From what is being claimed by the Finance Minister, the economy is on the mend and recent indicators, especially the GDP’s growth rate and investment, are seemingly positive. He may have a point because when economic activity is on the rise it is invariably accompanied by undefined buoyancy in the markets and the invariable prophesies of investment being “in the air.” Both these intangibles are coming across as being real time phenomenon today. Now the critics may turn around and say that the present up-swing in investment is despite poor economic management and has more to do with the following twin factors: investors don’t stay idle for long and reserves ultimately get converted into spending, (not to mention a stroke of luck where a government finds itself on the upward curve of a typical investment cycle). Still, the fact remains that Mr. Dar’s claims on the revival of growth and investment (to an extent) hold true. However, since this government has a history of shooting itself in the foot, it is not surprising to hear once again, of two distinct policy measures being contemplated by the government. Both, if implemented, will have a grossly negative bearing on the economic climate.
The first pertains to the proposed increase in the sales tax rate in textiles and the changes in the overall tax regime. The zero-rated facility in its true sense already stands withdrawn, which means that even at the present rate of 2%, the textile exporters have to adhere to the unnecessary and unproductive exercise of paying first and then applying for the related refund. With the country in dire need of enhancing its exports, and given that the GSP Plus status recently granted by the
As we know, of late the textile export sector has been reeling under severe energy shortages, hikes in tariffs, high costs of production and serious liquidity pressures compounded by the fact that at present huge amounts of sales tax refunds remain stuck with the
The second proposal refers to the government’s plans to tap the international bond market to raise finances.
On high risk, the government may argue that given the low interest on Euro deposits, this would be a good time to float bonds in the international market. Still, the fact remains that it would be doing so at a time when its own reserves to back up such an instrument (meaning back-up security) stand at an all time low. This would mean that investors would view these as high risk and naturally demand a higher return premium. Furthermore, recent bond floats, especially in the Euro denomination by emerging global economies have been project specific and not country specific as it would most likely be in our case. For example,
Then, the issue of high cost. We must remember that at the end of the day what the Pakistani government would be committing to, is not only servicing the bond in Euros during the float period, but also to pay the full maturity value in Euros at the time of culmination.
A bond in other words is a debt instrument, which essentially means that we will be assuming more foreign debt, albeit over a much shorter period and on market terms that invariably tend to be expensive (being more return-driven against the steady ones offered by international financial institutions). Also, if our recent devaluation track record is anything to go by, the actual rupee based pay-out will be much higher once the projected/forward Rupee-Euro parity is factored in. By all accounts and gauging from the signals from
In a recent report published by one of the largest financial houses,
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