Will budget 2017-18 promote local and foreign investment?
AMONGST the key signs of business enterprise growth is said to be the ability to increase level of investment both from locally and abroad; capacity to export and ability of employing greater levels of human and financial resources. Unfortunately the case of Pakistan was opposite from expectations as decline was observed in local and foreign investment from 63 in 2013 to 35 in 20 16.
If one is to look into previous trends of investment as percentage of GDP there has been improvement in terms of total investment but on the parallel side investment’s contribution in GDP is very much low.
In terms of total investment as percentage of GDP, it can be observed that there had been increase over the period with possible reforms strategy (National Doing Business Reforms Strategy 2016) but it didn’t proved to be significant. Such reforms steps didn’t proved to be encouraging for public investors due to high cost of compliance with tax and regulatory regime at federal, provincial and local level which is preventing firms to grow. Beside high cost of compliance, weak enforcement of rules of competition and higher sunk costs faced by businesses in entering and exiting markets is also not allowing new investors in small and large scale manufacturing and value added sector in agriculture and livestock to grow. It was because of these factors investment’s contribution in GDP growth declined over the past 2 years (2015-16 and 2016-17). These factors also influenced existing investors and prevented them from growing which also hinders investment’s contribution to GDP in the long run.
As it can be viewed that public investment as percentage of GDP stood low in comparison to private investment because of hesitance which is mostly related to ease of doing business as major hindrance. It can be viewed from (figure-2) that current government only got able for a positive increase in public investment from 3.17 percentage points in 2013-14 to 4.28 percentage points in 2016-17. This low growth can be attributed to various factors e.g. circular debt and consistent power outages.
Similarly there has .been found 12.2 percent increase in inflows of foreign direct investment In comparison to fiscal year 2015-16. Majority of investments in this regard are coming through CPEC projects resulting in China’s contribution to stand at 36 per cent of the total inflow of FDI followed by Netherland with 23.1 per cent and France with 8 per cent being major contributors.
Looking at this investment overview of Pakistan during previous fiscal years, If one is to look at the conventional determinants of investment these may include cost of capital, trade openness, tax and regulatory regime, enabling infrastructure including energy, ability of state to enforce contracts, financial intermediation, and security. Pakistan thus seems to have made some progress on: improving security out-look, perceptions regarding improved economic growth; owing primarily to China Pakistan Economic Corridor (CPEC), keeping interest rates low in turn allowing private sector credit to increase, however the progress on other indicators seem slow.
Budget of 2017-18 has nothing to offer for both local and foreign investors in the long term as far as the taxes are concerned, with corporate tax ranging to 30pc from 35pc in the previous year which is still on the high for investors who are or tend to invest here. Similarly, an increase in number of years for tax relief will not be encouraging for both public and private investor.
There has been no significant step taken for improvement in starting a business, where energy is one of the primary indicators. In budget 2017 -18, where government has proposed 401 billion PKR for power sector development, including investment of317 billion PKR to be undertaken by WAPDA, only focuses on projects like LNG based power terminals, Nelum Jhelum hydro power project and Tarbela hydel power to be more specific. There has been no significant allocation for improvement of quality and efficiency of energy sector. Factors which should be included in this regard for efficient and quality energy are introduction for systems to reduce number of days from starting of application to installation of system and quality of services including outages, restoration, regulation and communication.
For coming years more dependence is on investments in infrastructure and energy related projects with little efforts being done towards improved innovative investments e.g. only Rs 500 million has been allocated to Innovation Challenge Fund with special focus on use of technologies and SMEs. Besides, this innovation challenge fund, for access to finance by introducing fund of 3.5 billion under risk mitigation facility for SMEs in SBP.
The steps which are offered in current budget has very little to offer for investors in terms of reforms which will help in easing the cost of doing business. Only incentives offered is for new companies which are entering in the market in the form of tax relief for very short period of time (3 years). This budget didn’t offer anything for improving the cost of compliance which can help investor to step up and sustain. Similarly nothing was offered in the form of cost of entering the market due to additional tax measures which also goes down to district level. As can be seen from the budget and monetary policy document is concerned only lowering the interest rate will not serve the purpose. This lowering of interest rate has only increased the private sector credit resulted in very low growth of investment as percentage of GDP over the period of 4 years. As this budget only played around with the number on tax and tax relief, to promote local and foreign investment there should be a reduction in number, rate and type of direct taxes. Likewise budget didn’t high-light the balance in tax contribution by different sectors of the economy. This balance is needed to alleviate the manufacturing sector from what comes out as an unjustified burden of taxes as income from agriculture and services sector re- mains out of the tax net. This budget should have proposed a careful review of taxation on inputs to provide relief to major sectors like agriculture where farmers are also subject to GST and customs duty. For the case of industry, a level of playing field for SMEs need to be in shape and steps should be taken for encouragement of SMEs by provision of exemptions and preferences in the tax code with no offers in this budget. This budget should have also looked into administration of revenue authorities. Fear of intrusion by authorities prevents private sector entities from declaring all of their activities and even fear to enter the market and invest.
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The opinions expressed in this article are the author's own and do not necessarily reflect the viewpoint or stance of SDPI.