NationalVOLUME 15 ISSUE # 19

Incentives to revive the economy

Unsure about the future course of the coronavirus pandemic, the government is trying to mobilise its resources to revive the economy and bring much-needed relief to the common people, who have lost their sources of income due to the lockdown, which continues despite ease in restrictions. In this regard, Prime Minister Imran Khan has repeatedly said that while saving lives from the coronavirus, we must also save people from hunger.

Among other measures, the government has introduced an amnesty scheme for the construction industry and cut the interest rate to the single digit. Besides, the banks and financial institutions have relaxed paying off loan to borrowers. The federal cabinet in mid-April approved an incentive package for the construction industry after making amendments to the Income Tax Ordinance, 2001, which allows people to invest in the sector without disclosing their source of income.

Importantly, the incentive package has fulfilled the longstanding demand of builders and developers for fixed income tax and declaration of the construction sector an industry. With the declaration of the construction sector an industry, the import of plants and machinery used in the sector would have the same incentives as enjoyed by other industries.

According to the package, the fixed tax regime would be enforced where taxes are based on per square feet/yard, zero withholding tax on all material except cement and steel, exemption of tax on services and a facility of 10 times credit on income and profit for which tax has been paid. The tax ratio on low-cost housing units to be built by the Naya Pakistan Housing and Development Authority has been reduced by up to 90%. The regime would be applicable to projects initiated before December 31, 2020, and the current incomplete projects that are registered under the scheme.

Under the package, provisions of the Section 111 (unexplained income source) of the Income Tax Ordinance, 2001, will not be applicable to capital investments on land and cash if the cash investment is deposited in a new bank account on or before December 31, 2020, and if the investor has legal ownership title of the land at the time of the promulgation of the scheme.

Exemption from the Section 111 will only be provided for projects that are commenced by December 31, 2020, and completed till September 30, 2022. A project will only be considered to be completed only if the builder has completed the grey structure till September 30, 2022, and the developer has completed landscaping by the time, and constructed 50% sub-grade level roads on the project site.

The PTI government, in order to stabilize the depleting foreign reserves, has increased the interest rate. Subsequently, foreign investors invested over US$3 billion in the banking sector and stocks of Pakistan. The amount injected in the economy is called hot money. However, with the pandemic worsening in the developed and Western countries, the investors started pulling out hot money.

Technically speaking, the rapidly accelerating departure of so-called hot money that came pouring into government debt from last July onwards is now going to test the State Bank’s commitment to a “market-determined exchange rate”. In the first 12 days of March, for example, close to $600m left Pakistani markets, primarily from debt securities, as foreign investors and carry traders rushed for safety with the rising economic impact from the fight against the pandemic.

In the days to come, the exodus is likely to grow, especially since it has induced exchange rate volatility which is the biggest source of uncertainty in the eyes of the carry traders behind the inflows. Just in a week, the rupee touched 160 to a dollar, and then saw a mysterious dive back to 156.5 in a move that looked suspiciously, like intervention from the central bank. If so, we can be certain that the outflows have already given the central bank cold feet, after its young governor had gone to some lengths to play down the risks of a sudden outflow.

The financial markets will be the first to be tested by the growing clouds of uncertainty that are engulfing the country and the world economy these days. Pressure to reduce interest rates is now higher than it has ever been through the cycle of monetary tightening, and not a single voice is left in the public domain to make the case for continuing with high interest rates.

Another problem is that the government is in no position to afford the kind of stimulus measures that other economies are announcing to compensate for the slowdowns that the fight against the virus necessarily brings. Because of higher interest rates, the local businessmen were reluctant to secure loan from the banks in order to revive or expand their business. Likewise, the banking sector has also been at stake since the popular scheme related to car leasing and home loans lost interest among the potential buyers. Moreover, the car manufacturers had also increased the prices of vehicles and with the higher interest rates it was next to impossible for a client to buy a leased car through a bank.

However, the International Monitory Fund (IMF) has assured some relief for Pakistan as well as some developing countries. Pakistan has received an emergency loan of $1.39 billion from it to cope with the coronavirus pandemic that raised the country’s foreign reserves to about US$12billion. Earlier, the foreign currency reserves had dropped to a four-month low at $10.97 billion on April 10, 2020, according to the SBP’s weekly update. The reserves had partly depleted due to capital pullout worth around $2.69 billion by short-term foreign investors.

The government has tried to make the best of a bad situation and it has partially succeeded in its efforts to contain the damage to the economy as recently noted by some foreign financial institutions. But the task ahead is daunting and calls for constant monitoring of the situation and prompt remedial measures where needed.