Threats to Economic Stability Arise from High Tariffs and Tax Burden, warns PBC
Published on: March 26, 2024.
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Pakistan’s economy is facing a major challenge due to premature deindustrialization, leading to job losses and a decline in its share of world exports, according to the Pakistan Business Council (PBC). In a letter to the government, the council highlighted various issues plaguing the manufacturing sector, including excessive taxation, unrealistic exchange rates, unhelpful import tariffs, a poorly negotiated Free Trade Agreement (FTA) with China, frequent power outages, and non-competitive energy costs.
The PBC emphasized that these factors have contributed to a decline in the role of manufacturing in the national economy. If not addressed urgently, this decline will result in more job losses, struggling exports, increasing reliance on imports, and a decline in government tax revenue. The industrial sector is burdened with high power and gas tariffs compared to neighboring countries like India, Bangladesh, and Vietnam, making it difficult for Pakistan’s textile exports to compete internationally. Additionally, domestic energy-intensive industries struggle to offer goods at competitive prices compared to imports.
The council argued that tariff increases are not a sustainable solution to address the growth of the energy circular debt. Higher tariffs only burden the few who pay their bills, instead of resolving the underlying issues. The high costs associated with power and gas, including idle generation capacity, line losses, theft, and under-recovery of dues, have led to a 20-year low in domestic output of yarn and cloth. This has resulted in increased imports of energy-consuming products, reducing the net value-added through exports.
The PBC emphasized that fundamental reforms are necessary to address the challenges facing the energy sector. Rather than relying on short-term tariff increases, the government should focus on pursuing long-term reforms and engage with the International Monetary Fund (IMF) to implement a phased reform program.
The industrial sector plays a crucial role in employment generation, exports, and tax revenue. It accounts for 56% of direct taxes, more than twice its share in the GDP. Therefore, denying the industry competitive energy tariffs undermines its positive contribution to the economy. The PBC urged the government to prioritize providing energy to exporters at a competitive cost to boost demand and enhance the sector’s performance.
Furthermore, the council highlighted that a large fiscal deficit, high government spending, low tax revenues, and increased energy tariffs are preventing inflation from subsiding, making it difficult to cut the policy rate. The high level of government borrowing also crowds out the private sector from bank credit and leads to high borrowing costs for both the private sector and the government. The PBC emphasized the need to control government spending and borrowing in order to address these challenges.
In conclusion, the PBC emphasized the importance of engaging with the IMF to shift away from solely relying on energy tariff increases as a solution to energy sector challenges. The council encouraged the government’s efforts to broaden the tax base and recommended measures to reduce the burden of taxes on industry, the formal tax-paying sector, and their employees. The PBC also called for support for wealth creation through fair means and the elimination of double taxation and discouraging policies for listed companies.
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