Joint efforts need to attract GVC-linked investments
Interview with Mr Ashfaq Yousuf Tola – President, Tola Associates
[box type=”shadow” align=”” class=”” width=””]Profile:
- Fellow Member of Institute of Chartered Accountants of Pakistan
- Fellow Member of the Institute of Cost & Management Accountants of Pakistan
- Life Member of Karachi Press Club
- Life Member of SAARC Chamber of Commerce and Industry
- Member of Karachi Tax Bar Association
- Presentation to IMF on Single Stage Sales Tax in December 2015.
- Visited Turkey as an official of Government of Pakistan to study Turkish Tax System & authored a report on Turkish Taxation System.
- Knowledge of more than 40 jurisdictions around the globe and co-authored report with Dr. Hafeez Pasha on Sindh Provincial Taxation System.
- International Speaker on Pakistan Economy and Non-Resident Taxation in 2018 and 2019 at Dubai, Abu Dhabi and Jeddah.
- Distinction of passing CA Examinations – Intermediate & Final (both groups together in 1st attempt) as trainee of PWC A. F. Ferguson & Co., Chartered Accountants.
Areas of Expertise:
- Tax Planning and Advisory
- Assurance and Business Advisory Services
- International Mergers and Acquisitions
- Corporate Finance and Investment Advisory
- Due diligence and Forensic audits
- Financial Product Designing and Launching
- Public Listings and Corporate Affairs
- Member Board – Privatization Commission, Government of Pakistan (present)
- Chairman – Sub-Committee on Taxation for promotion of Islamic Banking Ministry of Finance (2017)
Federal Board of Revenue, Government of Pakistan:
- Chairman Anomaly Committee (2019)
- Member Tax Reforms Implementation Commission (2016 to date)
- Member Tax Reforms Commission (2015)
- Member Tax Advisory Council (2014-15)
- Member Taxation Reforms Coordination Group (2011-13)
- Member Revenue Advisory Council (2011)
Institute of Chartered Accountants of Pakistan:
- Member Council, (present)
- Chairman – Fiscal Laws Committee (Taxation), (present)
- Chairman – Anti Money Laundering Committee, (present)
- Chairman – CA Joint Committee, (present)
- Member Investigation Committee, (present)
- Member Examination Committee, (present)
- Member Public Sector Committee, (present)
- Member Overseas Coordination Committee, (2018)
- Member Regional Committee – (Southern Region) (1993-1996)
- Secretary of Regional Committee (Southern Region) (1996)
- Member Education and Training Committee, (1994-95, 95-96, 96-97)
- Member Technical Services Committee, and 1992-93, 93-94)
- Chairman Chartered Accountant Students’ Association (1993)
South Asian Federation of Accountants:
- Member Fiscal Law Committee (present)
- Member Tariff Committee (present)
Federal Tax Ombudsman:
- Member Advisory Committee (South) (present)
Pakistan Institute of Corporate Governance:
- Member Board of Directors (present)
- Member Audit Committee (present)
Pakistan Institute of Public Finance Accountant:
- Member Board of Governors (present)
- Chairman CPD Committee (present)
Institute of Cost & Management Accountants of Pakistan:
- Secretary of Karachi Branch Council (KBC) (1995 and 1996)
- Elected Member KBC and Convener Seminar and Publication Committees (1992-96)
- Member Technical Committee
- Member Research Committee
- President (2012 and 2013; 2016 and 2017)
- Honorary Secretary (2008)
- Member Managing Committee (2003, 2004)
- President Tola Associates: April 2017 to date
- Senior Partner Naveed Zafar Ashfaq Jaffery & Co, Chartered Accountants, a member firm of Prime Global International: 2012 to March 2017
- Partner Nasir Javaid Maqsood Imran Ashfaq, Chartered Accountants 2011 to March 2012
- Principal Strategic Officer in Stallion Textiles (Private) Limited: 2008 to 2010
- Chief Executive Officer in Fincon: 2000 to 2007[/box]
Pakistan & Gulf Economist had an exclusive conversation with Mr Ashfaq Yousuf Tola regarding economy. Excerpts of the conversation are as follows:
Pakistan has shown some progress, but it continued to lag far behind in comparison to other regional countries with regards to innovation, capability, technological readiness towards higher value-added processes and productions, and its share in global trade. The World Bank revealed that out of 170 countries, Pakistan’s share in the global export market stood at a meagre 0.11%, which is an eye opener for the government. Pakistan’s tariffs on intermediates average 8%, which are four times the average in East Asia, in addition to regulatory and additional duties. A one percentage point decrease in the country’s average manufacturing tariff can enhance the Global Value Chain (GVC) participation share by 0.4% in the country and bring in substantial foreign direct investment. In order to build our industrial base and create exportable surplus, we must build industries from scratch if we are serious enough to bring in technological advancement, managerial expertise, attract substantial FDI in key sectors and increase our share in the GVC.
Balance of trade is one of the key determinants of the current account, which is the value of country’s exports minus its imports. On account of import compression, reduction in the trade deficit has improved external imbalance risks of the country. However, without fixing structural challenges including industrial infrastructure, high cost of doing business, fiscal reforms, tariff reforms, long term solution of circular debt, import substitutions, value addition and capacity building of SMEs, Pakistan will not be able to tackle trade deficit in the long run. Due to contraction in the broad-based industries of the country, including food beverages and tobacco, petroleum products, pharmaceutical, chemicals, automobiles, iron and steel products, electronics and paper and board, Pakistan’s Large Scale Manufacturing (LSM) has dropped by 8% in October 2019 versus last year.
Moreover, Pakistan’s trade deficit has contracted by 33% in terms of the US dollar and 17% in terms of the Pakistani Rupee during July-November 2019, that fell to $9.66 billion from $14.43 billion last year. Pakistan’s exports have remained stagnant so far, not displaying a sizeable improvement.
On a month-on-month basis, Pakistan’s exports decreased by 0.64% in terms of the US dollar and 1% in terms of the PKR, that stood at $2.011billion in November 2019 over $2.024 billion in October 2019. On a year-on-year basis, the country’s exports grew by 9.35% in terms of the US dollar and 27% in terms of the PKR amounting to $2 billion in November 2019 versus $1.83 billion in November 2018. While imports dropped by 3% in terms of the US dollar on a month-on-month basis and 14% on a year-on-year basis in terms of the same, which were recorded at $3.940 billion in November 2019 versus $4.581 billion in November 2018. Trade figures reported by the State Bank of Pakistan (SBP) in the Balance of Payment ($8 billion) do not match with the Pakistan Bureau of Statistic (PBS) ($9.66 billion) because of three main reasons;
a) Trade statistics compiled by the SBP are based on exchange record data, which depends on actual receipts and payments of foreign exchange, whereas, the PBS records data on the physical movement of goods (customs record) and incorporates cost of freight and insurance while SBP does not; and
b) SBP and PBS also have data coverage variations with respect to imports; and
c) In relation to exports, PBS does not incorporate short shipments and cancellations while SBP does not take into account land-borne exports to Afghanistan and exports by Export Processing Zones.
Pakistan’s imports have dropped by 3% in terms of both the US dollar and PKR from $4 billion in October 2019 to $3.9 billion in November 2019 due to import compression. On account of an incremental growth in food and textile group imports, impact of lower imports in all other groups were muted during the month of November 2019 versus October 2019. On a year-on-year basis, imports of the country dropped by 14% in terms of the US dollar, that stood at $3.9 billion in November 2019 as compared to $4.5 billion last year. Despite an appreciation in the value of the PKR, the country could not save substantial gains in Rupee-terms as far as imports are concerned.
Due to a substantial growth in the imports of palm oil, pulses, Pakistan’s overall food import bill grew by 3.99% in terms of the US dollar that stood at $505 million in November 2019 versus $486 million in October 2019. In quantitative terms, the country imported 424,754 million tonne edible food items, which grew by 13% in November 2019 versus 375,074 million tonne in October 2019.
High cost of doing business and signs of economic slowdown have badly impacted the manufacturing sector of the country, which is considered to be the growth engine of the economy. During July-Oct of current fiscal year, large scale manufacturing (LSM) contracted by 6.48%, indicating that the problems are deep-rooted. During November 2019, on a month-on-month basis, imports of power generating machinery, construction and mining machinery and telecom and others dropped by 65%, 33%, 7% and 15% respectively. However, revival in imports of textile machinery is an encouraging sign as it plays significant role in the overall economic development of Pakistan. Textile imports grew by 50% in US dollar that stood at $41 million in November 2019 versus $27 million in October 2019.
In light of monetary tightening, high inflation and Rupee devaluation, the auto-sector sales and production have contracted leading to severe consequences for the auto industry. Depressed demand in the auto sector has further shredded imports by 29% in CKD/SKD, road motor vehicle (build CKD/SKD) segments by 17% amounting to $76 million and $36 million in November 2019 versus $92 million and $50 million in October 2019. Overall, road transport group’s imports dropped by 8% in terms of the US dollar and PKR, that stood at $99 million in November 2019 versus $108 million in October 2019.
On account of a decline in the import of petroleum crude and natural gas liquefied, Pakistan’s total petroleum import bill dropped by 8% in terms of both the US dollar and PKR, that stood at $930 million in November 2019 versus $1 billion in October 2019. In quantitative terms, petroleum products imports drop by 22% that stood at 871,244 million tonne in November 2019 versus 713,171 million tonne in October 2019, which has offset the impact of grew in petroleum crude. The declining trend in petroleum group import has contributed in improvement of the current account deficit. Overall country’s petroleum bill has dropped by 21% in US dollar terms that fell to $5.11 billion from $6.53 billion during July-November2019 against last year.
The country’s agricultural and other chemical group imports have dropped by 6.38% in terms of the US dollar, 6% in terms of the PKR, and 16% in quantitative terms in November 2019 versus October 2019. In quantitative terms, the overall imports of fertilizer products have also decreased by 36% that stood at 414,817 million tonne in November 2019 versus 657,640 million tonne in October 2018. Similarly imports of gold, rubber, iron and steel scrap etc have also depreciated in November 2019 versus October 2019.
Performance of Pakistan with regards to exports is not encouraging as textile exports remained stagnant despite regulatory intervention, incentives and releasing liquidity against refunds of exporters. Despite towering claims, Pakistan’s overall exports have dropped by 0.64% in terms of the US dollar and 1% in terms of the PKR which should be a concern for the commerce ministry. Country’s total exports remained stagnant at $2.011 billion in November 2019 over $2.024 billion in October 2019. Pakistan has still been unable to bring about fundamental structural changes in domestic manufacturing and SMEs sectors to enhance their capacity and restore their competitiveness.
Pakistan’s share of ‘textile exports’ stands at around 58% in the overall exports of the country. The textile exports have not shown a sizeable growth in quantitative terms, so far, in the wake of economic slowdown, inflation, high cost of doing business, increase in power tariff and devaluation of the PKR which impacted exporter’s competitiveness. Country’s textile exports have dropped by 3.10% each in terms of the US dollar and PKR in November 2019 that stood at $1.177 billion versus $1.214 billion in October 2019. In quantitative terms, on account of a drop in the cotton cloth, bed wear, towels, art silk and synthetic textile products, country’s ‘textile group’ exports have also dropped by 3% in quantity that stood at 333,919 million tonne in November 2019 vs,345,115 MT in October 2019. Other than Readymade garments, cotton yarn and raw cotton, all of Pakistan’s textile group exports dropped to US dollar terms in November 2019 versus October 2019.
1. The Country’s Special Economic Zones (SEZs) under CPEC can attract substantial interests of foreign capital in specific markets and specific sectors and increase GVC participation through well-integrated investment planning, simplifying tax regimes and offering fiscal and non-fiscal incentives such as work permits etc.
2. In order to attract GVC-linked investments, Pakistan must clearly formulate a long-term trade policy, improving infrastructure, address circular debt issue and eliminating unnecessary non-tariff barriers to reduce trade costs and improve competitiveness.
3. Under Phase-II of China-Pakistan free trade agreement, China has offered immediate elimination of tariffs on 313 tariff lines of Pakistan’s prime export interest and increase in protected list of Pakistan from 10% to 25% alongwith the implementation of electronic data exchange system. Such measures to boost exports will help Pakistan curb under invoicing.
4. Private sector credit offtake to remain weak in the wake of overall economic slowdown in the country.
5. Trade deficit to narrow down further on the back of import compressions.