The extent of private sector imagination: more subsidies and more amnesties
The private sector has gotten so used to government handouts and subsidies that it is no longer capable of proposing fresh and original ideas.
It appears that the private sector has gotten so used to government handouts and subsidies that it is no longer capable of proposing fresh and original ideas.
First was ICCI asking for continuing with the industrial amnesty
Industry opposes withdrawal of amnesty scheme (tribune.com.pk)
Islamabad Chamber of Commerce and Industry (ICCI) President Muhammad Shakeel Munir termed the government’s intention to withdraw the tax amnesty scheme for the industrial sector under IMF pressure disappointing.
Expressing concern, Munir said “the move will hurt industrial growth in the country and shake the confidence of investors willing to invest in Pakistan under this scheme”.
He urged the government to reconsider its intention to withdraw the tax amnesty scheme as it would harm economic growth of the country.
He highlighted that the ICCI had been constantly asking the government to announce a package for the industrial sector on the pattern of construction package. “The business community was quite satisfied when an incentive-laden tax amnesty scheme for the industrial sector was announced in the first week of March 2022, which encouraged industrial promotion, revival of sick units and foreign investment in the industrial sector.”
Entrepreneurs and investors were pleased as the amnesty scheme had created new opportunities for industrial promotion and investment in the industrial sector, he added. However, there were indications that on IMF’s demand the government was considering withdrawing the amnesty scheme, which would cause disappointment among the business community and potential investors.
How many amnesties do the industrialists need for industrial promotion? Below infographic from Dawn showing the amnesties offered in the last 10 years. It covers the period till 2019. Subsequently, the PTI government offered two more amnesties. In 2020, PTI government announced a construction amnesty and more recently in March 2022, PTI announced an industrial amnesty that will be rolled back if the IMF program is to continue, which the ICCI is complaining about.
Thus, since 2019, excluding the latest industrial amnesty, 14 schemes have been announced. If those didn’t lead to industrialization and documentation of the economy, we can be sure that the latest industrial scheme won’t lead to it either. ICCI is just looking for handouts. The aforementioned doesn’t include TERF, but more on it later.
Next, we have FPCCI.
Call for economic emergency (thenews.com.pk)
KARACHI: Federation of Pakistan Chambers of Commerce & Industry (FPCCI) on Monday proposed economic measures to the government, saying the business environment had reached the point of an economic emergency justifiable to put an end to the current economic uncertainty.
In a statement, FPCCI president Irfan Iqbal Sheikh said businesses could not operate profitably under such harsh and unfavourable conditions. He urged the government to bring down the policy rate to 7 percent from its currency level of 12.25 percent to make access to finance affordable and to keep economic activities afloat.
…
FPCCI expressed his willingness to engage with the government in a consultative process to take on the economic challenges collectively in a broader national interest. He said policies should not be announced in a vacuum without consulting the business, industry and trade community.
It appears that FPCCI hasn’t realized that despite SBP and various government spokespersons stating the contrary, SBP has been following a reactionary policy. SBP was compelled to increase the policy rate because the rate had become irrelevant, and it is still irrelevant. SBP can reduce the policy rate to 7% tomorrow and I can guarantee you that it will have ABSOLUTELY no effect on 3M T-bill rates or KIBOR rates.
It can become relevant if SBP increases it by another 250bps, but I don’t think anyone (not the private sector, not the SBP, and definitely not the government) are that eager for making the policy rate relevant.
[SBP can bring down T-bill rates by either engaging in massive balance sheet expansion and carrying out a huge Quantitative Easing exercise by aggressively buying T-bills from banks to bring down the yields on T-bills, or through backdoor lending to GoP by flooding the money market with liquidity through reverse repos (RRPs) at below-market rates similar to the earlier 63 days RRPs. A lower T-bill rate may bring down GoP financing costs and KIBOR. There may be repercussions of these measures, and SBP might have to take steps to soak up the excess liquidity such as increasing the CRR, but I digress.]
The point is, if FPCCI is asking for a decrease in the policy rate, FPCCI is just shooting in the dark and has no actionable ideas or suggestions beyond trying to bring down the industry’s financing cost and increase profitability.
Earlier, SBP offered subsidized long-term financing facility TERF during the Covid-19 slowdown.
Inefficient private sector lives off taxpayers’ money: ex-SBP governor - Newspaper - DAWN.COM
KARACHI: Former central bank governor Syed Salim Raza came out on Monday with all guns blazing against the subsidy-guzzling private sector that survives on taxpayer money despite massive inefficiencies.
Addressing a seminar held by the Pakistan Institute of Development Economics, the former governor of the State Bank of Pakistan (SBP) said the government has taken a step back from economic planning in the last few decades, which has resulted in an inefficient private sector and “pockets of industrialisation with big gaps”.
“Our entire private sector lives off massive subsidies,” said Mr Raza who led the SBP from 2009 to 2010.
He also criticised the widely celebrated Temporary Economic Refinancing Facility (TERF), a long-term subsidy scheme for the import of machinery launched during the pandemic.
“It’s a 10 per cent subsidy. And a bulk of (Rs500 billion) has gone into textile plants. More into spinning, a little less into weaving. So we’re back to yarn and cloth. It hasn’t gone into garments... into anything that can give an edge to our textile so they can compete against the rest of the world. Was this useful? What are we going to do with big businesses, which have such an influence on how policies are made?”
When the TERF was announced, there were comments from the SBP Governor and certain sections of the press that SBP isn’t deciding the winning industries, but letting the market decide where to direct the investment. Well, what do you know, it was the large textile groups that hogged the entire facility and directed it towards low-value manufacturing.
To summarize, the government has offered multiple amnesties, a low policy rate as well a 10 percent subsidy on long-term financing. Yet the private sector hasn’t delivered, except for investing more in low-value-added stuff. It looks great on paper to devise policy with private sector input or to announce a policy that the private sector celebrates by taking out full-page ads in the newspaper. However, the private sector, or at least the private sector lobbyists that have access to the policymakers and budgets for newspaper supplements, lacks imagination beyond asking for more amnesties and/or lower interest rates.
This is not to say private sector input should not be sought when making policies. The policymaking game of the government should improve beyond announcing blanket subsidies, amnesties, SEZs, etc.