FeaturedNationalVolume 13 Issue # 12

A worsening situation

Doing business in Pakistan was never easy. But it’s getting increasingly difficult with the passage of time. The latest proof of this is the World Bank’s Doing Business survey this year in which Pakistan’s ranking has dropped from 144 to 147 among 190 countries. Significantly, Pakistan slipped from its last year’s rating despite the introduction of some reforms in areas of starting business and making international trade relatively easier.  This is highly damaging to the government’s pro-business image ahead of the next general elections.

The World Bank’s Doing Business Index is mostly used as a guide by foreign investors to learn more about a country, affecting decisions on pouring in money in the economy. International investors consult the report and the Global Competitiveness Index of the World Economic Forum before taking decisions about their investment plans.

The Doing Business Index is a flagship World Bank publication.  Each year the World Bank conducts a survey and publishes a comprehensive report on Ease of Doing Business and country ranking. The parameters considered in the survey are: Starting a Business, Construction Permits, Getting Electricity, Getting Credits, Paying Taxes, Cross-border Trading, Property Registration, Contract Enforcement,  Resolving Insolvency, Protecting Rights of Minority Shareholders. The latest report is the fourteenth in a series of annual reports measuring governmental regulations that enhance or constrain business activity. Doing Business looks at quantitative indicators on business regulations and the protection of property rights, which can be compared over time, across 190 economies. It measures regulations affecting different aspects of running a business.

 

The World Bank report covers 190 economies and measures how close each economy is to global best practices in business regulations. In South Asia, Bhutan, at the 75th place in the Doing Business rankings, is the highest-ranked economy followed by India (100) and Nepal (105). Pakistan, at the 147th position, was at number 6 in South Asia followed by Bangladesh (177) and Afghanistan 183.

According to the World Bank, since 2005 all economies around the world have taken steps to improve the business environment.  Last year, for the first time, Doing Business compilers collected data for a second city in economies with a population of more than 100 million. In Bangladesh, it now analyses the business regulations in Chittagong and Dhaka; in India, in Delhi and Mumbai; and in Pakistan in Lahore and Karachi.  As per latest research, half of the economies around the world have an electronic database for rights and encumbrances. However, much more still needs to be done to make processing of business related matters easier. The report has strongly criticised long enforcement times in many countries which frustrate freedom of contract and limits freedom of contract in the areas of future determination of contract price, exclusion of liability for gross negligence and public policy and legal capacity.

Pakistan received extremely adverse scores on getting electricity, trading across borders and paying taxes — all federal subjects — where the country was ranked 167th, 171st and 172nd, respectively. Other countries that have similar rankings in these indicators include Afghanistan and some African countries. Is this how we are positioning ourselves in the global marketplace?

The report is based on surveys carried out in Karachi and Lahore. Pakistan lost 16 positions on the indicator of paying taxes, standing at 172, according to the 2018 report. Last year, Pakistan’s ranking was 156. One of the reasons behind the dismal performance was the increase in overall tax rates that surged to 33.8% of total profits. Although the PML-N government reduced the overall corporate tax rate to 30%, it imposed Super Tax on big companies that jacked up tax contribution. Due to multiplicity of taxes, people and companies made 47 tax payments every year which consumed 311.5 hours. Instead of broadening the tax base, the government relied heavily on the existing extremely narrow tax base to meet its additional revenue requirements. This made business uncompetitive.

The indicator on “getting electricity” not only covers procedural days but also measures associated costs, reliability of supply, transparency of tariffs, price of electricity, etc. India has an astoundingly high global rank of 29 on getting electricity, where it takes merely 47 days to get a connection. Interestingly, average electricity price for industrial consumers is 20.3 cents per KWh in India and 18.8 cents in Pakistan. Reducing electricity prices, as announced by the finance adviser, will therefore have little bearing on our ranking, unless it is accompanied by other interventions to reduce procedural delays of several months.

Similarly, a business has to pay taxes and mandatory contributions on 11 counts, including corporate income tax, sales tax, employer pension and social security contributions, etc. What is even more troublesome is that these have to be paid in 47 instances every year, putting excessive compliance burden. In China, a business only has to make three payments a year. Many countries have simplified their clearance, customs inspections and port handling procedures so much that the whole process takes about an hour. We, on the other hand, still take 5-6 days for exports and 11-12 days for imports.

If one particular government department is to be blamed for the overall poor performance, it is the Ministry of Finance, as the country’s ranking nosedived on the indicators of paying taxes and getting credit. The findings of the report serve as a rude reminder to the PML-N government that has claimed making Pakistan an easier place to do business in, while also helping it become one of the fastest 25 growing economies of the world. Instead, the country was ranked at 43 from the bottom on the influential global index. This year, Pakistan did make it easier to “start a business”, “register property”, “strengthened minority shareholders protection” and made it easier to “do trade across the border”. It also introduced electronic processing of documents for exports and imports and strengthened port infrastructure. But all this was not enough to improve its ranking in the world index. The report provides ample food for thought to the country’s policy makers.

Doing Business indicators provide a good starting point for policy reforms. Serious issues like adverse security, corruption, limited access to credit, poor infrastructure and non-availability of skilled labour also need to be tackled if we are serious about creating enough jobs for almost two million youth entering the workforce every year.

Recently, Minister for Finance Miftah Ismail said that the government is taking all possible measures to reduce the cost of doing business. Let’s hope he keeps his promise.  The government needs to undertake large scale economic, legal and administrative reforms and bold decisions to make Pakistan attractive for investment.

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