pakistan has recently executed an agreement to import LNG from Qatar to meet its energy needs. The Gulf region is amongst major export destinations of Pakistani products. Annual bilateral trade is in billions of $. In economic terms there is an unfavorable trade imbalance in the trade ties mainly due to the import of oil by Pakistan. Furthermore, there is a convergence on security interests between Pakistan and most of the Gulf countries baring the issues with UAE regarding conflict of interests re Gawadar port as outlined below.

On the other hand, while there are just a few thousands Pakistani employed in Iran (fifteen to twenty thousands), the strategic position of it being a neighbor of Pakistan has serious implications for nation defence and thereby resultant impact on defence spending and national budget. While the past has glorious examples of Pak-Iran collaboration particularly during the 1965 war with India, it is an unfortunate fact that due to the non-convergence of economic and regional security interests, Iran has lately been in partnership with Pakistan’s arch rival India. The process exacerbated due to the divergence of interests in Afghanistan and peaked with the launch of the Gawadar project which directly threatened Iran’s vital “Chahbahar” port just like it threatened the prospects of UAE ports more importantly Dubai. The result has been direct economic costs for Pakistan due to delays in making port operational due to law and order situation supported by foreign interests as well as increased defence spending further straining the national resources.

Keeping in view of the above, perhaps it is high time that the strategic decision makers in Pakistan list the vital national interests that can be secured from both KSA led Gulf region as well as Iran as well as to what extent it can offer its co-operation in return depending on existing agreements. It is vital that we think realistically respecting the support and co-operation we’ve received from our allies over the years but sans undue emotions. USA has done the services expected of Pakistan for years at extremely lucrative terms; it would therefore not be unfair or unethical for Pakistan to pursue the betterment of its inhabitants while supporting its allies.

Below are some proposals in regarding what Pakistan can offer considering its own issues and limitations:

  • Pakistan should focus on its ability play the role of an effective mediator to address the concerns of both Iran and KSA just like it did to bring China and USA closer back in the 1970’s.
  • Deploy air support and commanders to lead Gulf forces within their borders (particularly KSA) to ensure effective defence.
  • Deploying its own forces within KSA to protect its borders from outside attacks.
  • As a last resort conduct targeted air-strikes against local militia on formal request from the Yemen Government and KSA led Gulf coalition on the principle of supporting democratically elected government.

What Pakistan can achieve economically in return may include the following:

  • Assurances from both Iran and UAE to stop stirring up trouble in Balochistan resulting in a quicker start of Gawadar project as well as lower spending on counter-terrorism there.
  • Membership of important bodies including GCC with economic implications.
  • Removal of tariffs on Pakistani imports in their countries, with preferential treatment.
  • Attractive deals to secure reliable LNG, LPG, oil, e.t.c. at cheap rates to ensure Pakistan’s growing energy needs are met effectively. Depending on some key factors Pakistan can secure even free supplies for a long period.
  • Offering special nationality packages to Pakistanis working in the countries involved, which can positively influence the foreign exchange reserves of the country.
  • Writing-off of Pakistan’s debts due towards GCC countries.
  • Paying off Pakistan’s other external debts.

This is yet another historic opportunity for Pakistan and it should not be squandered like many in the past. The demands listed above are all very realistic and possible considering the vital role expected of and the possible costs for Pakistan. They’re also much less then what had been taken by the USA for similar services in the past. So if Pakistan is to play the most important role for one of the richest regions in the world, it may as well get due recognition and rewards. After all the law of the nature is such that even brothers working in brothers’ businesses must get rewarded for their work. And what’s better if the rewards are sufficient for one brother while less then what the other was paying to outsiders.

The author is Director of the think-tank “Millat Thinkers’ Forum”. He is a leading economist, chartered financial analyst, qualified fellow 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