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Obstacle to $900m loan removed

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ISLAMABAD:

The centre and four provinces, on Monday, reached a consensus on the implementation of the second phase of harmonisation of sales tax on services, removing a major obstacle in the way of the approval of a $900 million loan from two international creditors.

Speaking to the Express Tribune, Finance Minister Ishaq Dar said, “The National Tax Council (NTC) has successfully built consensus on the harmonisation of the General Sales Tax,” adding that, “The consensus will pave the way for the approval of a second Resilient Institutions for Sustainable Economy (RISE-II) budget support loan worth $450 million from the World Bank.”

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The finance minister chaired the NTC meeting at the Finance Division on Monday.

Based on the World Bank’s approval, the Asian Infrastructure Investment Bank (AIIB) has also promised giving Pakistan a loan of $450 million, bringing the total approvals to $900 million that Islamabad urgently needs to meet its external financing requirements.

Pakistan hopes to secure the WB’s approval by January. Due to the nature of the loan, the money will be immediately disbursed by the Washington-based lender after approval from the WB board.

The main stumbling block in the way of the RISE-II loan has been the lack of consensus between Islamabad and the four provincial governments over the harmonisation of GST on goods and services across the country.

To achieve the consensus, the Federal Board of Revenue (FBR) withdrew its objections to a settlement between the four provinces over the distribution of revenues being collected on franchises, banking insurance, transport of goods, services and advertisement.

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According to a participant of the meeting, the NTC has rectified an understanding reached among the four provinces. The provinces will now determine their revenue shares based on a formula that is grounded on both the origin and the destination of the service, according to the officials.

The NTC also rectified phase-I of the GST harmonisation in which the tax on the restaurant services will be the right of the province while the federal government’s right on toll service has been established.

According to a statement issued by the Ministry of Finance, “The FBR chairman and provincial stakeholders extended their consensus to proceed ahead in the spirit of greater national interest for harmonisation of GST under the umbrella of NTC.”

Finance Minister Ishaq Dar appreciated the stakeholders for building consensus and settlement of the decision regarding the harmonisation of GST for the ease of doing business, stated the ministry.

Finance Minister Punjab Muhammad Mohsin Leghari, Minister of State for Finance and Revenue Dr Aisha Ghous Pasha, SAPM on Finance Tariq Bajwa, SAPM on Revenue Tariq Mehmood Pasha also attended the meeting.

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The meeting reviewed the progress on the decisions of NTC’s previous meetings on the harmonisation of GST across the country. The finance minister explained that in order to ease doing business, the harmonisation of GST is important. Harmonisation of GST will also be a major step towards the completion of policy actions under the World Bank’s RISE programme.

The issue of de-coupling the RISE-II loan from the second Programme for Affordable Energy (PACE-II) loan worth $600 million, however, remains unresolved.

According to the sources, the World Bank’s Country Head Najey Benhussian, on Monday, told the Minister for Economic Affairs Sardar Ayaz Sadiq that the World Bank was willing to separate the approval of both loans provided that Pakistan shows seriousness in the implementation of some of the policy actions.

At present, the Washington-based lender has clubbed the approval of the $450 RISE-II loan and the $600 million PACE-II. At this stage, however, Pakistan hopes to get approval for the $450 million RISE-II policy loan.

While the conditions for the RISE-II loan pertain to the country’s fiscal and macroeconomic framework, involving the provinces too, the World Bank believes that Pakistan cannot achieve macroeconomic stability until its power sector is fixed.

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Pakistan is required to increase its annual base tariff, and implement the increase in electricity prices on account of pending fuel cost adjustments and the two quarterly tariff adjustments for the July-September and October-December quarters of 2022. The power distribution companies have already submitted an application for a Rs2.10 per unit increase in electricity prices for the first quarter.

These conditions are made even more difficult given the high political instability in the country brought on by protests from former Prime Minister Imran Khan’s party, Pakistan Tehreek-i-Insaaf (PTI).

Published in The Express Tribune, November 8th, 2022.

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Privatisation fails to meet objectives

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ISLAMABAD:

The success of Pakistan’s privatisation programme has remained limited to only generating $11 billion in sale proceeds, as the country could not achieve the post-privatisation objectives of improving efficiency and competition, says a new independent study.

The findings come amid the International Monetary Fund’s (IMF) push for approval of the State-Owned Enterprises (SOEs) Bill to improve efficiency and management of public sector firms. The finance ministry has requested the holding of a joint session of parliament to approve the law, after the bill was rejected by the Senate.

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In a study titled “Public Sector Enterprises (PSEs) in Post-Privatisation: Evidence from Pakistan”, authors Naseem Faraz and Dr Ghulam Samad concluded that the key objectives of the privatisation programme had remained unfulfilled. The study has been published in the Journal of Applied Economics.

“Our main finding is that the performance of firms has improved in the post-privatisation period but (it is) statistically insignificant,” said the authors. Privatisation has been carried out with the motive of reducing the fiscal burden and increasing the efficiency of the inefficient PSEs. Since 1991, the sale of PSEs has raised revenues of Rs649 billion, or $11 billion.

The $11 billion has been worked out by applying the exchange rate of the year when a privatisation transaction took place.

Pakistan is one of the developing countries where privatisation of a large number of PSEs has taken place, but the post-privatisation effect is yet to be analysed. Second, rather than focusing on one or a few sectors, the study considers all the privatised PSEs.

The study showed that the performance of a few firms improved in the post-privatisation period but it largely remained negative.

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“In particular, the privatised PSEs in energy, cement and chemical sectors do not show positive gains in the post-privatisation period. However, the telecom and textile sectors have experienced a positive change in the performance of the privatised PSEs.” “Similarly, the results also showed that the efficiency of firms did not increase significantly.”

The authors said that according to their assessment through the Key Informant Interviews, the malfunctioning of regulatory environment led to the market failure that eventually resulted in market exploitation.

Regulations and regulators are captured by the market, bureaucrats, judiciary and politicians. An effective regulatory environment does not exist to force the privatised entities to have higher efficiency and develop a competitive environment.

Government intervention in the regulatory sphere is dominant. Every regulatory authority has a board member from the government. This practice is clearly not aligned with the privatisation regulations.

The government intervention (secretary sitting as a board member) creates conflict of interest by having ownership and management together.

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The privatised banking and energy companies have failed to bring in the benefits of sell-off, according to the study. The process of privatisation and rewards distribution favoured mainly the buyers, while the government faced risk and cost.

According to the authors, the privatised companies earned a higher average rate of return on assets compared to their fully government-owned counterparts, as measured by the total net profits-to-sales ratio.

The higher returns on assets suggest a favourable effect of privatisation. On the contrary, the profitability or productivity measure (net profits-to-sales ratio) was relatively higher for the privatised firms but it was statistically insignificant compared to the period when the firms were fully government owned.

“The privatised firms experience a mild increase in productivity compared to their pre-privatisation period. This difference in performance is not statistically significant.”

Privatisation also did not enhance the efficiency of the privatised firms in terms of increase in sales. It suggested that the efficiency improvement was merely coming through the reduction in cost of production.

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The study identified weak regulators as a reason for the failure to achieve the privatisation objectives.

“Unfortunately, the regulator Pakistan Telecommunication Authority (PTA) did not influence PTCL and other related entities to work in a regulated market environment.”

The role of the PTA is limited to overseeing the determination of market prices. PTCL’s privatisation was not a fair deal. It lost $800 million and also did not improve the market in terms of competition.

“The government sold 26% shares to Etisalat and also transferred the management, which is against the rule, which requires 51% shares,” emphasised the authors.

The government had agreed that Etisalat would pay $2.6 billion by making upfront payment of $1.4 billion and the remaining $1.2 billion in nine installments of $33 million each. For the deal, the government received only $1.8 billion and the remaining $800 million was never paid.

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“The monopoly of the telecom sector persisted despite the privatisation and drove away billions of dollars.”

The privatisation of KESC, now KE, also did not achieve the objectives. Though the main reason of the privatisation was to get rid of the loss-making enterprise, unfortunately the government is paying more after privatisation, according to the study.

Published in The Express Tribune, November 24th, 2022.

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Tractor maker faces legal action over fraud

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KARACHI:

The Federal Tax Ombudsman (FTO) has ordered legal action against a tractor manufacturing company as the Federal Board of Revenue (FBR) reported a fraud of more than Rs10 billion.

According to FBR sources, the tractor company has allegedly committed a fraud of over Rs10 billion under the previous government’s initiative to provide tractors at a lower cost to the farmers.

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As part of the subsidy scheme, the government gave billions of rupees to the deserving and underprivileged farmers for the purchase of tractors.

Sources said that the tractor manufacturer had claimed sales tax refunds on fake documents and flying invoices. The FBR then referred the case to the FTO.

They added that the FBR recommended the application of the Benami Transactions Act while taking legal action against the tractor manufacturer.

“The respondent company misused pay orders of the complainant by issuing bogus and fake sales tax invoices to other persons for obtaining fraudulent adjustment and refund,” a notification of the FTO office read.

The FBR has initiated legal proceedings against the owners and dealers of the tractor manufacturing company for the recovery of money obtained through fraudulent means.

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The Directorate General of Intelligence and Investigation, Inland Revenue has been tasked with investigating the fraud and tax evasion case.

Published in The Express Tribune, November 24th, 2022.

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G7 looking at Russian oil price cap of $65-70

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BRUSSELS:

The Group of Seven nations (G7) are looking at a price cap on Russian sea-borne oil in the range of $65-70 per barrel, a European Union (EU) diplomat said on Wednesday.

Views in the EU are split, with some pushing for a much lower price cap and other arguing for a higher one. The G7, including the United States, as well as the whole of the EU and Australia, are slated to implement the price cap on sea-borne exports of Russian oil on December 5.

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“The G7 apparently is looking at a $65-70 per barrel bandwidth,” the EU diplomat said.

“Poland, Lithuania and Estonia consider this too high because they want the price set at the cost of production, while Cyprus, Greece and Malta find it too low, because of the risk of more deflagging of their vessels, which might mean the G7 has found a good middle-ground,” the diplomat said.

Some 70%-85% of Russia’s crude exports are carried by tankers rather than pipelines.

The idea of the price cap is to prohibit shipping, insurance and re-insurance companies from handling cargos of Russian crude around the globe, unless it is sold for no more than the maximum price set by the G7 and its allies.

Because the world’s key shipping and insurance firms are based in G7 countries, the price cap would make it very difficult for Moscow to sell its oil – its biggest export item accounting for some 10% of world supply – for a higher price.

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At the same time, because production costs are estimated at around $20 per barrel, the cap would still make it profitable for Russia to sell its oil and in this way prevent a supply shortage on the global market.

Brent crude front-month future oil prices initially fell to $86.54 from $87.30 on the news.

Published in The Express Tribune, November 24th, 2022.

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