The Ripple Effect
As the Pakistani government gears up to grapple with the medical side of Weeks 4-5 (marking a potentially exponential spread) of COVID-19, serious fears are now also beginning to emerge on whether or not Pakistan can economically sustain such a multipronged War.
Amidst an environment of plummeting markets, squeezed spending, widespread industrial closures, and a shattered myth of Anglo-Saxon business integrity (almost the entire West has conveniently reneged on agreements and contracts in the name of force majeure), Pakistan’s economy faces yet another external account challenge.
This time in shape of an abrupt loss in exports and incoming home remittances, as customers in Europe and the US refuse to lift contracted goods and thousands of expatriate workers return home after losing their jobs at their workplaces abroad.
Postponement of health insurance premiums without penalty by at least 3 months, without any penalties or interest, both for self-employed and companies
The government has to be proactive in quickly helping businesses and industries at this critical juncture. Not only the losses arising from industrial shutdowns and abandoned output would be colossal, but the resultant spike in unemployment & poverty would simply be unprecedented.
And this on the back of 2 years where growth and economic activity has at best been below par, inflation high and unemployment and poverty levels consistently rising. The reality is that for all governments, including ours. The rethinking of the economic policies has become imperative, as there was an old economic world before Corona and there will now be a new economic world after Corona.
Emergency Measures
However, to even get to the ‘After-Corona’ stage, one will first have to survive the current economic devastation being caused by the global Corona pandemic. The sooner the Pakistani Government becomes cognizant of the new economic challenges to survive this economic downturn, the better it would be for our chances to survive.
For anyone in doubt or not fully comprehending the economic implications, the steps already taken by the West which is currently the epicenter of COVID-19. In efforts to support or even resurrect businesses or perhaps for the Western economies to simply stay afloat, can also be a good guideline for us to follow.
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So, with this, getting down to some specifics instead of just uttering vague or generic cliché statements, let’s try and list some of the precise measures that the European Governments in unison with the EU (European Union) and the ECB (European Central Bank) have already announced or are actively in the process of implementing by April 01, 2020?
Broadly the Relief Measures have two facets:
A) Resolution approving the financial contribution for self-employed persons, persons with daily flexible jobs and all nursing staff or nursing-help, which is self-employed, works on a need be basis or partially employed. This resolution guarantees them a minimum of 50% wages by the government in their related wage category. Now in Pakistan, this would be the category we generally refer to as daily wagers.
B) More comprehensively, the European Governments, the representatives of the Confederation of Industry, the Confederation of Employers and Entrepreneurs Associations, the confederations of Labor Unions and the Chambers of Commerce have joined hands and collectively agreed on measures aimed at protecting jobs in companies, employers and saving the companies from becoming insolvent and thereby saving the European Union economies from imminent collapse. In summary, these are essentially 17 measures primarily involving helping measures from the governments and the financial institutions:
Immediately endeavor to reduce the size and the footprint of the government. To start with slashing pays and perks by 50 percent for all parliamentarians, appointees, advisors, etc
1. State compensation for interest and fines paid to banks. If a self-employed or SMEs are late in paying their loans to the banks, the State will compensate them by contributing half of the default’s interest amount and/or half of the contractual penalties.
2. State compensation on interest payable and on any fines relating to energy and network service providers. If the self-employed or the SMEs are delayed in paying utility bills and other inputs from network suppliers, the state is to compensate half of the default’s interest amount and/or half of the contractual penalties.
3. Cheap/Interest-free loans. The State will ensure that entrepreneurs have access to cheap (no more than 1.50%) or interest-free loans (depending on the sector) from respective commercial banks, including disbursement of small emergency operating loans (up to Euro 50,000/- for each self-employed and Euro 100,000/- for a small sized company).
4. Leniency of banks with debtors. State will or can intervene in case Banks and Insurance Companies do not show leniency and helpfulness towards debtors in rescheduling non-performing loans since January 01.2020 to December 31, 2020.
5. Postponement of social insurance premiums without penalty by at least 3 months, i.e. without any penalties or interest, both for self-employed and companies.
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6. Postponement of health insurance premiums without penalty by at least 3 months, without any penalties or interest, both for self-employed and companies.
7. Total waiver of social security contributions paid by the employer from March to June 2020 (so far and can be extended).
8. Total VAT waiver for businesses from March to June 2020 (so far and can be extended).
9. Speeding up the refund of excessive VAT deductions. In terms of cash flow, it is especially important for exporters. To be refunded within a period of NO later than 14 working days.
10. Up to fifty percent Contribution of self-employed persons, possibly also to statutory representatives and to the statutory representatives of companies, for at least the period that the EU regards as ‘extraordinary’.
11. General cancellation of any requirements on advance income tax or advance insurance payments, for both for SMEs and self-employed till 30.09.2020.
12. Date of Income-tax filing extended by 6 months.
13. Abolishing and waiver of all local charges/levies/taxes to manufacturing till further notice.
A small trader in Kasur recently complained about receiving as many as 14 tax notices in less than 10 months with one dating back to the tax return filed more than 6 years back
14. A 50% relief in income tax on companies producing the necessary protective, medical, pharmaceutical, sanitary, resp. disinfectants, etc., provided they ensure the production of such devices within a reasonably short period (4 months), in reasonable volumes (at least 25% volume growth) and 0% price growth. Also, such goods to be free from any VAT levy till 30.06.2020 (for now till further notice).
15. Zero VAT on accommodation services that help in keeping the suffering patients.
16. Postponement and waiver for all SMEs and self-employed on any rent paid to municipalities.
17. To enable all companies to set up a data box for direct electronic communication with state authorities in order to get an immediate resolution/relief on any specific difficulty being faced or for any urgent help required. For immediate implementation, the process has been started by way of simple email communication, to be moved later to a Data Box system, in order to avoid fraud.
Feasibility Litmus
While one does realize that all the above may not be possible for us in its entirety, as not only do we lack the resources, but also the institutions to deliver some of the very intricate steps involved, still inaction is not an option. Within our limited resources the government must act in a way that a) optimally taps the fiscal space available at its disposal, b) creates capital along the way and c) utilizes help that can be obtained cost free. Keeping to these three notions, the following are some recommendations that should be considered on a priority basis:
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Immediately endeavor to reduce the size and the footprint of the government. To start with slashing pays and perks by 50 percent for all parliamentarians, appointees, advisors, etc. Also, rationalize Bureaucracy’s (except police and health-related personnel) pays and perks for the next 12 months.
Renegotiate with the IMF and seek a three years interest free support of additional $2 billion and negotiate with all debtors a moratorium of 3-5 years on all current external debt, starting immediately.
Reduce interest rates to 6 or 7%, no later than 30.09.2020.
Exporters need help on a war footing and some good quick measures would be to revert to zero-rating immediately, double SBP’s export refinance allocation as most shipments that are effected are likely to remain so for at least anywhere from 3 to 6 months, and to direct our respective embassies to help in recovering stuck up payment and goods by pressurizing companies that are reneging on firm contracts with Pakistani exporters.
Take immediate control of foreign currency outflows: All unnecessary imports need to be stopped and all production (unless essentials) with more than 25% imported components needs to be discontinued.
Strictly monitor supply-side flows and pricing to ensure markets stay calm and in equilibrium.
It will need to accumulate a pool of experienced and qualified professionals who can not only help the government in implementing the new economic priorities but also in managing key sectors in a hands-on manner
Reign in FBR and NAB from needlessly harassing people and creating panic. A small trader in Kasur recently complained about receiving as many as 14 tax notices in less than 10 months with one dating back to the tax return filed more than 6 years back.
Suspend documentation drive till 30.06.2021, as under the current circumstances the un-documented sector will have a big role to play in keeping supplies flowing, costs down, providing employment and stoking philanthropy, which has always been an integral part of discreet social safety nets in Pakistan.
Slash Sales-Tax rate to 7% (till 30.06.2021) to bring cost of production down.
Stop bleeding in State-owned Enterprises (SOEs) by giving all loss-making SOEs on ten years management contracts. This will help arrest precious capital resource drain of as much as nearly 2 trillion rupees per annum and at the same time avoid (at least for now) the lengthy and (often) controversial privatization process, while the ownership still ultimately remains with the government.
In Entirety
All the above is by no means going to easy or without pain and perhaps our entire thought process cum approach on governance and economic management will need to be revamped. Also, the government will need professional help. Currently, it just does not have adequate human resources to manage things competently and efficiently.
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And for this reason alone, it will need to accumulate a pool of experienced and qualified professionals who can not only help the government in implementing the new economic priorities but also in managing key sectors in a hands-on manner. However, those who are willing to do so without any remuneration – to give back to the country when it needs them the most.
One can understand that to some, quite a few of the above proposals may seem very ambitious or even idealistic. To pacify their concerns all one can say is that perhaps they do not realize that this is now a battle for our economic survival and given the uncertainty all around, any half-baked solutions will just not do!
Dr. Kamal Monnoo is a political analyst. He is honorary consul general of the Czech Republic in Punjab and a member Board of Governors of Islamabad Policy Research Institute. He is author of two books ‘A Study of WTO’, and ‘Economic Management in Pakistan.’ He can be reached at: kamal. monnoo@gmail.com. The views expressed in this article are the author’s own and do not necessarily reflect the editorial policy of Global Village Space.