Incentives to industry must be very selective

Pakistan’s major export industries are clamouring for policy revision that they claim would enable them to compete with competitors, including China and India, the regional giants – policies that, in the past, extended monetary and fiscal incentives at the taxpayers’ expense to select industry, with critics maintaining that the incentives were proportional to their political influence in previous administrations, civilian and military. The International Monetary Fund (IMF) assessment of these incentives was damning and outlined in the October 2024 staff level agreement on the ongoing Extended Fund Facility (EFF) loan: “subsidies have taken the form of low-cost financing and other concessions, which although varied across industries, left financing and taxes net of subsidies more favourable than in peer economies and less-favoured sectors. The tax system has been extensively used to provide non-transparent support through exemptions for privileged sectors like real estate, agriculture, manufacturing, and energy, as well as, through the proliferation of Special Economic Zones. The government’s intervention in price setting, including for agricultural commodities, fuel products, power, and gas (biannual), combined with high tariff and non-tariff protection tilted the playing field in favour of selected groups or sectors. Despite all this support, the business sector has failed to become an engine of growth, and the incentives eventually weakened competition and trapped resources in chronically inefficient (including perpetually “infant”) industries. ” This assessment led to IMF conditions to cease (and a few instances phase out) incentives with industry recommending multiple policy revisions that include: (i) combating power sector inefficiencies. The government recently opted to borrow 1. 25 trillion-rupees to retire the intransigent circular debt, approved by the Fund to be passed onto the consumers – an approval contingent on the fact that the policy rate was 10. 5 percent at the time with the expectation that it would decline further by December last year. Nonetheless, the Fund added the proviso that the government would adjust the Debt Service Surcharge on tariffs in the event that the policy rate was raised and thereby ensure that the tariff covers the debt servicing; (ii) Monetary Policy Committee raised the policy rate by 100 basis points on 27 April due to the Middle East crisis which may necessitate an upwards adjustment in tariffs; and (iii) contain petroleum levy as that translates into higher transport costs (subsequent to the Middle East conflict the proposal to raise this levy to retire the over 2 trillion rupee circular gas debt has been deferred) with a major negative impact on inflation. Failure to implement any of the agreed conditions on the three programmes – one in 2019 (deferred in 2020 and 2021 due to the pandemic though deferral post Middle East conflict that has caused severe oil and fertilizer supply disruptions is not yet evident), another in July 2023 and the ongoing one approved in October 2024 highlight a stark reality: the government needs an ongoing programme with the IMF, with no delays or worse suspension, as the two friendly countries informed the government in no uncertain terms that without an active programme the over 9 billion-dollar annual rollovers will be withdrawn, triggering default. Recent reports suggest that the government is negotiating a more phased approach, read higher incentives for specific industries, but so far has met with little success. The question is which of the four industry types merit incentives. First, primary industry which includes agriculture, forestry, fishing, mining, quarrying and the extraction of minerals. Farm output remains subject to weather conditions and in spite of support from the government average yield per hectare remains lower than the regional average. Illegal logging continues and Pakistan faces the prospect of ever declining forest area with reports suggesting total forest cover has dropped from 3. 78 million hectares in 1992 to approximately 3. 09 million hectares, an 18% reduction over 33 years. Pakistan is rich in mineral wealth but lacks expertise and capital to extract it. All administrations including the incumbent sought foreign investment to exploit this wealth. Unfortunately, foreign interest was compromised due to lack of consensus between the provinces and the Centre and lack of legal acumen in vetting the contracts. This accounts for contracts subjected to domestic litigation (Pakistan Steel) as well as international arbitration where decisions usually went against the country that in turn compelled Pakistan to pay penalties worth hundreds of millions of dollars. With a rise in terror-related acts in Pakistan the security threat to foreign investors has escalated further. Secondary industry is defined as manufacturing dependent on raw materials (home-grown like cotton and sugar or imported in times of low output due to adverse weather) or processing semifinished products or capital goods used to manufacture consumer (packaged milk and sugar); non-consumer goods include hydroelectricity generation plants and automobiles though in Pakistan automobiles are largely assembled with little indigenisation. The government must focus incentives on higher value addition items for example molasses and bagasse (used for energy/fuel). Tertiary industry is defined as services sector including tourism, banking, finance, insurance, investment and real estate. While tourism was proactively encouraged by the Khan administration, yet it was largely domestic tourism. As aforementioned there has been a rise in terror attacks which is anathema to a rise in tourist numbers. The IMF 10 October 2024 document notes that “the balance sheets of the three parties, the sovereign (government), commercial banks, and the central bank have become highly interconnected. This complex tripartite relationship means that developments or actions in one domain (e. g. , fiscal, monetary policy and the banking sector) can have wide-ranging effects across the economy. It also significantly affects the strength of monetary policy transmission by impinging the relationship between policy rates, private credit, and, private investment and consumption decisions. .. .” and it urged the government to “in the medium-term, the structural impediments to financial sector and capital market development, including the extent of the informal economy should be addressed. ” Pakistan’s real estate sector is largely thought to be a money laundering exercise which has in recent months been severely curtailed due to policy changes and uncertainty. And, finally, there is the quaternary industry which is an extension of the tertiary industry and consists of information-based or knowledge-oriented products and services comprising both government and private sector efforts. Rivals – US and China – are competing in developing Artificial Intelligence and while our AI policy was approved last year envisaging teaching and educational technologies for 2000 students every year, a ludicrous small number; however, one would hope that the government’s fiscal and monetary incentives (including scholarships to China and the US) focus on developing quaternary industries. To conclude, the government must not focus on incentivizing those industries that have survived through fiscal and monetary incentives at the taxpayers’ expense and instead focus on those that are clearly the way forward globally with a large value addition component. Copyright Business Recorder, 2026

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