(BE2C2 Report); IRSHAD SALIM — Some 9 million Pakistanis are now abroad and in two different broad categories: Pakistanis working overseas mostly in the Middle East (NICOP card holders), and those who have switched citizenship or hold dual nationality, and are living and working abroad over the years (Pakistani Diaspora holding POC cards).
Almost 99 percent of Pakistanis working in GCC countries are NICOP holders and according to our best estimate do not need an amnesty to bring monies back. They regularly remit most of their disposal income with no tax on their income in the host country and no tax to their families in Pakistan as remittances received). It’s quite plausible that some of the NICOP holders moved to the region and have shifted their “residency, wealth and assets” and maintaining the status quo.
As for dual nationals (Pakistani Diaspora, POC holders) they are mostly concentrated in North America, UK and EU countries with some working and living in the Middle East. Yes some of them could benefit from the amnesty if they wanted to on the assumption that they may be culpable of money-laundering, having acquired ill-gotten wealth by earning beyond their known means—under Pakistani laws. However, being dual nationals, they may not opt and could continue to keep their assets abroad unless the long arm of the “country-of-origin laws” proved beyond any reasonable doubt that these individuals were indeed involved in money-laundering, tax evasion, etc.– but that would be a long-haul lego exercise with diminishing returns.
The brighter side of two categories of Pakistanis abroad combined is that their (A) total disposal incomes, net worth, credit worthiness and proven track record of eagerness to remit or invest in home country far exceed the (B) total amount of undeclared monies and hidden assets of Pakistanis known to exist at home and abroad.
Also, “A” is known and verifiable– may be risky to incentivize and monetize, but the risk can be quantified and therefore mitigated. But “B” remains unverifiable and subject to many encumbrances if verified– its quantum remains elusive to-date, and therefore subject to uncertainty for all sides. Hence, it cannot be quantified and therefore cannot be mitigated.
Metaphorically put: A is a behemoth of low hanging fruits visible and reachable for the country’s economic managers. B is a cloud, a rainbow with pots of gold at its end to chase, and now considered a gigantic cherry tree which would however require fleets of cherry-pickers and aerial plucking after special glasses are worn to discern the trees’ and its fruits’ visibility.
According to our estimate, A runs into several billions of dollars over and above B’s total elusive figure and still counting.
“A” could be Pakistan’s Fort Knox. How?
We figured the number among 9 million OPs minus Middle Eastern OPs (who send their disposal income through remittances) to be close to 4.5 million and mostly in the Western Hemisphere of the globe. Their combined potential which Pakistan can harness is in the range of $1.125 trillion to $1.5 trillion (not counting their regular remittances) conservatively speaking.
At 50 percent probability, the expected value (EV) of their available investment potential is in the range of $563 billion to $750 billion. Most importantly the scenario is predictable and therefore the outcome can be positively managed.
As compared, the amnesty-based fee which Pakistan government may be able to collect is theoretically: $800 billion (elusive and maximum figure) x one-time 5% = $40 billion. Using 50/50 probability it may have expected value (EV) of $20 billion.
Ironically, this figure by and large may have been considered a “low hanging fruit”. The feel-factor is aromatic but fails to meet risk assessment thresholds on public policy criteria as well as on tradeoff basis.
So why the amnesty has been announced with only few months remaining for the elections being considered “mother of all elections” by many politically-tilted analysts and observers?
According to reports, the Supreme Court may take up the amnesty announcement as an issue of public interest– the matter will then run through court proceedings with a verdict hard to predict.
Pakistan’s trade deficit has already accumulated to $27.3-billion in the cumulative nine-month period of the current fiscal year (July 2017 to March 2018) and surpasses the amount which was projected for the entire fiscal year that ends in 3 months– June 30.
The deficit (gap between exports and imports) has exceeded to 106% of the government’s annual target of $25.7 billion, according to official statistics released by Pakistan Bureau of Statistics (PBS) on Monday.
The value of goods imported exceeded the value of those exported by $27.3 billion during the nine-month period, the national data collection agency has reported and the imports may shoot up to $54.3 billion against the target of $48.8 billion for the whole year.
At the same time, while exports may also surpass the target of $23.1 billion but to a maximum of $24.6 billion. The growth may therefore remain insufficient to finance the gap in current account deficit.
While imports were almost 16% higher than the import bill booked during the first nine months of the last fiscal year, export receipts are still 260% less than the import bill during the period.
The higher-than-officially-projected trade deficit in just nine months will therefore have adverse implications for both the current account deficit and foreign currency reserves.
The exports have lately started to pick up on the back of combination of administrative and policy actions announced last year, suggesting that exports are highly susceptible to short-term incentives, and the growth in exports, as a result of such incentives, is unlikely to be sustainable.
The trade deficit worries economic managers. Its trickle-down effect on performance of stock exchange Index is another issue the government and the business & commerce sector may have to contend with.
Moreover, according to the central bank, Saudi economic reforms may further upset remittance inflows crucial for balance of payments.
Pakistan may attract maximum remittances of $20.5 billion from overseas workers in FY18 that would be slightly lower than the target of $20.7 billion.
Pakistan is expected to book a current account deficit of around $16 billion during the current fiscal year against the government’s target of $9 billion. This will have direct implications for foreign currency reserves that have slipped to $11.7 billion by end of March and likely to slip further.
Therefore, a yawning trade deficit, balance of payment issue and dipping foreign exchange reserves will likely continue the rising trend of volatility going forward and into the next fiscal year starting July 2018.
The federal government took a number of measures including levying regulatory duties on hundreds of import tariff lines, devaluing the rupee by 10% against the US dollar to curb imports, borrowing money from international market. More importantly it is now wooing Pakistanis home and abroad to pay one-time fee on their hidden and stashed (undeclared) wealth that they may have locally and or offshore. The government whose term expires in a couple of months last week also announced measures to broaden the tax base to enhance revenue collection.
Notwithstanding how the announcement will eventually play out in months ahead and where the chips may ultimately fall, independent analysts say the move is well-intended and may have been made in good faith but it’s kind of too little too late giving the timing of the announcement and the capability and capacity issue to implement it.
Only a new government expected to come in late summer or early fall, will have the authority to formalize it–Abbasi said he is exercising his executive power by promulgating a Presidential Order to legalize it which however will run its course only for next few months.
Then comes the elections and predictably the issue would be another hot potato tossed around by the politicos and the vested interests until it smells like a rotten egg– in fact the two major opposition parties (PPP, PTI) have already given it a thumbs down calling it an election gimmick, polemical in form and substance and therefore a non-starter. So it’s “not in the national interest” for these parties to support such a move,” quipped one independent analyst tongue-and-cheek.
In fact the country’s economy inhibited by a dwindling tax base and rising practice of hiding assets inland and abroad have indeed become a combined national security issue, many observers say. Sooner than thought these parties will be forced to handle this bull by the thorn– it’s no longer dust under the carpet, they added.
The big bang announcement could therefore be a whimper in months ahead if successive government does not ratify it through its executive branch and then the parliament, unless PML-N ruling party to which Abbasi belongs to, is sure it will retain power and be able to pass on this baton to its next team.
PM Abbasi also announced plans to increase tax base and at the same time restructured the tax brackets for the salaried and self-employed individuals.
For the gainfully employed individuals drawing salary:
Of up to Rs 100,000 a month, they will be exempt from income tax– a happy news but does not enhance the tax base.
Those drawing salary between Rs 100,000-200,000 per month will be taxed at 5% only– another incentive to tax-payers but does not increase headcount of tax-filers or tax-payers.
Salary between 200-400,000 per month will be taxed 10%– ditto as mentioned above.
Above 400,000 per month salary being drawn by individuals shall be taxed 15%– ditto as stated above.
There’s one silver lining in the announcement regarding broadening of tax base currently comprising only 1.261 million income tax return filers with only 700,000 tax payers.
All CNIC numbers will now be considered as NTNs. In effect, millions of Pakistanis holding CNIC cards will automatically be considered as potential “tax filers” and the iron wall between NADRA and FBR may give way to seamless exchange of data and info on who is drawing/depositing monies from banks and whether they are submitting tax returns or not– whether the money is taxable or not.
Good move and a better late than never initiative while rest even if made in good faith could be too little too late. Miracles though happen.