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Federal Budget Why business community feels let down?

The Finance Minister’s budgetary measures have been a huge setback to small business owners. Especially, the reintroduction of wealth tax assessments and giving bank accounts access to FBR have been met with huge skepticism and disbelief by the business community.

In the history of Pakistan, the fastest growth in government revenues occurred during the period 2000-08. Total Federal Tax Receipts went up from Rs 420 billion in 1999-2000 to Rs 1,250 billion in 2008-09. This dramatic increase was observed even though no new taxes were applied during this period, interaction between tax collectors and business community was minimised and self-assessment schemes were introduced in customs, income tax and sales tax departments

How did this miracle happen? What led to the three-fold increase in government revenues without applying new taxes? The answer lies in the following facts:

— The removal of fear of harassment by tax machinery led to a feeling of buoyancy within the business community.

— This resulted in rapid expansion in the amount of investment in manufacturing and service sectors, initially by local entrepreneurs, then followed by foreign investors who jumped into Pakistan eying the opportunities to enter a market of 180 million people.

— The Foreign Direct Investment went up, from an annual level of less than US $300 million in 1998-99 to almost US $8,000 million in 2006-07. The banks were flush with excess liquidity leading to a scenario of low interest rates and availability of credit for capacity expansions as well as consumer financing.

— Thus, a cycle of economic growth was triggered. The country’s GDP shot up, from US $62 billion in 1999 to almost US $175 billion in 2007. Several sectors (automobiles, cement, steel, chemicals, beverages, consumer durables etc) saw their production rise 5-6 fold in a short period of 7 years. This surge in economic activity led to job creation for the youth and unemployed.

— As the economy started to grow rapidly (peaking at 8.4% in 2007-08), new sectors such as mobile telecommunication were created, contributing substantially to increase in GoP revenues

— As production levels went up, so did the tax revenue, from Rs 420 billion in 1999-2000 to Rs 1,250 billion in 2008-09.

— Subsequently, tremendous fiscal space was created. Debt servicing as a percentage of GoP revenues went down drastically. The surplus funds were therefore available for massive investments in Infrastructure, higher education and other projects of benefit to general public

— All this happened without any need to tighten the noose around existing taxpayers. It happened without any need to devalue the Rupee or to borrow excessively from the World Bank or the IMF.

At the mid of 2007, the country was on the way to sustainable medium-term growth. Even though the Oil-shock of 2007 caused balance of payments (BoP) difficulties for all oil importing countries (Pakistan included), yet, it was manageable and short-lived as the oil price soared to US $147 per barrel only to crash to US $40 per Barrel within a span of one year.

The new government that took oath in March 2008 lost the plan completely. They had little idea on how to run a complex economy with GDP of US $175 billion attracting Foreign Investment of US $8 billion+ per year. Hence we are back to shambles with low economic growth, huge fiscal deficits, collapsing Foreign/ Domestic Investment, heavy domestic borrowing and almost 50-60 percent of our budget revenues going towards debt servicing.

Now, what would be an alternate way for the PML (N) government to approach the economic crisis faced by Pakistan. My recommendation would be as follows:

— With total sovereign debt touching Rs 16 trillion, requiring huge amounts for debt servicing, Pakistan has a genuine need to raise Tax Revenues to cover the budget deficits.

— The only way to come out of this situation is by targeting to double the size of our economy, from US $213 Billion today to US $400 billion in 2020.

— The private sector and small businesses can be the engine of this economic expansion. The government would be well served by a strategy to encourage the entrepreneurial class rather than scaring it away with measures such as FBR’s access to bank accounts data and imposition of wealth tax assessments.

— As the private sector starts to sense a favourable and comfortable business environment, it will begin to invest within the country.

– Luckily, the incoming government enjoys credibility and sound relationship with China and the Arab world, who have been the key investors in Pakistan during 2000-07. This cordiality will come handy and the government must assign the task of courting FDI into Pakistan to its most capable team members.

– Finally, the Public Sector Corporations (PSCs) and the deficits from the power sector are causing a loss of over Rs 500 billion to the national kitty. With the help of the private sector, the new government is fully capable to resolve these issues and save almost half a trillion every year for allocating towards development expenditures.

There are two key ingredients to achieving success in the above strategy. The GoP must focus on controlling the security situation and must give morale boosting confidence to the local/foreign businesses to fearlessly invest in expanding their operations

The critical test for the Nawaz Sharif government is to prove whether they are competent enough to infuse buoyancy in an economy 3 times the size of 1999 or will they make the same mistake of alienating the private sector as was done by the preceding government.

(The writer has served as Chairman of Pakistan Association of Automotive Parts & Accessories Manufacturers (PAAPAM) during 2010-11)

Aamir Allawala, "Federal Budget Why business community feels let down?," Business recorder. 2013-07-19.
Keywords: Economics , Economic system , Economic policy , Economic issues , Economic growth , Economic activities , Economic planning , Banks and banking , Business community , Tax-GDP , Tax policy , Tax reforms , Taxes , IMF