ARTICLE (May 13 2010): The International Monetary Fund (IMF) approved a $7.6 billion Stand-By Arrangement (SBA) programme for Pakistan, to be delivered over 23 months which has been enhanced to $11.3 billion in July 2009. As expected, the IMF approved the enhancement after imposing certain conditionalities, one of which is introduction of value-added tax system w.e.f. July 1, 2010 coupled with surrendering control of monitoring of revenue collection to the IMF.
Since then the 6 directors of the IMF and 2 directors of the World Bank are supervising revenue collection and preparation of federal budget. If you compare the role of the IMF/World Bank in Pakistan with the East India Company in Sub-Continent, you will find great resemblance in their operation.
The IMF officials, during their recent visit to Pakistan, had categorically warned that if the VAT was not enforced, Stand-By Arrangement programme would be abolished and Pakistan would be required to refund $6.5 billion, so far paid by the IMF. The IMF's fifth tranche of $1.2 billion that was to be released by the end of March is still pending, because of the fact that the IMF wants assurance regarding the imposition of the VAT from 1st July 2010.
Besides all representatives of trade and industry, who have totally rejected the VAT Bill, the provincial governments of Sindh and Punjab have also shown concern against the levy of the VAT. However, the FBR, on behalf of its foreign master, is advocating the VAT, knowing that it will have devastating effects for Pakistan's economy, which has already been showing recessionary trend for the last two years due to a host of internal and external factors.
Due to ever-increasing socio-economic challenges prevailing in the country, including wide income disparity, high cost of living, poverty, increase in unemployment rate, energy crisis, slow industrial sectors' performance, low economic growth, widening trade deficit, the people have become highly sceptical about the impact of any new economic proposal.
Given below are the views and proposals on some harsh and irritant measures of the VAT Law, evolved through consensus, after holding a series of consultative meetings with the representatives of business community and high government officials, for improving its impact on trade and industry.
Enforcement of VAT from July 1st: Without infrastructure, finely crafted law may be black ink on white paper. The FBR has failed to discuss the proposed VAT bill with the stakeholders and get consensus on its measures well in time. It started the consultancy process very late, 15th March, 2010, that is about two-and-a-half months before the announcement of 2010-11 Federal budget in June 2010.
During this period, the FBR is required to hold consultative meetings with more than 150 associations and chambers, and incorporate their proposals in the act, which is a gigantic task. There are reasons to believe that the FBR will not be able to get the comprehensive feedback from trade and industry due to shortage of time and any haste in enforcement of the VAT act with effect from July 1, 2010 will serve as counter productive.
In other countries, sufficient time of 2-3 years is given to the stakeholders to study the pros and cons of the new law and seek their confidence which is a prerequisite for the success of any scheme. Therefore, the VAT act (draft) be enforced from 1st July 2011 and during this period, it should be made public for seeking their comments and observations to incorporate in the proposed act, create awareness among all the stakeholders through workshops, conferences, interaction with trade and industry etc.
Moreover, the FBR should also complete its homework and develop infrastructure for the enforcement of the VAT act, such as documentation of the economy, registration of all eligible/potential taxpayers in the supply chain from importers/manufacturers to retailers, clearance of outstanding backlog of sales tax refund claims, removal of distortions from economy etc.
The establishment of an institutional framework with reference to multiple options for policy, enforcement and relationship between various stakeholders is most serious challenge for the FBR, at the time of introducing the VAT in order to achieve the VAT aims without creating any friction with taxpayers.
In the absence of an effective monitoring system, the FBR will also find it difficult to collect the tax. Under the VAT, the threshold turnover has been proposed to be enhanced to Rs 7.5 million, but there is no mechanism, procedures or rules in place to determine the actual turnover. One of the troublesome areas is rampant smuggling. The smuggled items are flooded and sold at both, small and big retail outlets without any invoice or legal import permits and makes it almost impossible for the tax collectorate to determine the real annual turnover, due to widespread under reporting.
During the current year, only 857 retailers so far have submitted their quarterly sales tax return out of which just 307 retailers have deposited sales tax amounting to Rs 90.86 million along with return. It means that too many retailers and wholesalers escaped the reporting system, mainly due to loopholes in the law, especially the turnover ceiling, after palm greasing of tax officials. As long as such loopholes are there in the law, no plan or scheme to raise the tax-to-GDP ratio can succeed. It is, therefore, again emphasised that the government must first ensure proper documentation of the system and removal of loopholes from the system.
However, given below are some harsh and irritant measures of the proposed bill and suggestions thereof, identified after a series of consultative meetings with the representatives of trade and industry. These proposals, if adapted, will reduce the level of corruption and harassment without compromising the ability and power of the bill to generate the potential revenue.
Bar of suit, precaution and other legal proceeding (U/S 87): Under this section, taxpayers are not allowed to go to any court, including the high court, to seek remedy or justice against the order passed, assessment made, tax levied, penalty imposed, audit etc, against any action taken by an officer of Inland Revenue. This measure is against all norms of justice and tantamount to denying a taxpayer of his basic right of justice, given in the Constitution of Pakistan. It is proposed that a taxpayer be allowed to go any court of law and if the case is decided in his favour, the concerned tax official should be penalised. If the case is not decided within 6 months, it shall deemed to be decided in favour of the taxpayer.
Recovery or payment of tax (U/S 61): Unlimited powers have been given to the official for recovery of amounts, including raiding the business premises without serving prior notice etc. The powers granted are too harsh. All these powers can be applied at one time and at once without giving any time notice to the taxpayer. Moreover, no distinction is made between admitted tax not paid and the disputed tax imposed by the department, which is a big injustice to the taxpayer and, therefore, must be removed.
Discretionary powers U/S 72: Section 72 of the bill grants arbitrary power to arrest anybody, not necessarily a tax defaulter, who, in the opinion of the low-ranking officer of the FBR, is suspected (just only suspected) of any offence or is believed to commit offence liable to prosecution. The arrest can be made even of a person against whom no tax demand is outstanding. It must be deleted.
Concept of supply (U/S 4, 6 and 8): The concept of supply, based on open market price, is proposed to be introduced according to which the price can be challenged on the basis of evidence. These are harsh measures and against the business practice where the bargain in price is made on the basis of quantity and value of supply/order, credibility of party etc.
Advance payment at import stage U/S 35: At present, under Special Procedure Rules, advance tax on value addition is paid by various categories of taxpayer such as commercial importers, and gets exemption from the audit. Now the taxpayers will pay advance tax but they will not be immune from the audit. It is proposed that the importers, on payment of advance value added tax should be exempted from audit.
Carry-forward and refund (U/S 37): Excess amount will be carried forward and may be deducted in the following six tax periods and thereafter will be refunded. It will create hardship for the taxpayers, particularly for those who pay advance tax, in getting refund.
Cancellation and suspension of registration (U/S 46 and 47): After serving the notice, the taxpayer's registration will either be suspended or included in the blacklist or cancellation whether the notice is received or not. The task of serving the notice should also be assigned to the concerned associations and it should be consulted before blacklisting or cancelling registration.
Tax invoice (U/S 49): A tax invoice will be prepared to contain a plethora of information about the buyer such as NTN, CNIC etc. However, the supplier will be implicated/penalised if he is given fake or forge CNIC. Moreover, nowhere in the world such information is given by the supplier/buyer. The job of business community is to undertake economic activities not collection of unnecessary information from the purchaser.
Sales receipt (U/S 50): In case a registered person, who makes taxable supply of a value not more than Rs 25,000 to an unregistered person, will issue a sales receipt for the price of supply containing a lot of unnecessary information. The measure will consume a lot of time of the supplier unnecessarily.
Record-keeping (U/S 54): This section proposes to keep records and accounts for at least 6 years, which is too long and should be reduced to 2 years for the sake of simplicity of law.
IRS to act as court (U/S 62): The IRS will have the same powers as enjoyed by civil court for recovery of unpaid amount which tantamount to create a state within state.
Audit and special audit by IR officer (U/S 69 and U/S 70): Conduction of audit, including forensic audit etc by the Inland Revenue officer will enhance their discretionary powers for harassment and interaction between a taxpayers and tax collector, which will be resulted in corruption and tax evasion. It is suggested that audit should be conducted once in three years after giving 30 days' notice, but the audit objection should be finalised by the officer above the officer conducting the audit after receiving the viewpoint of the taxpayer.
Adjustment of input tax (U/S 96 (a) and (c)): A taxpayer may claim a decreasing adjustment to any amount of input tax, incurred, but within 12 month. It means that input adjustment will not be available on imports (say) made 1.5 years ago. Similarly, U/S 96 (c) there is no provision of automatic carry forward of input tax amount. It is proposed that section 96 of the VAT Act be abolished altogether.
Rate of 15 percent: Low tax rate discourages tax evasion and encourages potential taxpayers to get into the tax net, therefore, the VAT rate be reduced from 15 percent to 10 percent.
Abolishing of zero-rating: The facility available on domestic supply chain of five export oriented sectors and reverting to refund regime under which refunds were more than the collection, will again open floodgate of corruption as it will increase interaction between taxpayer and tax official and encourage Bawan Shah-like scandals. Therefore, the zero rating facility on domestic supply chain for five export oriented industrial sectors is resorted. Moreover, the delay in refund will create liquidity for the exporters, who will be constraint to take loan form bank at higher mark-up rate. This will be resulted in reduction of competitive edge of our products both in local and foreign markets, against the foreign product.
Penalties (U/S 89): Heavy penalties, ranging from Rs 5,000 to 50,000, will be levied on a person who will commit an offence as described in Third Schedule to VAT Act.
Powers to reopen cases U/S 78: As per VAT, the FBR and commissioner have been empowered to examine the record (to reopen) even if the appeal is pending before the commissioner, appeals. No such powers exist in ST. This may increase the hassle of double audit, hence section 78 (1) be amended as ST section 45.
Power of commissioner appeal U/S 79(4): As per section 79 (4) of the bill, it has been made compulsory for the commissioner, appeal, to decide the taxpayer's appeal in 90 days, therefore, it can be provided in section 61 that the recovery proceedings as provided in clause (c) to (h) of Section 61 will become applicable only after the decision of the first appeal of the taxpayer.
Appeals to tribunal U/S 80 (6): It is suggested that the condition of expiry of stay after six months be removed by amending section 80 (6).
Appeals to high court U/S 81 (8): It is proposed that section 81 (8) be deleted that requires stay to the extent of 6 months only.
Proposed addition of new section to VAT: A new section be introduced to the effect that any issue decided by the customs, excise and sales tax appellate tribunal, high court or the Supreme Court will be given effect in the returns/orders for the subsequent period. If that order or decision is reversed, then such assessment/returns be revised to that effect. This section should in principle be in line with section 124A of the Income Tax Ordinance, 2001. It may be noted that absence of similar provision leads to unwarranted litigation.
Default surcharge U/S 88 and 89: It should be clarified in the VAT that in case of past cases (cases related to all preceding years) additional tax/default surcharge will be levied at the rate presently applicable as default surcharge.
Simultaneous levy of penalty and additional Tax under the Act may need to be removed, being unjustified, since both the provisions are of punitive nature. There should be only one penalty on a single default. Moreover, default surcharge should not be charged on an inadvertent error as was the case of additional tax.
Recovery of tax not levied or short levied or erroneously refunded U/S 90: It should be clarified that Section 90 will apply in case of 'tax fraud' only. Service of orders, decisions etc U/S 56 of ST: There is no section in the VAT regarding service of notice, order and decision etc ie pari material of Section 56 of Sales Tax Act, 1990 is missing.
One-window operation on Federal and provincial level: The VAT must have one-window operation, instead of implementing VAT separately on Federal and provincial levels. This is essential as the registered person should not be burdened by two separate bills, procedures and audits! One widow method will not prevent the federal government from distributing to provinces after it has collected the VAT and finalised all refund claims.
Manufacturer under provincial VAT bill: The provincial VAT bill does not cover manufacturer, who other than consuming zero rated inputs, also uses inputs attracting VAT. There is no satisfactory refund procedure given in these bills! How does one adjust/claim refunds if the manufactured product is zero rated but the inputs are liable to VAT?
Establishment of new provincial and Federal status for export-oriented industries: It comes as a complete surprise that Federal and Provincial VAT Bills require that industries and products, already established as export oriented industries and having obtained zero rated status, after lengthy investigation, will now have to re-establish this new provincial and federal status! To quote:
-- It is specified as a zero-rated supply or import in the Second Schedule of this Act or it is a supply of a right or option to receive a supply that will be a zero-rated supply.
-- It is specified as a zero-rated supply under a Provincial Value Added Tax law.
It is proposed that these new requirements be applicable only to new entrants to the zero regimes and that a clear procedure be given on how to achieve zero rating; this should also be a one-window system. Those industries and products already on zero rated status should automatically be carries forward into this new system. There should not be any surprise on July the first 2010!
Refund of input under federal and provincial VAT bills: There should be only one format, agency and law applicable to VAT. However, in case of two separate bills and authorities; it is proposed that the total refund on VAT input levied for the production of zero rated output is refunded to the manufacturer, from a combination of both. The refund process should be unambiguous and rapid.
(The writer is Vice-President of the Federation of Pakistan Chambers of Commerce and Industry.)
Source: http://www.brecorder.com/index.php?id=1056123&currPageNo=1&query=&search=&term=&supDate=
Monday, May 17, 2010
Wednesday, May 12, 2010
Contenders for the villain's tag By A B SHAHID
ARTICLE (May 11 2010): The financial restructuring models applied to Latin American and Asian countries in the past earned the IMF the reputation of being cold-blooded, heavy-handed and deaf to the demands of the under-privileged, who bear the brunt of the IMF loan conditionalities. Greece is the new chapter in this continuing saga.
For a change though, the IMF isn't curtailing outlay on 'safety nets' for the poor. In Pakistan, it didn't ask for cutting the outlay on the BISP. What remains questionable, though is whether that's how you go about restructuring economies because until a country's businesses don't get back on their feet, people can't start 'fishing' for themselves; they keep asking for fish to survive.
That's what is happening. Reportedly, it took some pleading on Pakistan's part to convince the IMF to delay another hike in power charges. But the fact that Lahore High Court had to stay another 6 percent hike in these charges by the Lahore Electric Supply Company shows that the IMF didn't agree to delaying this debilitating hike.
On the controversial VAT levy at the retail level and the proposal to stagger the withdrawal of subsidies on fuel and basic consumption items, the IMF refused to budge. Inflation, therefore, would only rise, and so will the mark-up rates and the cost of doing business - a scenario that could only worsen the social order.
Higher prices will build pressure for higher wages and threaten the ability of business and industry to survive, employ more workers, and pay higher wages. The IMF does not feel that in an insurgency-ravaged, Pakistan, the solution lies in re-focusing the impact of subsidy withdrawals on sectors with the ability-to-pay, not the poor.
This flaw in the IMF's restructuring programmes earned it the tag of a villain. Indeed, countries in economic distress must cut consumption, but not every consumption-type, more so in a country like Pakistan whose population rises by over 2 percent a year. What is required is selectivity in tax-enforced cuts in consumption.
Selective containment of consumption is not a complex issue; what makes it complex is that it hurts powerful vested interests with unlimited greed. For instance, the auto sector has been demanding relaxation in import duties to revive its lost glory of which (during 2003-07) 'on money' and 'profitability' were the hallmarks.
To begin with, we already have enough cars, courtesy the now delinquent consumer loans. Even if some of us can afford to buy petrol at the price it is sold, does Pakistan have the exchange reserve surpluses to buy oil? And, right now, should we buy more cars, or commute to our places of work in combined transport vehicles?
But what we can't live with are power shortages and recurring increases in power charges. What Pakistan needs is higher employment (even if a chunk thereof is on part-time basis) to sustain peoples' faith in surviving by earning a living, not queuing up for charity. Impliedly, it is imperative for a population-wise fast growing Pakistan that its GDP grows substantially.
Higher GDP alone can boost taxes, not flawed initiatives like replacing the GST with VAT. This isn't the time for experiments, but for making the most out of the existing systems and plan for changes therein once the economy shows signs of stability to afford the FBR the luxury of a major system change.
The government is oblivious to the slide in peoples' faith in governance. Social chaos is just round the corner. The frequency with which power company offices and police stations are being targeted in broad daylight is frightening. That we don't have enough law-enforcers (police) and many are being targeted for their bad conduct, is a bad setting for what may be in store for us. Kyrgyzstan and Greece offer examples thereof.
The build-up of chaos can be stopped by rationalising 'tax incidence' and the state setting examples of austerity to save enough to keep the economy growing. But when you hear that the utility bills of the President's House are overdue and the Punjab Governor's new official car will cost Rs 25 million, you wonder whether the top echelon of the state machinery has any idea of what Pakistan confronts.
The fact that implementation of the "austerity plan" is nowhere in sight proves that cutting waste isn't a priority, despite the fact that the Auditor General detected irregularities of over Rs 323 billion in just the FY09 accounts of federal ministries and departments. This amount (29 percent of FY09 tax revenue) reflects the regime's concern for good governance, and tramples rather than sets an inspiring example of austerity.
While the primary responsibility for what may go wrong with Pakistan will lie with its government and its people, other countries, especially the 'Friends of Democratic Pakistan' (FoDP), will have their share in it. The fact that the financial and governance crisis in Pakistan was allowed to drag on until financial markets lost faith in Pakistan (leaving it at the IMF's mercy), is an affair wherein our 'friends' have a share.
Pakistan is a 'strategic ally' of the US but, instead of helping Pakistan, debts owed to it (representing CFS expenses) aren't repaid quickly. Consequences of such apathy were aptly summed up by a former IMF Chief Economist Simon Jones, who recently blamed Europe's foot-dragging that turned the Greek problem into a disaster. According to him, "the EU has shown itself bankrupt morally and politically."
Belatedly, the IMF has agreed to lend to Greece an amount 40 times its borrowing quota. Reason: although Greece's share in the EU GDP is just 2.6 percent, its collapse threatens, at first the Euro, and then the EU. Economies like Pakistan, whose failure doesn't threaten a global crisis don't matter. Besides, Pakistan doesn't have sympathisers like Simon Jones even among the FoDP.
But, given the current state of Pakistanis' awareness about what goes on in the government circles, should social chaos unfold courtesy fiscal waste and flawed state policies, the blame will lie with those who ignored sane advice, and the contender for the villain's tag will be a trio - IMF, Pakistan's government, and the FoDP, not just the IMF; the likes of Simon Jones will spot the hiding villains and tag them.
Source: http://www.brecorder.com/index.php?id=1054879&currPageNo=1&query=&search=&term=&supDate=
For a change though, the IMF isn't curtailing outlay on 'safety nets' for the poor. In Pakistan, it didn't ask for cutting the outlay on the BISP. What remains questionable, though is whether that's how you go about restructuring economies because until a country's businesses don't get back on their feet, people can't start 'fishing' for themselves; they keep asking for fish to survive.
That's what is happening. Reportedly, it took some pleading on Pakistan's part to convince the IMF to delay another hike in power charges. But the fact that Lahore High Court had to stay another 6 percent hike in these charges by the Lahore Electric Supply Company shows that the IMF didn't agree to delaying this debilitating hike.
On the controversial VAT levy at the retail level and the proposal to stagger the withdrawal of subsidies on fuel and basic consumption items, the IMF refused to budge. Inflation, therefore, would only rise, and so will the mark-up rates and the cost of doing business - a scenario that could only worsen the social order.
Higher prices will build pressure for higher wages and threaten the ability of business and industry to survive, employ more workers, and pay higher wages. The IMF does not feel that in an insurgency-ravaged, Pakistan, the solution lies in re-focusing the impact of subsidy withdrawals on sectors with the ability-to-pay, not the poor.
This flaw in the IMF's restructuring programmes earned it the tag of a villain. Indeed, countries in economic distress must cut consumption, but not every consumption-type, more so in a country like Pakistan whose population rises by over 2 percent a year. What is required is selectivity in tax-enforced cuts in consumption.
Selective containment of consumption is not a complex issue; what makes it complex is that it hurts powerful vested interests with unlimited greed. For instance, the auto sector has been demanding relaxation in import duties to revive its lost glory of which (during 2003-07) 'on money' and 'profitability' were the hallmarks.
To begin with, we already have enough cars, courtesy the now delinquent consumer loans. Even if some of us can afford to buy petrol at the price it is sold, does Pakistan have the exchange reserve surpluses to buy oil? And, right now, should we buy more cars, or commute to our places of work in combined transport vehicles?
But what we can't live with are power shortages and recurring increases in power charges. What Pakistan needs is higher employment (even if a chunk thereof is on part-time basis) to sustain peoples' faith in surviving by earning a living, not queuing up for charity. Impliedly, it is imperative for a population-wise fast growing Pakistan that its GDP grows substantially.
Higher GDP alone can boost taxes, not flawed initiatives like replacing the GST with VAT. This isn't the time for experiments, but for making the most out of the existing systems and plan for changes therein once the economy shows signs of stability to afford the FBR the luxury of a major system change.
The government is oblivious to the slide in peoples' faith in governance. Social chaos is just round the corner. The frequency with which power company offices and police stations are being targeted in broad daylight is frightening. That we don't have enough law-enforcers (police) and many are being targeted for their bad conduct, is a bad setting for what may be in store for us. Kyrgyzstan and Greece offer examples thereof.
The build-up of chaos can be stopped by rationalising 'tax incidence' and the state setting examples of austerity to save enough to keep the economy growing. But when you hear that the utility bills of the President's House are overdue and the Punjab Governor's new official car will cost Rs 25 million, you wonder whether the top echelon of the state machinery has any idea of what Pakistan confronts.
The fact that implementation of the "austerity plan" is nowhere in sight proves that cutting waste isn't a priority, despite the fact that the Auditor General detected irregularities of over Rs 323 billion in just the FY09 accounts of federal ministries and departments. This amount (29 percent of FY09 tax revenue) reflects the regime's concern for good governance, and tramples rather than sets an inspiring example of austerity.
While the primary responsibility for what may go wrong with Pakistan will lie with its government and its people, other countries, especially the 'Friends of Democratic Pakistan' (FoDP), will have their share in it. The fact that the financial and governance crisis in Pakistan was allowed to drag on until financial markets lost faith in Pakistan (leaving it at the IMF's mercy), is an affair wherein our 'friends' have a share.
Pakistan is a 'strategic ally' of the US but, instead of helping Pakistan, debts owed to it (representing CFS expenses) aren't repaid quickly. Consequences of such apathy were aptly summed up by a former IMF Chief Economist Simon Jones, who recently blamed Europe's foot-dragging that turned the Greek problem into a disaster. According to him, "the EU has shown itself bankrupt morally and politically."
Belatedly, the IMF has agreed to lend to Greece an amount 40 times its borrowing quota. Reason: although Greece's share in the EU GDP is just 2.6 percent, its collapse threatens, at first the Euro, and then the EU. Economies like Pakistan, whose failure doesn't threaten a global crisis don't matter. Besides, Pakistan doesn't have sympathisers like Simon Jones even among the FoDP.
But, given the current state of Pakistanis' awareness about what goes on in the government circles, should social chaos unfold courtesy fiscal waste and flawed state policies, the blame will lie with those who ignored sane advice, and the contender for the villain's tag will be a trio - IMF, Pakistan's government, and the FoDP, not just the IMF; the likes of Simon Jones will spot the hiding villains and tag them.
Source: http://www.brecorder.com/index.php?id=1054879&currPageNo=1&query=&search=&term=&supDate=
Be brave, step out and export By IMTIAZ RASTGAR
ARTICLE (May 10 2010): In times of recession, successful companies usually manage to grow their market shares by using the slowdown to prepare themselves for the next upswing. In other words: stay on the ball, invest all you can, refuse to cut back on research and development, investigate new markets, improve processes, acquire certification, and generally use whatever downtime you have to get ahead of yourself and your competitors.
In general terms, these are, perhaps, the key crisis survival recommendations that can be drawn from a recently published series of in-depth CBI surveys of the impact of the global financial and economic crisis on various sectors in developing countries (DCs). The surveys thus far have covered sectors: flowers, fruit & vegetables, garments, the IT sector, the business process outsourcing sector (BPO), castings & forgings, electronic components, the automotive sector, natural ingredients for food, cosmetics and pharmaceuticals, tourism, engineering products, home decoration, coatings, pharmaceuticals, pipes and process equipment and garments. Additional sectors are under investigation.
The facts revealed by the survey, which was commissioned by Dutch Minister of Development Co-operation Bert Koenders, are serious enough. Throughout all sectors, the crisis is causing a shakeout, with many SMEs going down or struggling to remain standing. Key problems include decreased demand from European and other non-DC markets, global price pressure, limited access to credit and financial resources, postponement of orders and payment delays. Destabilised domestic and regional markets, meanwhile, are cutting off exporters from the only alternative left them.
Be brave and step out
If you think all that bad news gives you a reason to go home and quit, you're wrong. Now, more than ever, exporting SMEs in DCs should be brave and step out, the survey emphasises.
Here is a list of the top recommendations applicable to virtually every sector and every export company:
-- Reduce cost;
-- Don't wait for better days, but try to move ahead with your most ambitious plans;
-- Professionalise on purchasing and look for the ideal mid- to long-term sourcing opportunities;
-- Don't yield to the temptation to save money on quality, rather invest in raising it;
-- Focus on quality and, if necessary, implement a recognised quality assurance scheme;
-- Concentrate on your two or three most profitable export products and improve them;
-- Stick to a long-term strategy centred not merely on survival, but on innovation and partnerships;
-- Get some training in risk management;
vAccept smaller orders rather than hoping for large ones and not getting any;
-- Use redundant capacity to improve processes;
-- Develop market intelligence and keep yourself updated on the latest market developments by attending seminars and subscribing to relevant information sources;
-- Identify new growth areas in your sector and decide whether you should pursue them;
-- Reach out to new clients and markets that fall in with your long-term strategy, follow up on leads you put aside previously, dust off strategic plans for new business development;
-- Make a market segmentation and define your most promising target markets as sharply as you can so that your marketing efforts will yield a maximum effect;
-- Explore niche opportunities;
-- Benefit from the need among European businesses to refocus on their core competencies and outsource the rest;
-- Prepare yourself for the fact that in many sectors, European SMEs will be joining the larger firms in outsourcing as soon as the worst waves of the crisis have passed;
-- Try to avoid laying off employees as it will weaken your company, and by all means hold on to your experts, your English speakers and your staff with European experience;
-- Join forces with colleagues, form export clusters, share as much as you can to reduce cost and to increase knowledge, capacity and reliability;
-- Take an active interest in your customers' and prospects' problems - it will generate new business and help you overcome your own worries;
-- Climb up the value chain by adding value and integrating yourself in your customers' business, for instance by pre-packaging according to their requirements;
-- Introduce energy-efficient production methods so as to be less vulnerable to rising energy prices and decrease your own prices in the long term;
-- Develop a clear strategy to make your company more sustainable and to distinguish your company by investing in corporate social responsibility (csr) - and communicate with prospective customers about your goals and achievements in this area;
BSO recommendations
As for business support organisations (BSOs), chambers of commerce, trade associations and trade development authorities, the following general recommendations are worth looking into:
-- Step up your efforts to provide your export companies with the most accurate, up-to-date and insightful market information and analyses you can;
-- Offer exporters market research services;
-- Organise workshops and training programmes for your exporters on hot issues, like some of those mentioned the list above, making use of the best possible expertise you can find;
-- Offer coaching and assistance in strategic thinking, through workshops and training programmes;
-- Provide companies with financial guidance, eg on investment strategies and risk reduction;
-- Provide up-to-date and accurate information and advice on European legislation;
-- Organise trend-spotting events for the benefit of your sector;
-- Give exporters the chance to hire specialised consultants;
-- Encourage and facilitate the formation of local, national and regional export clusters and help run and promote them once they're established;
-- Spend time in your target markets, ie Europe, by visiting seminars, trade fairs and special events and networking with European counterpart organisations;
-- Ask European associations, your government and other major institutions, such as the World Bank, the Asian Development Bank (ADB) or your national development institute, for support;
-- Organise collective trade missions and other matchmaking activities;
-- Tap into the possibilities offered by the Global Trade Finance Programme at http://www.ifc.org/ifcext/gfm.nsf/Content/TradeFinance;
-- Create awareness that now is the time to develop energy-efficient solutions, as demand is booming and in 10 to 15 years time the European market will no longer tolerate energy-inefficient solutions in many industries;
-- Emphasise the long-term advantages of specialisation and the overall trend in most sectors towards specialisation;
-- Lobby for better facilitation of international payment traffic, such as the creation of regional clearing unions, which greatly enhances payment conditions for buyers;
-- Consider the possibilities of joint, regional promotion with counterparts and government agencies in neighbouring countries.
Sector-specific
The CBI surveys also offer a host of sector-specific recommendations. Here are a few examples:
Fruit and vegetables: In the fruit & vegetables sector, specific opportunities may exist for cheaper alternatives for exclusive fruit and for vegetable varieties already being marketed in the EU.
Garments: The survivors among DC garment exporters are those selling value-added products, targeting higher EU market segments, practising vertical or reverse integration, and benefiting from government incentives and access to flexible credit.
Business process outsourcing: With their EU customers facing challenging times, BPO service providers in DCs have a chance to show their dedication and consolidate business by proactively responding to customer's problems. At the same time, the EU buyers are not eager to engage in new offshore contracts, which means new business calls for professional marketing campaigns and high-level networking.
Castings and forgings: Decreasing raw material prices in the castings and forgings industry have raised the importance of labour costs in the total cost price, to the advantage of DC manufacturers. It is extremely important for foundries and forges to have a smart manager in place to monitor and order raw materials, as raw materials form a substantial part of the cost price and can be a means of saving a lot of money in the short to medium term.
Electronic components: The most promising segments in the electronic components industry include energy-efficient components. This has become a very urgent topic on the agenda of European manufacturers due to the European Commission's adoption of two eco-design regulations to improve the energy-efficiency of household lamps and office, street and industrial lighting products. Light activating sensors are also a growth segment.
Automotive sector: In the struggling automotive sector, the industrial after-market is the best bet. The agricultural machinery market is also continuing to perform relatively well. Lean Manufacturing is the standard in Europe for this sector and suppliers who are unable to implement it have few chances. Pakistani vendors of automotive parts serving multinational Japanese automakers on home soil, have a chance to export to niche markets in Europe.
Natural ingredients for food, cosmetics and pharmaceuticals: A point of attention in the natural ingredients business is that exporters must devise ways of anticipating buyer stocks, delivering small orders with shorter lead times.
Tourism: Contrary to common belief, price truly matters in the tourism industry - all the more so since the beginning of the crisis. Destinations with a favourable exchange rate have an advantage. Pin-point marketing is also essential: rather than targeting an entire European country, tourism suppliers should zoom in on specific target groups, such as windsurfers if a destination offers excellent windsurfing opportunities.
Engineering products: On step, the DC exporters of engineering products must take if they intend to cash in on the expected increase in orders from (new) EU customers is to implement total quality management as soon as possible.
Home decoration: The weakening of competition from China is a favourable development in the home decoration sector. China is a strong competitor in the low end, but the crisis has reportedly forced large numbers of Chinese companies into bankruptcy. The best opportunities are to be found in the higher-end segments.
Coatings: In the coatings sector, buyers are more open than ever to talking and negotiating with new suppliers of formulations and raw materials. Solid research, a focus on your current assets and pro-active marketing can make a difference here. With the mainstream markets largely covered by bigger players, SMEs stand a good chance in niche markets, either in terms of specific products or less saturated geographic markets such as the CEE region or the Baltic States.
Pipe and process equipment: In the pipe and process equipment sector, doing business with European distributors is becoming less worthwhile as their position is expected to weaken in the years to come; the shift towards a higher share of direct business for commodity products, such as standard pipes and fittings, may provides your company with real opportunities. Pakistani manufacturers of Process Equipment do however stand chances of working as sub-contractors of renowned European process equipment manufacturers and gain market by making their customers more competitive.
Garments: Garment suppliers from the DCs should use downtime caused by the crisis to develop a good sample collection, optimise processes, and review their supplier base, particularly fabrics.
(The writer is external expert CBI at Islamabad)
Source:http://www.brecorder.com/index.php?id=1054309&currPageNo=1&query=&search=&term=&supDate=
In general terms, these are, perhaps, the key crisis survival recommendations that can be drawn from a recently published series of in-depth CBI surveys of the impact of the global financial and economic crisis on various sectors in developing countries (DCs). The surveys thus far have covered sectors: flowers, fruit & vegetables, garments, the IT sector, the business process outsourcing sector (BPO), castings & forgings, electronic components, the automotive sector, natural ingredients for food, cosmetics and pharmaceuticals, tourism, engineering products, home decoration, coatings, pharmaceuticals, pipes and process equipment and garments. Additional sectors are under investigation.
The facts revealed by the survey, which was commissioned by Dutch Minister of Development Co-operation Bert Koenders, are serious enough. Throughout all sectors, the crisis is causing a shakeout, with many SMEs going down or struggling to remain standing. Key problems include decreased demand from European and other non-DC markets, global price pressure, limited access to credit and financial resources, postponement of orders and payment delays. Destabilised domestic and regional markets, meanwhile, are cutting off exporters from the only alternative left them.
Be brave and step out
If you think all that bad news gives you a reason to go home and quit, you're wrong. Now, more than ever, exporting SMEs in DCs should be brave and step out, the survey emphasises.
Here is a list of the top recommendations applicable to virtually every sector and every export company:
-- Reduce cost;
-- Don't wait for better days, but try to move ahead with your most ambitious plans;
-- Professionalise on purchasing and look for the ideal mid- to long-term sourcing opportunities;
-- Don't yield to the temptation to save money on quality, rather invest in raising it;
-- Focus on quality and, if necessary, implement a recognised quality assurance scheme;
-- Concentrate on your two or three most profitable export products and improve them;
-- Stick to a long-term strategy centred not merely on survival, but on innovation and partnerships;
-- Get some training in risk management;
vAccept smaller orders rather than hoping for large ones and not getting any;
-- Use redundant capacity to improve processes;
-- Develop market intelligence and keep yourself updated on the latest market developments by attending seminars and subscribing to relevant information sources;
-- Identify new growth areas in your sector and decide whether you should pursue them;
-- Reach out to new clients and markets that fall in with your long-term strategy, follow up on leads you put aside previously, dust off strategic plans for new business development;
-- Make a market segmentation and define your most promising target markets as sharply as you can so that your marketing efforts will yield a maximum effect;
-- Explore niche opportunities;
-- Benefit from the need among European businesses to refocus on their core competencies and outsource the rest;
-- Prepare yourself for the fact that in many sectors, European SMEs will be joining the larger firms in outsourcing as soon as the worst waves of the crisis have passed;
-- Try to avoid laying off employees as it will weaken your company, and by all means hold on to your experts, your English speakers and your staff with European experience;
-- Join forces with colleagues, form export clusters, share as much as you can to reduce cost and to increase knowledge, capacity and reliability;
-- Take an active interest in your customers' and prospects' problems - it will generate new business and help you overcome your own worries;
-- Climb up the value chain by adding value and integrating yourself in your customers' business, for instance by pre-packaging according to their requirements;
-- Introduce energy-efficient production methods so as to be less vulnerable to rising energy prices and decrease your own prices in the long term;
-- Develop a clear strategy to make your company more sustainable and to distinguish your company by investing in corporate social responsibility (csr) - and communicate with prospective customers about your goals and achievements in this area;
BSO recommendations
As for business support organisations (BSOs), chambers of commerce, trade associations and trade development authorities, the following general recommendations are worth looking into:
-- Step up your efforts to provide your export companies with the most accurate, up-to-date and insightful market information and analyses you can;
-- Offer exporters market research services;
-- Organise workshops and training programmes for your exporters on hot issues, like some of those mentioned the list above, making use of the best possible expertise you can find;
-- Offer coaching and assistance in strategic thinking, through workshops and training programmes;
-- Provide companies with financial guidance, eg on investment strategies and risk reduction;
-- Provide up-to-date and accurate information and advice on European legislation;
-- Organise trend-spotting events for the benefit of your sector;
-- Give exporters the chance to hire specialised consultants;
-- Encourage and facilitate the formation of local, national and regional export clusters and help run and promote them once they're established;
-- Spend time in your target markets, ie Europe, by visiting seminars, trade fairs and special events and networking with European counterpart organisations;
-- Ask European associations, your government and other major institutions, such as the World Bank, the Asian Development Bank (ADB) or your national development institute, for support;
-- Organise collective trade missions and other matchmaking activities;
-- Tap into the possibilities offered by the Global Trade Finance Programme at http://www.ifc.org/ifcext/gfm.nsf/Content/TradeFinance;
-- Create awareness that now is the time to develop energy-efficient solutions, as demand is booming and in 10 to 15 years time the European market will no longer tolerate energy-inefficient solutions in many industries;
-- Emphasise the long-term advantages of specialisation and the overall trend in most sectors towards specialisation;
-- Lobby for better facilitation of international payment traffic, such as the creation of regional clearing unions, which greatly enhances payment conditions for buyers;
-- Consider the possibilities of joint, regional promotion with counterparts and government agencies in neighbouring countries.
Sector-specific
The CBI surveys also offer a host of sector-specific recommendations. Here are a few examples:
Fruit and vegetables: In the fruit & vegetables sector, specific opportunities may exist for cheaper alternatives for exclusive fruit and for vegetable varieties already being marketed in the EU.
Garments: The survivors among DC garment exporters are those selling value-added products, targeting higher EU market segments, practising vertical or reverse integration, and benefiting from government incentives and access to flexible credit.
Business process outsourcing: With their EU customers facing challenging times, BPO service providers in DCs have a chance to show their dedication and consolidate business by proactively responding to customer's problems. At the same time, the EU buyers are not eager to engage in new offshore contracts, which means new business calls for professional marketing campaigns and high-level networking.
Castings and forgings: Decreasing raw material prices in the castings and forgings industry have raised the importance of labour costs in the total cost price, to the advantage of DC manufacturers. It is extremely important for foundries and forges to have a smart manager in place to monitor and order raw materials, as raw materials form a substantial part of the cost price and can be a means of saving a lot of money in the short to medium term.
Electronic components: The most promising segments in the electronic components industry include energy-efficient components. This has become a very urgent topic on the agenda of European manufacturers due to the European Commission's adoption of two eco-design regulations to improve the energy-efficiency of household lamps and office, street and industrial lighting products. Light activating sensors are also a growth segment.
Automotive sector: In the struggling automotive sector, the industrial after-market is the best bet. The agricultural machinery market is also continuing to perform relatively well. Lean Manufacturing is the standard in Europe for this sector and suppliers who are unable to implement it have few chances. Pakistani vendors of automotive parts serving multinational Japanese automakers on home soil, have a chance to export to niche markets in Europe.
Natural ingredients for food, cosmetics and pharmaceuticals: A point of attention in the natural ingredients business is that exporters must devise ways of anticipating buyer stocks, delivering small orders with shorter lead times.
Tourism: Contrary to common belief, price truly matters in the tourism industry - all the more so since the beginning of the crisis. Destinations with a favourable exchange rate have an advantage. Pin-point marketing is also essential: rather than targeting an entire European country, tourism suppliers should zoom in on specific target groups, such as windsurfers if a destination offers excellent windsurfing opportunities.
Engineering products: On step, the DC exporters of engineering products must take if they intend to cash in on the expected increase in orders from (new) EU customers is to implement total quality management as soon as possible.
Home decoration: The weakening of competition from China is a favourable development in the home decoration sector. China is a strong competitor in the low end, but the crisis has reportedly forced large numbers of Chinese companies into bankruptcy. The best opportunities are to be found in the higher-end segments.
Coatings: In the coatings sector, buyers are more open than ever to talking and negotiating with new suppliers of formulations and raw materials. Solid research, a focus on your current assets and pro-active marketing can make a difference here. With the mainstream markets largely covered by bigger players, SMEs stand a good chance in niche markets, either in terms of specific products or less saturated geographic markets such as the CEE region or the Baltic States.
Pipe and process equipment: In the pipe and process equipment sector, doing business with European distributors is becoming less worthwhile as their position is expected to weaken in the years to come; the shift towards a higher share of direct business for commodity products, such as standard pipes and fittings, may provides your company with real opportunities. Pakistani manufacturers of Process Equipment do however stand chances of working as sub-contractors of renowned European process equipment manufacturers and gain market by making their customers more competitive.
Garments: Garment suppliers from the DCs should use downtime caused by the crisis to develop a good sample collection, optimise processes, and review their supplier base, particularly fabrics.
(The writer is external expert CBI at Islamabad)
Source:http://www.brecorder.com/index.php?id=1054309&currPageNo=1&query=&search=&term=&supDate=
IMF and efficacy of its prescriptions By ANJUM IBRAHIM
ARTICLE (May 10 2010): What is it about the International Mone-tary Fund (IMF) prescriptions that can raise the ire of an entire nation? Why are the people of Greece up in arms against the Fund for agreeing to allocate 40 billion dollars in emergency assistance and are referring to an "IMF junta," and "asphyxiation" of the Greek people?
And why are the Pakistani analysts, the common man in this country largely unaware of the influence exerted by the Fund on our domestic economic policies, expressing concern over the IMF prescriptions that are being meticulously adhered to in spite of what is regarded as the "asphyxiation" of the Pakistani people?
Many analysts refer to the disastrous outcome on the poor of the standard normal prescriptions as proposed by the IMF for diverse countries in the past. The IMF may well point out that pro-poor policies is not its objective when extending emergency assistance to over heated economies that have been compromised by poor governance including profligacy and corruption, as that is the objective of other international financial institutions notably the World Bank; the Fund's objective instead is to ensure macroeconomic stabilisation. Ideally of course, the Fund would have the capacity to forecast a melt down well in advance so that corrective measures can be taken in time.
Its critics refer to ample literature on its inability to forecast a crisis in several countries during the 1980s and 1990s, including the Asian financial crisis. Be that as it may the need for continued Fund support for several economies was felt during the 2000-10 decade, marked by the global financial crisis of mammoth proportions. Lessons everyone argued had been learned by the IMF and prescriptions were tempered by past mistakes.
One of the mistakes of the current decade was the IMF handling of Argentina's needs in 2001. The reference is to what was referred by several analysts as Argentina's 'implosion in 2002' when full-scale riots by almost every section of the society were seen to have the IMF fingerprints. The Argentina government at the time opted for a fixed exchange rate - one to one peso parity with the US dollar.
This had disastrous consequences for the economy as it made Argentina exports expensive and imports artificially cheap resulting in a trade deficit of 400 billion dollars. To maintain the overvalued currency, Argentina required large reserves of dollars as the government had to guarantee that everyone who wanted to exchange a peso for a dollar could get it. While the IMF denied that it had supported a fixed exchange rate policy, yet it played a crucial role in sustaining the rate by arranging massive amounts of loans, $40 billion in 2001 alone. Overvaluation of the peso, in turn, compelled the market to demand ever rising interest rates, which literally crippled the economy.
This accounted for the inability of the Argentine economy to recover from four years of recession while its foreign debt became impossible to pay back, 100 billion dollars, leading to default. Currency support was also extended to Brazil and Russia in 1998 by the IMF with equally disastrous consequences.
The second fatal error of the IMF with respect to Argentina was to insist on a zero deficit policy. It convinced most analysts at the time that it was the government's profligacy that was responsible for its economic malaise. And in this regard, the Fund was fully supported by Washington. The then White House spokesman Ari Fleisher is on record for having stated that "it's important for Argentina to continue to work through the International Monetary Fund on sound policies." While one cannot challenge the IMF assumption that profligacy was a factor yet its associated policies, notably attached fiscal conditions, played havoc with the purchasing power of the people of Argentina leading to massive riots that forced the incoming government to send the IMF packing.
It is a measure of the continued anger of the Argentina government that in spite of the recent need to issue bonds, which would be facilitated if the IMF gave the economy a clean bill of health the government made the following statement: "If we had followed the recommendations traditionally made by (the IMF) - which have favoured opening our economies, foreign indebtedness, financial liberalisation and 'unbeatable' market-oriented reforms - the outcome would have been totally different and today we would have been embroiled in a fresh economic, social and political crisis...Therefore, we celebrate today our well-gained economic independence."
Any Pakistani analyst would recognize all the terms associated with the IMF prescriptions in this statement and would urge the government to follow the Argentina prescription: economic independence. That, however, appears unlikely as the recent addition to the government's economic team namely the Advisor to the Prime Minister on Finance has already assured the Fund of compliance with its prescriptions.
More recently, three Eastern European countries namely Latvia, Romania and Hungary also went on the IMF programme. The Fund had learned some valuable lessons: fixed exchange rate was not supported and all three have by now been enabled to issue bonds in the financial markets as a consequence. And zero deficit policy was abandoned in favour of supporting budget deficit targets that would be sustainable. However, all three countries missed budget deficit targets by big margins. All of them found spending cuts and tax hikes pushed their economies into deeper recessions than expected, and all were forced to renegotiate budget targets with the IMF.
Even before the assistance package with its attached conditionalities has become effective the tangible anger on the Greek streets has already led to violent deaths. Greece as a case in point is distinct from other countries suffering from similar economic malaise: it cannot devalue its currency given that it's a member of the single currency euro zone which effectively implies that fiscal adjustment "must be the cornerstone of the programme," according to the IMF. In other words lower expenditure on public services, including wages and entitlements like pension, and higher taxes. Little wonder that the anger on the Greek streets is so palpable.
And then there is Pakistan. The Fund's programme is to be adhered to, or so stated the newly appointed Advisor to the Prime Minister on Finance. What does that mean for us, the people? Unfortunately, not a rationalisation of government expenditure as the government continues the policy of hiring jiyalas in the public sector and raising public as well as military salaries, and a reduction in military spending is impossible at this stage given the ongoing war on terror. The major cut in expenditure is from development expenditure with obvious implications on the poor.
On the revenue side the possibility of implementing a value added tax remains a challenge with all stakeholders opposed to this tax and with tax exemptions for the rich and influential continuing. Thus the cornerstone of fiscal adjustment in Pakistan remains lower development outlay and a rise in existing taxes. With respect to monetary policy, the high rates of interest as per the IMF prescription are having the same impact they did on the Argentina economy: crippling productivity. In our case, it is further crippled by a continuing energy shortfall.
The question is can we go the Argentina way: towards independence? This would require living within our means and that this government has shown little inclination to do so far.
Source: http://www.brecorder.com/index.php?id=1054308&currPageNo=1&query=&search=&term=&supDate=
And why are the Pakistani analysts, the common man in this country largely unaware of the influence exerted by the Fund on our domestic economic policies, expressing concern over the IMF prescriptions that are being meticulously adhered to in spite of what is regarded as the "asphyxiation" of the Pakistani people?
Many analysts refer to the disastrous outcome on the poor of the standard normal prescriptions as proposed by the IMF for diverse countries in the past. The IMF may well point out that pro-poor policies is not its objective when extending emergency assistance to over heated economies that have been compromised by poor governance including profligacy and corruption, as that is the objective of other international financial institutions notably the World Bank; the Fund's objective instead is to ensure macroeconomic stabilisation. Ideally of course, the Fund would have the capacity to forecast a melt down well in advance so that corrective measures can be taken in time.
Its critics refer to ample literature on its inability to forecast a crisis in several countries during the 1980s and 1990s, including the Asian financial crisis. Be that as it may the need for continued Fund support for several economies was felt during the 2000-10 decade, marked by the global financial crisis of mammoth proportions. Lessons everyone argued had been learned by the IMF and prescriptions were tempered by past mistakes.
One of the mistakes of the current decade was the IMF handling of Argentina's needs in 2001. The reference is to what was referred by several analysts as Argentina's 'implosion in 2002' when full-scale riots by almost every section of the society were seen to have the IMF fingerprints. The Argentina government at the time opted for a fixed exchange rate - one to one peso parity with the US dollar.
This had disastrous consequences for the economy as it made Argentina exports expensive and imports artificially cheap resulting in a trade deficit of 400 billion dollars. To maintain the overvalued currency, Argentina required large reserves of dollars as the government had to guarantee that everyone who wanted to exchange a peso for a dollar could get it. While the IMF denied that it had supported a fixed exchange rate policy, yet it played a crucial role in sustaining the rate by arranging massive amounts of loans, $40 billion in 2001 alone. Overvaluation of the peso, in turn, compelled the market to demand ever rising interest rates, which literally crippled the economy.
This accounted for the inability of the Argentine economy to recover from four years of recession while its foreign debt became impossible to pay back, 100 billion dollars, leading to default. Currency support was also extended to Brazil and Russia in 1998 by the IMF with equally disastrous consequences.
The second fatal error of the IMF with respect to Argentina was to insist on a zero deficit policy. It convinced most analysts at the time that it was the government's profligacy that was responsible for its economic malaise. And in this regard, the Fund was fully supported by Washington. The then White House spokesman Ari Fleisher is on record for having stated that "it's important for Argentina to continue to work through the International Monetary Fund on sound policies." While one cannot challenge the IMF assumption that profligacy was a factor yet its associated policies, notably attached fiscal conditions, played havoc with the purchasing power of the people of Argentina leading to massive riots that forced the incoming government to send the IMF packing.
It is a measure of the continued anger of the Argentina government that in spite of the recent need to issue bonds, which would be facilitated if the IMF gave the economy a clean bill of health the government made the following statement: "If we had followed the recommendations traditionally made by (the IMF) - which have favoured opening our economies, foreign indebtedness, financial liberalisation and 'unbeatable' market-oriented reforms - the outcome would have been totally different and today we would have been embroiled in a fresh economic, social and political crisis...Therefore, we celebrate today our well-gained economic independence."
Any Pakistani analyst would recognize all the terms associated with the IMF prescriptions in this statement and would urge the government to follow the Argentina prescription: economic independence. That, however, appears unlikely as the recent addition to the government's economic team namely the Advisor to the Prime Minister on Finance has already assured the Fund of compliance with its prescriptions.
More recently, three Eastern European countries namely Latvia, Romania and Hungary also went on the IMF programme. The Fund had learned some valuable lessons: fixed exchange rate was not supported and all three have by now been enabled to issue bonds in the financial markets as a consequence. And zero deficit policy was abandoned in favour of supporting budget deficit targets that would be sustainable. However, all three countries missed budget deficit targets by big margins. All of them found spending cuts and tax hikes pushed their economies into deeper recessions than expected, and all were forced to renegotiate budget targets with the IMF.
Even before the assistance package with its attached conditionalities has become effective the tangible anger on the Greek streets has already led to violent deaths. Greece as a case in point is distinct from other countries suffering from similar economic malaise: it cannot devalue its currency given that it's a member of the single currency euro zone which effectively implies that fiscal adjustment "must be the cornerstone of the programme," according to the IMF. In other words lower expenditure on public services, including wages and entitlements like pension, and higher taxes. Little wonder that the anger on the Greek streets is so palpable.
And then there is Pakistan. The Fund's programme is to be adhered to, or so stated the newly appointed Advisor to the Prime Minister on Finance. What does that mean for us, the people? Unfortunately, not a rationalisation of government expenditure as the government continues the policy of hiring jiyalas in the public sector and raising public as well as military salaries, and a reduction in military spending is impossible at this stage given the ongoing war on terror. The major cut in expenditure is from development expenditure with obvious implications on the poor.
On the revenue side the possibility of implementing a value added tax remains a challenge with all stakeholders opposed to this tax and with tax exemptions for the rich and influential continuing. Thus the cornerstone of fiscal adjustment in Pakistan remains lower development outlay and a rise in existing taxes. With respect to monetary policy, the high rates of interest as per the IMF prescription are having the same impact they did on the Argentina economy: crippling productivity. In our case, it is further crippled by a continuing energy shortfall.
The question is can we go the Argentina way: towards independence? This would require living within our means and that this government has shown little inclination to do so far.
Source: http://www.brecorder.com/index.php?id=1054308&currPageNo=1&query=&search=&term=&supDate=
VAT implementation By MOHAMMED ASHRAF
ARTICLE (May 09 2010): VAT or GST in VAT mode is normally implemented either in robust or sustained economies, but fortunately or unfortunately Pakistan is in economic laboratory of the IMF which is in a process of experimenting about the fact that what will going to happen if the VAT is implemented in a country passing through recessionary period as experienced around the globe!
It is about to be experienced in a country, riddled with economic turmoil, shrinking size of economy, severe internal political problems and chaos among its provinces over the distribution even after NFC award. This is not merely a personal opinion, but is evidenced from international press - Washington Post (Lori Montgomery) whereby the emphatic rejection by both parties in recent days of a value-added tax, a sales tax, imposed by nearly every other developed nation.
After a White House economic advisor was reported speaking semi-favourably about a VAT, the White House this week vigorously denied that President Obama is looking to include the tax in his deficit-cutting arsenal. "This is not something the president has proposed, nor is it under consideration," White House press secretary Robert Gibbs told reporters. The VAT isn't the only potential budget solution drawing fire. Republicans howled about cuts to medicare in the recent healthcare overhaul, and no one in Washington wants to raise taxes on the 98 percent of taxpayers whom the White House has defined as the middle class.
Anyway, VAT/GST has increasingly become steadily more important as a source of revenue around the globe. In Mexico and Turkey, it contributes around 50% of the government revenues. This seems to be a trend but a cautious one, and some commentators have asked why the governments don't rely even more heavily on indirect tax revenues and introduction of VAT law in Pakistan may be the answer irrespective of recessionary economy! But another answer is that higher indirect taxes are politically difficult to introduce as taxpayer often question the benefits of paying taxes.
The link between higher indirect taxes and higher prices is obvious to anyone who buys goods and services, but the link between lower corporate tax rates and increased inward investment often results in increased employment and infrastructure development, which is less well understood by robust or sustained economies instead of recessionary one! This article is endeavouring to assess the ground realities pertaining to implementation of a comprehensive value-added tax.
VAT AND REDUCED DIRECT TAX RATES Indirect taxes seem to be playing in the revenue-gathering strategies of many countries around the globe and plan to introduce the VAT in Pakistan is no exception. It may be correct that this is a world-wide trend, but there is a clear tendency in competition to attract and keep inward investment, to reduce their corporate tax rates and seek to make up the shortfall with increases in indirect taxes. This is rather than relying solely on growth brought about by corporate investment to expand the tax base.
These tactics suggest that as well as attracting new investment, retaining current investment is a success in itself. In November 2006, Lee Hsien, the Prime Minister of Singapore, while speaking to the parliament said, "if we have to bring our corporate tax down, every percentage point we bring it down will cost us $400 million a year. It is big money. Therefore, we need to consider raising indirect taxes, in other words, the Goods and Services Tax. It is now five percent; I think we need to push it up to seven percent. Even seven percent will still lower than nearly all other countries, which have GST or VAT. But if we raise it from five percent to seven percent, it will give us precious extra resources to implement social programmes."
This is exactly what the Singapore government did in its 2007 budget, announcing a two percent cut in corporate tax rates to 18 percent from next year and an increase in GST to seven percent. There seems to be a clear deviation from this principle in Pakistan's VAT introduction fiscal policy.
This nexus of introduction of VAT, coupled with reduced tax rate, is not based on any myth but on realities. For taxpayers, introduction of VAT has immediate consequences (discussed below). One of the advantages of the VAT over direct profits tax is that they supply a steady flow of funds throughout the year, rather than lump sums at widely spaced intervals evidenced in direct taxes.
This present government failed to chalk out any strategy to communicate the benefit of a 'low direct tax strategy combined with principled VAT regime. It may well be in the long-term interests of a country to follow this path, but the voters may need persuading of the benefits of paying today for better economy tomorrow.
VAT COLLECTION: FEDERATION OR PROVINCES Prior to entering into the debate of the VAT collection in Pakistan, one must look at the European Union experience. Work is under way to reform the basic structure of the tax in certain areas, such as those determining which the EU jurisdiction is entitled to the VAT being collected at present. Much of the legislative debate has been focused on how to alter the system to better reflect taxation where consumption actually occurs, principally for services that can be supplied at a distance like e-commerce, telecommunication etc.
The outcome of any new legislation in this area in the EU will see a shift of the VAT revenue from one country to another principally from low rate countries to high rate countries. And no mention of the EU VAT modernisation issues would be complete without a reference to the need to tackle the carousel/missing trader fraud issue, which is costing the EU governments very large sums in lost revenue. This drove urgent legislative change across the EU.
The issues faced by the EU are not alien to Pakistan, but will surface soon! For instance, if a person is registered as service provider in Khyber-Pakhtoonkhwa and delivers the service in Punjab on the instruction of a person registered in Sindh, then where will the input and output be paid and claimed. This and other similar peculiar issues will crop up!
Further one school of thought is of the opinion that if the provinces are finding it difficult to share, then wouldn't that also be difficult for the federation to allow input of services VAT adjustment against output of goods and federal services! Moreover, if the provincial VAT will be collected by the provinces themselves, then this may tantamount to increasing the compliance cost by the businesses which are already overburdened with 47 compliance's a year according to the World Bank survey conducted by PwC but actually they are around 58 if labour law compliance's are included.
VAT OR GST BY PROVINCES The VAT is meant for allowing credit on expenses and purchases, but it seems that even after the NFC award, the provinces are struggling for additional revenue owing to trust deficit. These issues were raised by a local expert in the VAT conference held by the FBR in Islamabad, but was not made part of the recommendation of Dr Hafeez Pasha's report.
The ground reality of operation of taxpayers is that some of the companies registered offices are located either in Sindh, Punjab or Islamabad irrespective of the fact that their operations may be carried out in Khyber-Pakhtoonkhwa or Balochistan. Consequently, the registration domain either at registered address or operational place is the key question when the provinces come to know about their actual share.
Further, continuing with the example in previous paragraphs above, if a person is registered as service provider in Khyber-Pakhtoonkhwa and delivers the service in Punjab on the instruction of a person registered in Sindh then where will the input and output be paid and claimed.
In case, if it is decided that this situation will be avoided by slapping 15% on output of services in the province, as suggested by Kaiser Bengali in the ACCA per-budget discussion, where the service provider is registered and without allowing any input either in Punjab or Sindh, then would such fixed rate cost be acceptable to businesses or could anyone call it VAT!
The Dayton Accord (2001) of Bosnia proved disastrous and they had to revert to central government. Bird and Abel (2007) study also concluded that transferring the right to the federating unit is preferable when regional units either do not have the capacity or are in a process to build the same.
RATE OF VAT The hottest debate in town is about the rate of the VAT on essential and non-essential items. As stated above, the link between higher indirect taxes and higher prices is obvious to anyone who buys goods and services. However, the approach of all Pakistan Tax Bar Association Abdul Qadir at the pre budget proposal meeting called by the chairman of the KCCI Budget and Tax Committee Qamar is more rational, which require a scientific study. The FBR chairman has also already hinted for a rate ranging between 5 to 7%. The impact can be under stood through following comparative chart.
As evident from composite rate table above, multiple rates for essential items will be deteriorating. This process would result in unnecessarily blockage of funds of businesses in the shape of refunds, meaning thereby cost of funds to businesses, which will further increase the inflation. Similar results will also be evidenced where single rates are restricted to the cost of goods sold. The ultimate solution is that the whole supply chain rates of essential items should be extended to business involved in essential items supply chain.
VAT AND TAXPAYERS ACCOUNTING SYSTEM For taxpayers, introduction of the VAT has immediate consequences. One of the advantages of the VAT over direct profits tax is that they supply a steady flow of funds throughout the year, rather than lump sums at widely spaced intervals evidenced in direct taxes.
To deliver this benefit, taxpayers, in their capacities as tax collectors, have to have accounting systems that can provide accurate real time information on transactions and the associated tax liability.
Keeping the systems up to date with tax authorities' information requirement is a major cost and resource issue for the business sector. As indirect taxes become more important to governments, so regulators are intensifying their scrutiny of business tax systems to satisfy themselves that tax revenues are not at risk.
Further, till today, the FBR failed to issue the rules relating to registration, deregistration, filing of return, declaration, summaries, statements, record keeping, accounts, related documentation, tax invoices, credit and debit notes, refunds, prepayments, audit, alternate dispute resolution, charging of fee for processing of documentation and official acts, recovery of arrears, including compounding of offence and appointment and management of e-intermediaries then how could it expect from businesses to cope with new law fortnightly.
VAT LIABILITY CONCEPT The determination of the VAT liability revolves around some important terms like input, output, adjustment (increasing and decreasing) for creditable purpose and second hand goods. Like Sales Tax Act, 1990, the VAT liability is also determined deducting the input from output. The liability may either be increased or decreased by any of the following adjustments.
(1) Cancellation of supply (2) alteration in consideration for supply (3) return of supply (4) fundamental variation in the nature of taxable supply (5) bad debt (6) goods applied for a private purpose (7) registration or cancellation thereof (8) change of rates (9) advance payment of tax at import stage (10) withholding by government and large taxpayers.
Taxpayers are cautioned that the concepts of progressive/periodic and ancillary/incidental supplies are of utmost importance and would have significant implications on supplies under contractual agreement and normal supplies.
INADMISSIBLE AND DEFERRED VAT INPUT: Unlike the Sales Tax Act, 1990, the list of inadmissible input is exhaustive, that is, input of reverse charge, purchase or import of passenger vehicle or its spare parts or repair thereof, entertainment expense and membership of club etc. Further, taxpayers will be treated to have incurred input tax (deferred VAT input) at the time of sale of second hand taxable goods.
VAT AUDIT AND ASSOCIATED PERSON: The suggested legislation prescribes various types of audit like routine, normal, forensic etc but when, how and under what circumstances it will be conducted was absent suggested by Senators Haroon and Professor Khursheed Ahmed. Further, they also rightly pointed out about the application of the concept of open market price and its implication over associated persons.
GROSSING UP: The concept of grossing up of transaction for the VAT is included in the law where the tax is borne by a taxpayer. Surprisingly, the formula of grossing up does not exclude withholding income tax. Consequently, the vicious cycle of grossing up computation would never end. The relevant provisions require afresh thought!
LEGAL DEFICIENCIES: There seems to some conceptual drafting and typographical errors in the federal law. For instance, federal list services include carriage of goods or passengers, but in the presence of FED and other indirect taxes, it would be cumbersome for end consumers to bear the cost.
Further, the VAT law seems to be a deviation from policy of registration of taxpayers as it intends to give a separate registration number instead of relying over taxpayer registration number [formerly NTN] issued under the Income Tax Ordinance, 2001.
Moreover, the concept of Federal VAT services is missing in provisions relating to imposition of tax, person liable to pay tax, value of supply and time of supply. Further, it is beyond imagination to understand the rationale why the concept of exempt and zero-rated supply was not incorporated in ancillary or incidental supplies.
In more furtherance, there seems to be a gross conceptual drafting error in Sub-Section (3) of Section 18. The number 332 used in Section 24(4)(d) should be corrected to 32 while clause (e) and (f) should be shuffled up to give the section numbering effect. Further, the Rs 1,000 limit set is refund and carry-forward sections is too low.
CONCLUSION The Dayton Accord (2001) of Bosnia proved disastrous and they had to revert to central government. Bird and Abel (2007) also concluded that transferring the right to the federating unit is preferable when the regional units either do not have the capacity or trying to build the same. The EU has not yet concluded on distribution of taxes! Consequently, the centralised dual VAT system of Germany where revenue is shared with the state is the best system (TAT 1988).
For or taxpayers, introduction of the VAT has immediate consequences. To deliver this benefit, the taxpayers, in their capacities as tax collectors, have to have accounting systems that can provide accurate real time information on transactions and the associated tax liability. Keeping the systems up to date with tax authorities' information requirement is a major cost and resource issue for the business sector.
As indirect taxes become more important to the governments, so regulators are intensifying their scrutiny of business tax systems to satisfy themselves that the tax revenues are not at risk. Contrary to this, the FBR failed to issue the necessary rules, then how could it expect from businesses to cope with new law fortnightly.
Multiple rates for essential items will be deteriorating as this would result in unnecessarily blockage of funds of businesses in the shape of refunds meaning thereby cost of funds to businesses, which will further increase the inflation. The ultimate solution is that the whole supply chain rates of essential items should be extended to business involved in essential items supply chain.
One school of thought is of the opinion that if the provinces are finding it difficult to share the services the VAT then wouldn't that also be difficult for the federation to allow input of services VAT adjustment against output of goods and federal services!
The ground reality of operation of taxpayers is that some of the companies registered offices are located either in Sindh, Punjab or Islamabad irrespective of the fact that their operations may be carried out in Khyber-Pakhtoonkhwa or Balochistan. Consequently, the registration domain either at registered address or operational place is the key question when the provinces come to know about their actual share. In case the provinces decides that they will slap 15% on output of services where the service provider is registered and will not allow any input, then would such fixed rate cost be acceptable to businesses or could anyone call it VAT!
This present government failed to chalk out any strategy to communicate the benefit of a low direct tax strategy combined with principle based VAT regime. It may well be in the long-term interests of a country to follow this path and respective assemblies may need to reconsider this instead of passing the bill in haste, but the voters may need persuading of the benefits of paying today for better economy tomorrow:
(The writer is Chairman, ACCA Budget and Tax Committee [South], member of Karachi Chamber of Commerce and Industry's Tax Committee and member Executive Committee of Professional Accountants Forum) (taxonomy.ashraf@gmail.com)
Source: http://www.brecorder.com/index.php?id=1054067&currPageNo=1&query=&search=&term=&supDate=
Transforming the economy? By DR ZAFAR ALTAF
ARTICLE (May 08 2010): As one enters a different world, it is apparent that Pakistan will have to do things differently. Business as usual will not do and the meanderings of the last decade will be disastrous. First, the waste in the current economy has to be so modified as to get into a new rhythm, creating a new kind of work ethics and setting a trend for a new type of economic structure. Pakistan has never considered how it will develop its human resources.
The capacity-building projects of the last decade were merely a gloss to hide the cracks. The capacity-building projects worked itself without due care. The interventions were, more or less, on the purchase of cars, of computers and of such actions as were responsible for encouraging the development of the economies of the west.
The projects that I had the chance to visit and analyse were so ridiculously handled that one did not see how these could deliver anything. Thus one of the 'modern ministries' helped themselves to 147 cars and buses, 87 desktop computers and an equal number of laptops and then what was left of the financial resources that was to be utilised for junket tours.
As I examined the entire project, I realised that Pakistan was being fed the typical graceless medicine of Islamabad-heroin. The people here are in a stupor and the new ones that come in, no matter of what ilk, catch up with the heroin-intoxicated organisational structure. Most of them are delirious with the make-belief work world in which they are living.
Every morning, if they are here in Islamabad, they move moron-like to the place of their posting - a policeman-on-the-beat-sort-of living. The policeman-on-the-beat is one who travels on his beat every night and day and sees that there is nothing disastrous taking place in the area of his beat. The policeman is ultimately responsible for what takes place and there is no interference by the bosses.
Now things have changed. What am I supposed to do if the policeman at a barrier stops me and wants to see documents that are not part of his responsibility? He wants to determine ownership or is he looking for a chink in the doings of the owner and is he trying to help the fellow-citizen or is he trying to squeeze something out of him?
Over the years, that kind of working takes an ugly toll and that is what we witnessed in the Bhara Kau incident some months ago. It was not a protest against travel prices but a sudden jerk in the system. Had it been the former, the policeman would have been able to handle it. The public had no faith in the ability of the policeman to be fair. In the best of times, equity and fairness is difficult to implement and to think that the uninitiated will be able to perform is just being ludicrous. So whatever one sees, one has the feeling that we have meandered out of the system.
The system that is supposed to be doing wonders for us. Where do I stand on these issues simply stated, is that no one else can be responsible for developing us and we have to go it alone. Why would some other agency/country set us up for competition of the colonial world and their imperialistic designs? It is against the selfishness of the developed world. They talk of free markets and then they rough it up. I do not see the logic in that kind of thinking. If it is a case of doing things the other way, then the best way is to trust oneself.
That has been lost due to the subservient and the slavish mentality that we have developed over the years. It has been a massive effort at breaking down the personality[s] of the peoples of this country. The policy-makers frequent flight to the west does not augur well for us, for they are subjected to a process of brain management. That damage has to be somehow contained. The West seems to be an ideal for everyone.
It seems to be doing its work for its own self and I have no reason to squabble on that. I would probably want to do the same given the opportunity. What I would want to do is to do well by my country? It is too dear to me to think of anything else and one is sure that every one of us is a patriot in different ways. That is, after all, human nature for no one can claim to be absolute. That belongs to the celestial world.
The effort then is to do little things well and to do so in a manner that helps everyone along. There is no point in having all the conveniences in Islamabad and none in the other towns what to talk of the countryside. The effort has to be on the equitable development of the country in terms of social, economic and other conditions that do prevail and that need to be overcome. No high-fluting equation is going to do this. That effort has been lost and recovery is difficult unless we realise that the effort has to be massive and is going to be an uphill task.
The uncertainties and indecisions of the last sixty years are not going to be removed by an effort that is only of a couple of years. That would require sustained effort. The economic, social system will only work if the human element is worked in such a manner that it works for the betterment of all. That does not require a massive dose all over the country but simply the involvement and not the interference of the policymakers to work on the positive side. Over the years, what has happened is that the bureaucratic system has become more and more rigid.
This has resulted in, obviously, a system that does not deliver. Delivery is not dependent on how much one can please, but how much one can do to be in harmony with the social system that is before us. No one can explain why, in the periphery of Islamabad, do we have more people living than in Islamabad? The cost of living has become exorbitant in the town and that has been basically due to the land-based actions that have been taken in the last decade or so.
The agency responsible for this can only undo a matter if it is based on the systematic assumption that every one has the right to benefits and that no one can be above the spirit of the country's requirement. Selfishness in allotment of plots and in perverting a land system has to go. I was once a tenant of a clerk of CDA and he would ring up his clients from my office rather than his own house.
He had something like 40 plots and an unlimited number of houses. He had been, for a number of years, there and that is how he managed to work things out through unlimited lust and greed. As with the scrooges of this world, he was unable to enjoy the fruits of his worldly goods.
So how is the scrooge to be dealt with and how would one deal with the greedy and the persons that believed in acquiring much more than what would be their requirements? In other countries, rules are followed, irrespective of what power they enjoy. The best and the worst have a similar outlook to asset formation and the place that society gives to such overnight rich and how that lust for money is dealt with.
Fiscal policies are so encouraged as would deny any benefits to those who want to sit back and live off the land. This is easily dealt with. Society then decides that those who work hard and for the country are entitled to the benefits that can be given to any citizen. So everyone has an even chance and not some exaggerated asset formation. Indeed, the days of the Barons seem to be over.
The effort required is at the conceptual level, where the rightful place is ordered for the benefit of the citizens. That would mean that the organisational structure be so developed as would be equally available to all, irrespective of caste or creed. Difficult yes, but doable-no? Take your pick and see how it affects the ordinary citizen.
The conclusion may be different from what you have thought. Take care. Governance in circumstances, as we find ourselves in, is difficult to understand and hence implement. The rural areas have just as much right on these assets as we have in the urban areas and the urban poor have the right to move up the scale through hard work. It has to do with people-centered policies.
Source:http://www.brecorder.com/index.php?id=1053743&currPageNo=1&query=&search=&term=&supDate=
The capacity-building projects of the last decade were merely a gloss to hide the cracks. The capacity-building projects worked itself without due care. The interventions were, more or less, on the purchase of cars, of computers and of such actions as were responsible for encouraging the development of the economies of the west.
The projects that I had the chance to visit and analyse were so ridiculously handled that one did not see how these could deliver anything. Thus one of the 'modern ministries' helped themselves to 147 cars and buses, 87 desktop computers and an equal number of laptops and then what was left of the financial resources that was to be utilised for junket tours.
As I examined the entire project, I realised that Pakistan was being fed the typical graceless medicine of Islamabad-heroin. The people here are in a stupor and the new ones that come in, no matter of what ilk, catch up with the heroin-intoxicated organisational structure. Most of them are delirious with the make-belief work world in which they are living.
Every morning, if they are here in Islamabad, they move moron-like to the place of their posting - a policeman-on-the-beat-sort-of living. The policeman-on-the-beat is one who travels on his beat every night and day and sees that there is nothing disastrous taking place in the area of his beat. The policeman is ultimately responsible for what takes place and there is no interference by the bosses.
Now things have changed. What am I supposed to do if the policeman at a barrier stops me and wants to see documents that are not part of his responsibility? He wants to determine ownership or is he looking for a chink in the doings of the owner and is he trying to help the fellow-citizen or is he trying to squeeze something out of him?
Over the years, that kind of working takes an ugly toll and that is what we witnessed in the Bhara Kau incident some months ago. It was not a protest against travel prices but a sudden jerk in the system. Had it been the former, the policeman would have been able to handle it. The public had no faith in the ability of the policeman to be fair. In the best of times, equity and fairness is difficult to implement and to think that the uninitiated will be able to perform is just being ludicrous. So whatever one sees, one has the feeling that we have meandered out of the system.
The system that is supposed to be doing wonders for us. Where do I stand on these issues simply stated, is that no one else can be responsible for developing us and we have to go it alone. Why would some other agency/country set us up for competition of the colonial world and their imperialistic designs? It is against the selfishness of the developed world. They talk of free markets and then they rough it up. I do not see the logic in that kind of thinking. If it is a case of doing things the other way, then the best way is to trust oneself.
That has been lost due to the subservient and the slavish mentality that we have developed over the years. It has been a massive effort at breaking down the personality[s] of the peoples of this country. The policy-makers frequent flight to the west does not augur well for us, for they are subjected to a process of brain management. That damage has to be somehow contained. The West seems to be an ideal for everyone.
It seems to be doing its work for its own self and I have no reason to squabble on that. I would probably want to do the same given the opportunity. What I would want to do is to do well by my country? It is too dear to me to think of anything else and one is sure that every one of us is a patriot in different ways. That is, after all, human nature for no one can claim to be absolute. That belongs to the celestial world.
The effort then is to do little things well and to do so in a manner that helps everyone along. There is no point in having all the conveniences in Islamabad and none in the other towns what to talk of the countryside. The effort has to be on the equitable development of the country in terms of social, economic and other conditions that do prevail and that need to be overcome. No high-fluting equation is going to do this. That effort has been lost and recovery is difficult unless we realise that the effort has to be massive and is going to be an uphill task.
The uncertainties and indecisions of the last sixty years are not going to be removed by an effort that is only of a couple of years. That would require sustained effort. The economic, social system will only work if the human element is worked in such a manner that it works for the betterment of all. That does not require a massive dose all over the country but simply the involvement and not the interference of the policymakers to work on the positive side. Over the years, what has happened is that the bureaucratic system has become more and more rigid.
This has resulted in, obviously, a system that does not deliver. Delivery is not dependent on how much one can please, but how much one can do to be in harmony with the social system that is before us. No one can explain why, in the periphery of Islamabad, do we have more people living than in Islamabad? The cost of living has become exorbitant in the town and that has been basically due to the land-based actions that have been taken in the last decade or so.
The agency responsible for this can only undo a matter if it is based on the systematic assumption that every one has the right to benefits and that no one can be above the spirit of the country's requirement. Selfishness in allotment of plots and in perverting a land system has to go. I was once a tenant of a clerk of CDA and he would ring up his clients from my office rather than his own house.
He had something like 40 plots and an unlimited number of houses. He had been, for a number of years, there and that is how he managed to work things out through unlimited lust and greed. As with the scrooges of this world, he was unable to enjoy the fruits of his worldly goods.
So how is the scrooge to be dealt with and how would one deal with the greedy and the persons that believed in acquiring much more than what would be their requirements? In other countries, rules are followed, irrespective of what power they enjoy. The best and the worst have a similar outlook to asset formation and the place that society gives to such overnight rich and how that lust for money is dealt with.
Fiscal policies are so encouraged as would deny any benefits to those who want to sit back and live off the land. This is easily dealt with. Society then decides that those who work hard and for the country are entitled to the benefits that can be given to any citizen. So everyone has an even chance and not some exaggerated asset formation. Indeed, the days of the Barons seem to be over.
The effort required is at the conceptual level, where the rightful place is ordered for the benefit of the citizens. That would mean that the organisational structure be so developed as would be equally available to all, irrespective of caste or creed. Difficult yes, but doable-no? Take your pick and see how it affects the ordinary citizen.
The conclusion may be different from what you have thought. Take care. Governance in circumstances, as we find ourselves in, is difficult to understand and hence implement. The rural areas have just as much right on these assets as we have in the urban areas and the urban poor have the right to move up the scale through hard work. It has to do with people-centered policies.
Source:http://www.brecorder.com/index.php?id=1053743&currPageNo=1&query=&search=&term=&supDate=
Make SECP truly independent body By RAZI-UR-RAHMAN KHAN
ARTICLE (May 07 2010): I was shocked and truly saddened to read reviews of the proposed amendments in the draft SECP Act from various national dailies. The hard work and progress that has been achieved by SECP over the last 13 years seems to be coming to naught by certain elements for their own vested interests it seems.
The people at the helm of affairs at the SECP and its Policy Board are inadvertently playing into their hands. Having spent three precious and most productive years of my life at the institution I could not help but examine the press reports and am raising my voice against what I believe to be official murder of the SECP.
I therefore got myself a copy of the draft 2010 SECP Act, which was an exercise in itself. The draft law is steeped in secrecy and cloak and dagger, so much so that apparently the law department of the Commission headed by a Commissioner has not been provided with a copy. I have reviewed the draft Act and tried to understand why the Commission and the Policy Board are so intent on going the wrong way down a one way street. My review does not leave me a happy man.
Review of the 1997 SECP Act started back in 2005 when Dr Tariq Hassan was Chairman SECP. A lot of hard labour has been put in since then to try and bring it in line with other similar progressive Commissions around the world. The objective was to instill best practices from other parts of the world while keeping in view the peculiar circumstances that prevail in Pakistan and our stage of development.
In 2008, after a lot of deliberation, the Commission approved a draft SECP Act and presented it to the Policy Board for comments prior to presenting the same to the Ministry of Finance. Unfortunately, a misconceived controversy with SBP took us off course and the draft law got derailed. It was then reviewed in 2009 and the latest draft doing the rounds was revealed in 2010.
In my review I have taken advantage of the background thinking and rationale used to draft the 2008 version of the law together with the three years hands-on experience that I had in the Commission to try and determine what should or should not be included in the new SECP Act. The draft Act impacts the following major areas and I would recommend the GoP to immediately review the proposed recommendations for further development of the SECP and capital markets in Pakistan.
AUTONOMY AND INDEPENDENCE OF SECP The draft 2010 SECP Act in my opinion effectively downgrades SECP into a department of GoP and in particular the Ministry of Finance. We seem to be going back in history and trying to re establish the CLA. Incidentally, creation of an independent SECP has always been a conditionality of ADB and World Bank loans for the GoP.
Currently it is one of the conditions imposed by the ADB prior to disbursing a US $400.0 million loan. How can the Policy Board and the Chairman SECP compromise on this very important institution building measure? Without independence and autonomy I am afraid the SECP will not be worth retaining as an institution and would be a monumental waste of time.
The SECP will be subject to unwarranted political and bureaucratic pressures which will be almost impossible to withstand and will consequently affect the performance of its duties and functions namely enforcing laws fairly, fiercely and independently.
Interestingly, clauses within the proposed draft SECP Act on one hand are still professing high sounding principles of autonomy and independence of the Commission and on the other hand the same ideals are being systematically eroded away.
For example, Section 3(3) states "In performance of its functions and duties under this Act, the Commission shall be an independent and autonomous body and no person or entity shall seek to influence the Chairman, Commissioners and its officers or interfere in the working or activities of the Commission."
POWERS OF THE POLICY BOARD These have been enhanced beyond recognition at the cost of the Commission. The Policy Board which consists of five ex-officio members including three federal secretaries, is now proposed to be given executive powers as well as oversight of the Commission's regulatory functions. Furthermore, Chairman SECP is now required to report on quarterly basis to the Policy Board on executive functions.
It has been given the powers to approve regulations made by the Commission on functional and regulatory issues. Commissioners will be appointed by GoP on the advice of the Board. All these new powers coupled with the powers to approve the Commission's budget, employment policy, HR policy, investment policy etc will turn the Policy Board into a super executive board that has the potential to suffocate the Commission and its working.
In my view, the Board should not oversee the performance of the Commission as it is not a performance evaluating Board, nor is it an executive Board. After granting these powers where is the independence and autonomy of the Commission and the Chairman? What happened to the high sounding goals enumerated in Sec 3 (3) above?
Furthermore, majority of the Policy board members should be sourced from the private sector with the ex officio members being restricted to four. The Chairman of SECP Policy board should be appointed by the Federal Government from amongst the non-ex-officio members. Ideally, the Chairman should be the Chairman of the Commission and I would seriously plead this case. A lot of issues will be resolved where the Chairman is made Chairman of Policy Board by law.
SECURITY OF TENURE FOR CHAIRMAN AND COMMISSIONERS Security of tenure is now proposed to be removed by the Government without due process and reasoning. This move alone will obliterate any possibility that the Chairmen and Commissioners will in future act independently and without submitting to undue pressures.
The Commissioners and Chairmen will be beholden to the Policy Board members for their jobs, perks and privileges and cannot be independent. In addition, they will now have a carrot dangling in front of them that they may be reappointed for as many terms as they want till they reach 62 years of age so long as they remain good boys and toe the party line.
In my view, there is a dire need to appoint honest, dedicated, technically well qualified and proficient individuals as Commissioners and Policy Board members who have the stature and are capable of withstanding pressures not just from the government but also from the private sector. The law should provide that all Commissioners should be from the private sector or home grown within the SECP.
That any person with direct or indirect interests in the capital market or associated directly or indirectly as shareholder or partner with a regulatee of the Commission should not be appointed as Commissioner or Chairman. Similarly, there should be a one year bar on senior management of SECP, including the Chairman and the Commissioners, from joining a regulatee after leaving their employment with the SECP.
Security of tenure must be guaranteed to the Commissioners and the Chairman and they should be debarred from being appointed in the Commission as an advisor or consultant or in any other capacity after completion of two terms as Commissioner.
POWERS OF THE CHAIRMAN The draft SECP Act proposes to give the Chairman SECP wide powers which tramples on the Commission in no uncertain terms. The Commission has in effect been made subservient to the Chairman. The Chairman is proposed to be vested with the powers to manage the administration and operation of the Commission including procurement of goods and services, entering into contractual commitments and obligations and appointing staff and agents.
Sec 8-4-c: Furthermore, he has also been given the powers to take enforcement action, including instructing any regulated person to take remedial actions, or appoint a receiver or impose penalties sec 8-4-d. The Chairman is also being given the powers to delegate any of his powers or functions to whom he likes sec 8-4-e.
To top it all, in sec 8-4 g he is being given carte blanche powers on issues and matters that are not specifically mentioned in the proposed Act. Total powers, no less. The Commission effectively becomes redundant, the Commissioners downgraded to lackeys and we have on our hands the potential for a one man dictatorial show.
In addition to the sweeping powers proposed to be given to the Chairman, he is also being provided with emergency powers similar to those of Governor SBP. However, it is worth noting that SBP is not a Commission and hence blindly importing clauses from the SBP Act may not work for the SECP. SBP regulates the monetary policy of the country in addition to the payment systems and the entire banking sector.
Emergencies do arise at the SBP which need to be tackled almost instantaneously. SBP does not have an in-house collegiate body to seek views and counsel and hence may need to provide emergency powers to the Governor. No emergency of the nature that SBP may face is envisaged in SECP. Even if an emergency does arise that warrants an immediate decision it is worth remembering that an emergent Commission meeting can be called within 5 minutes, in which the issue will be debated and a collective decision taken in the best interests of the Commission and the country. Consequently, giving the Chairman sweeping powers, albeit in an emergency, is principally wrong as it goes against the concept of a collegiate body.
ENFORCEMENT POWERS OF SECP The independent tribunal proposed by the Commission to hear appeals and try criminal offences has also been done away with by the Policy Board in the latest draft Act. It may come as a surprise to many but it was during my tenure as Chairman that SECP for the first time filed criminal cases against high profile companies and individuals for market manipulation and insider trading and other fraudulent activities.
Individuals and companies transgressing the law knew that they have an even chance of getting caught and will be penalised as provided in the law without any favours. However, these cases which were filed in the ordinary criminal courts have not made any progress even after nearly three years. Simple criminal cases filed by the Commission take nearly a decade to decide.
In such circumstances, the Commission in 2008, under my chairmanship, had proposed that special tribunals be formed which shall have the expertise, time and single mindedness to try such serious offences. These Tribunals exist in many countries, including India, with satisfactory results. In my view these Tribunals should have been set up decades ago.
The failure to apprehend and try offenders who commit fraud on ordinary investors of the country not only seriously affects the Commission's reputation as a regulator, but also erodes the investor confidence in the market and in the country.
PLEA BARGAINING OR 'LENIENCY' Plea bargaining or Leniency as the draft Act likes to call it, is practised in developed economies of the world and in principle is a useful provision. It takes on a life of its own in our environment where the judicial process is time consuming and cases drag on for years.
While I am supportive of this new provision I have some reservations. Strangely enough the power to accept the plea bargain offer has been given to the Appellate Bench of the Commission on the recommendation of the Commission. It does not make sense that the Commission consisting of all Commissioners should refer a matter for approval to the Appellate Bench which consists of two of the same Commissioners.
'VOLUNTARY RETURN' While I support voluntary confession of crime and the need for SECP to show some leniency as it certainly has merit given our judicial system, however, it is recommended that these not be applicable in cases concerning fraud and malpractice to the detriment of the investor and the general public.
In such cases SECP should prosecute the errant regulatee with full force and vigour. Fraudulent activities once caught cannot be allowed to get away scot-free as proposed in the draft Act. If the Commission approves and accepts the offer the accused should stand convicted of the offence and should cease to hold public office and stand disqualified for a period of 3 years from holding any public office or that of a director or officer of a company.
DISBURSEMENT OF FINES The power to apply any fine collected by the Commission towards payment to an informant or for other purposes as stipulated in the draft Act should only lie with the Commission. This is a very important power and should not be delegated to any individual member of the Commission as it is prone to misuse and may give rise to potential corruption and misappropriation.
MISCELLANEOUS SAFEGUARDS AND FACILITATIONS REQUIRED In my experience, the SECP should have the power to call for information directly from banks and financial institutions with respect to payment, so that identity of a payer or payee is tracked expeditiously. This information is invariable required to bring to fruition any properly conducted and duly authorised investigation.
No successful investigation into financial crimes can be completed and prosecution closed without effectively understanding and laying bare the money trail. It is proposed that prior to a Chairman or Commissioner or Executive Director taking up appointment in the Commission he should not only disclose his interests but should also sell all securities held in a regulatee and settle all outstanding loans to any regulatee.
In conclusion, I would impress upon all concerned at the SECP, the Policy Board and the Government of Pakistan to please review the proposed amendments in light of the concerns raised herein above. It is imperative that the collegiate nature of the Commission be retained, the autonomy of the Commission remains preserved and the independence of the Commissioners and Chairman zealously safe guarded. Without independence of the Commission justice and fair play shall be sacrificed and the poor investor and the public at large shall be the main sufferers.
(The writer is former Chairman of SECP)
Source: http://www.brecorder.com/index.php?id=1053370&currPageNo=1&query=&search=&term=&supDate=
The people at the helm of affairs at the SECP and its Policy Board are inadvertently playing into their hands. Having spent three precious and most productive years of my life at the institution I could not help but examine the press reports and am raising my voice against what I believe to be official murder of the SECP.
I therefore got myself a copy of the draft 2010 SECP Act, which was an exercise in itself. The draft law is steeped in secrecy and cloak and dagger, so much so that apparently the law department of the Commission headed by a Commissioner has not been provided with a copy. I have reviewed the draft Act and tried to understand why the Commission and the Policy Board are so intent on going the wrong way down a one way street. My review does not leave me a happy man.
Review of the 1997 SECP Act started back in 2005 when Dr Tariq Hassan was Chairman SECP. A lot of hard labour has been put in since then to try and bring it in line with other similar progressive Commissions around the world. The objective was to instill best practices from other parts of the world while keeping in view the peculiar circumstances that prevail in Pakistan and our stage of development.
In 2008, after a lot of deliberation, the Commission approved a draft SECP Act and presented it to the Policy Board for comments prior to presenting the same to the Ministry of Finance. Unfortunately, a misconceived controversy with SBP took us off course and the draft law got derailed. It was then reviewed in 2009 and the latest draft doing the rounds was revealed in 2010.
In my review I have taken advantage of the background thinking and rationale used to draft the 2008 version of the law together with the three years hands-on experience that I had in the Commission to try and determine what should or should not be included in the new SECP Act. The draft Act impacts the following major areas and I would recommend the GoP to immediately review the proposed recommendations for further development of the SECP and capital markets in Pakistan.
AUTONOMY AND INDEPENDENCE OF SECP The draft 2010 SECP Act in my opinion effectively downgrades SECP into a department of GoP and in particular the Ministry of Finance. We seem to be going back in history and trying to re establish the CLA. Incidentally, creation of an independent SECP has always been a conditionality of ADB and World Bank loans for the GoP.
Currently it is one of the conditions imposed by the ADB prior to disbursing a US $400.0 million loan. How can the Policy Board and the Chairman SECP compromise on this very important institution building measure? Without independence and autonomy I am afraid the SECP will not be worth retaining as an institution and would be a monumental waste of time.
The SECP will be subject to unwarranted political and bureaucratic pressures which will be almost impossible to withstand and will consequently affect the performance of its duties and functions namely enforcing laws fairly, fiercely and independently.
Interestingly, clauses within the proposed draft SECP Act on one hand are still professing high sounding principles of autonomy and independence of the Commission and on the other hand the same ideals are being systematically eroded away.
For example, Section 3(3) states "In performance of its functions and duties under this Act, the Commission shall be an independent and autonomous body and no person or entity shall seek to influence the Chairman, Commissioners and its officers or interfere in the working or activities of the Commission."
POWERS OF THE POLICY BOARD These have been enhanced beyond recognition at the cost of the Commission. The Policy Board which consists of five ex-officio members including three federal secretaries, is now proposed to be given executive powers as well as oversight of the Commission's regulatory functions. Furthermore, Chairman SECP is now required to report on quarterly basis to the Policy Board on executive functions.
It has been given the powers to approve regulations made by the Commission on functional and regulatory issues. Commissioners will be appointed by GoP on the advice of the Board. All these new powers coupled with the powers to approve the Commission's budget, employment policy, HR policy, investment policy etc will turn the Policy Board into a super executive board that has the potential to suffocate the Commission and its working.
In my view, the Board should not oversee the performance of the Commission as it is not a performance evaluating Board, nor is it an executive Board. After granting these powers where is the independence and autonomy of the Commission and the Chairman? What happened to the high sounding goals enumerated in Sec 3 (3) above?
Furthermore, majority of the Policy board members should be sourced from the private sector with the ex officio members being restricted to four. The Chairman of SECP Policy board should be appointed by the Federal Government from amongst the non-ex-officio members. Ideally, the Chairman should be the Chairman of the Commission and I would seriously plead this case. A lot of issues will be resolved where the Chairman is made Chairman of Policy Board by law.
SECURITY OF TENURE FOR CHAIRMAN AND COMMISSIONERS Security of tenure is now proposed to be removed by the Government without due process and reasoning. This move alone will obliterate any possibility that the Chairmen and Commissioners will in future act independently and without submitting to undue pressures.
The Commissioners and Chairmen will be beholden to the Policy Board members for their jobs, perks and privileges and cannot be independent. In addition, they will now have a carrot dangling in front of them that they may be reappointed for as many terms as they want till they reach 62 years of age so long as they remain good boys and toe the party line.
In my view, there is a dire need to appoint honest, dedicated, technically well qualified and proficient individuals as Commissioners and Policy Board members who have the stature and are capable of withstanding pressures not just from the government but also from the private sector. The law should provide that all Commissioners should be from the private sector or home grown within the SECP.
That any person with direct or indirect interests in the capital market or associated directly or indirectly as shareholder or partner with a regulatee of the Commission should not be appointed as Commissioner or Chairman. Similarly, there should be a one year bar on senior management of SECP, including the Chairman and the Commissioners, from joining a regulatee after leaving their employment with the SECP.
Security of tenure must be guaranteed to the Commissioners and the Chairman and they should be debarred from being appointed in the Commission as an advisor or consultant or in any other capacity after completion of two terms as Commissioner.
POWERS OF THE CHAIRMAN The draft SECP Act proposes to give the Chairman SECP wide powers which tramples on the Commission in no uncertain terms. The Commission has in effect been made subservient to the Chairman. The Chairman is proposed to be vested with the powers to manage the administration and operation of the Commission including procurement of goods and services, entering into contractual commitments and obligations and appointing staff and agents.
Sec 8-4-c: Furthermore, he has also been given the powers to take enforcement action, including instructing any regulated person to take remedial actions, or appoint a receiver or impose penalties sec 8-4-d. The Chairman is also being given the powers to delegate any of his powers or functions to whom he likes sec 8-4-e.
To top it all, in sec 8-4 g he is being given carte blanche powers on issues and matters that are not specifically mentioned in the proposed Act. Total powers, no less. The Commission effectively becomes redundant, the Commissioners downgraded to lackeys and we have on our hands the potential for a one man dictatorial show.
In addition to the sweeping powers proposed to be given to the Chairman, he is also being provided with emergency powers similar to those of Governor SBP. However, it is worth noting that SBP is not a Commission and hence blindly importing clauses from the SBP Act may not work for the SECP. SBP regulates the monetary policy of the country in addition to the payment systems and the entire banking sector.
Emergencies do arise at the SBP which need to be tackled almost instantaneously. SBP does not have an in-house collegiate body to seek views and counsel and hence may need to provide emergency powers to the Governor. No emergency of the nature that SBP may face is envisaged in SECP. Even if an emergency does arise that warrants an immediate decision it is worth remembering that an emergent Commission meeting can be called within 5 minutes, in which the issue will be debated and a collective decision taken in the best interests of the Commission and the country. Consequently, giving the Chairman sweeping powers, albeit in an emergency, is principally wrong as it goes against the concept of a collegiate body.
ENFORCEMENT POWERS OF SECP The independent tribunal proposed by the Commission to hear appeals and try criminal offences has also been done away with by the Policy Board in the latest draft Act. It may come as a surprise to many but it was during my tenure as Chairman that SECP for the first time filed criminal cases against high profile companies and individuals for market manipulation and insider trading and other fraudulent activities.
Individuals and companies transgressing the law knew that they have an even chance of getting caught and will be penalised as provided in the law without any favours. However, these cases which were filed in the ordinary criminal courts have not made any progress even after nearly three years. Simple criminal cases filed by the Commission take nearly a decade to decide.
In such circumstances, the Commission in 2008, under my chairmanship, had proposed that special tribunals be formed which shall have the expertise, time and single mindedness to try such serious offences. These Tribunals exist in many countries, including India, with satisfactory results. In my view these Tribunals should have been set up decades ago.
The failure to apprehend and try offenders who commit fraud on ordinary investors of the country not only seriously affects the Commission's reputation as a regulator, but also erodes the investor confidence in the market and in the country.
PLEA BARGAINING OR 'LENIENCY' Plea bargaining or Leniency as the draft Act likes to call it, is practised in developed economies of the world and in principle is a useful provision. It takes on a life of its own in our environment where the judicial process is time consuming and cases drag on for years.
While I am supportive of this new provision I have some reservations. Strangely enough the power to accept the plea bargain offer has been given to the Appellate Bench of the Commission on the recommendation of the Commission. It does not make sense that the Commission consisting of all Commissioners should refer a matter for approval to the Appellate Bench which consists of two of the same Commissioners.
'VOLUNTARY RETURN' While I support voluntary confession of crime and the need for SECP to show some leniency as it certainly has merit given our judicial system, however, it is recommended that these not be applicable in cases concerning fraud and malpractice to the detriment of the investor and the general public.
In such cases SECP should prosecute the errant regulatee with full force and vigour. Fraudulent activities once caught cannot be allowed to get away scot-free as proposed in the draft Act. If the Commission approves and accepts the offer the accused should stand convicted of the offence and should cease to hold public office and stand disqualified for a period of 3 years from holding any public office or that of a director or officer of a company.
DISBURSEMENT OF FINES The power to apply any fine collected by the Commission towards payment to an informant or for other purposes as stipulated in the draft Act should only lie with the Commission. This is a very important power and should not be delegated to any individual member of the Commission as it is prone to misuse and may give rise to potential corruption and misappropriation.
MISCELLANEOUS SAFEGUARDS AND FACILITATIONS REQUIRED In my experience, the SECP should have the power to call for information directly from banks and financial institutions with respect to payment, so that identity of a payer or payee is tracked expeditiously. This information is invariable required to bring to fruition any properly conducted and duly authorised investigation.
No successful investigation into financial crimes can be completed and prosecution closed without effectively understanding and laying bare the money trail. It is proposed that prior to a Chairman or Commissioner or Executive Director taking up appointment in the Commission he should not only disclose his interests but should also sell all securities held in a regulatee and settle all outstanding loans to any regulatee.
In conclusion, I would impress upon all concerned at the SECP, the Policy Board and the Government of Pakistan to please review the proposed amendments in light of the concerns raised herein above. It is imperative that the collegiate nature of the Commission be retained, the autonomy of the Commission remains preserved and the independence of the Commissioners and Chairman zealously safe guarded. Without independence of the Commission justice and fair play shall be sacrificed and the poor investor and the public at large shall be the main sufferers.
(The writer is former Chairman of SECP)
Source: http://www.brecorder.com/index.php?id=1053370&currPageNo=1&query=&search=&term=&supDate=
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