How difficult is to do business in Pakistan?
The World Bank has released its annual report “Doing Business 2018” that contains information on business regulations in 190 countries of the world. It measures how close each economy is to global best practices in business regulations. It has ranked Pakistan at 147th position on its Ease of Doing Business Index. In its previous report i.e. ‘Doing Business 2017’, the World Bank had ranked Pakistan at 144 out of 190 countries. Hence, Pakistan has slipped three positions this year. In South Asia, Bhutan has been ranked at 75, which is the highest-ranked economy in the region, followed by India at 100 and Nepal at 105. Pakistan with the 147th position is at number 6 in South Asia, followed only by Bangladesh 177 and Afghanistan 183.
“Ease of Doing Business Index” provides an important yardstick, which investors consult in order to decide whether a particular destination is suitable for investment or not? Needless to mention that total investment in Pakistan was Rs 5,026 billion (US$ 48 billion) in 2017 and investment to GDP ratio was 15.78%. Fixed investment was Rs 4,517 billion (US$ 43 billion) and fixed investment to GDP ratio was 14.18%. On the other hand, private investment to GDP ratio was 9.9% and public investment to GDP ratio was 4.28%.
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. Due to multiplicity of taxes, individual taxpayers and companies had to make 47 tax payments every year which consumed 311.5 hours, according to the report.
Furthermore, Pakistan lost 23 positions on the indicator of getting credit for doing business as its position was 105 this year, as against 82 last year. It was because amidst the government’s growing budget-financing needs, very little capital was left for the businesses to expand.
Similarly, the country remained at 167 on the index of getting electricity. There were about six kinds of procedures that an applicant had to complete for getting a connection. There are 15 types of procedures that require 252 days for an investor to get a construction permit. For registering a property, about 155 days are required, as per the report.
Last year, Pakistan was the most improved economy with 10 places higher on the Ease of Doing Business Index. It was mainly because Pakistan was the sole economy in South Asia to reform property transfers. Under the Land Records Management and Information System, a programme has been developed and deployed to strengthen the capacity of land administration institutions in Lahore. During a five-year period, the project deployed an automated land records system and improved the quality of services provided by the land agency.
Another reform measure was that Pakistan improved access to credit information guaranteeing, by law, borrowers’ rights to inspect their own data. The credit bureau also expanded the borrower coverage. This reform applies to both Karachi and Lahore.
Pakistan made trading across borders easier by enhancing its electronic web-based customs platform. This reform applies to both Karachi and Lahore.
In order to boost investment activity in the country, Pakistan has to improve on Ease of Doing Business Index that requires drastic measures in the overall economic system, especially in the areas of tax policy and tax administration.
There is ample room for improvement and concrete measures are needed to perform better on a number of socioeconomic dimensions. On the gender index, Pakistan’s performance is dismal and at the lowest ebb. The economy does not offer equal opportunities to male and female labour force for earning. Even the business environment is hostile toward females. There is a wide gap between literacy rate for males and females in the country. Among others, access to education is very difficult for females. Even the parents are prejudiced toward teaching their daughters as they prefer to invest on sons.
Increased violence at national level particularly since 2011 is the primary source of damaging the business environment. Violence happened in many forms such as urban crime, terrorism, trafficking, civil war, etc. Karachi, Pakistan’s largest city and the hub of its economic activity, has seen massive increase in brutal and senseless barbarism in the past decade that has caused considerable damage to business environment. Violent actors such as terrorists and gangsters were at large in the wake of weak institutional capacity so much so that a portion of business community, discouraged by the poor law and order situation in this metropolis, started transferring business capital to other countries for better returns on their investments. Such a reaction always looms since the security situation tends to modify the decisions of the investors – both domestic and foreign. An uncertain environment is damaging for long-term investment activities.
Undoubtedly, terrorism has inflicted huge damage to peace and security in Pakistan. In fact, Pakistan is the only country that has suffered a lot, in its fight against terrorism; in terms of loss of human lives, finances and destruction of physical infrastructure, etc., more than any other country of the world. There happened deadly terrorist attacks on public gatherings, educational institutions, airports and army installations that unquestionably are contributing to damaging business environment. Both domestic and foreign investors shy away from investing under such turbulent situations.
The convoluted tax system also has a great bearing on the business environment. If too many hours are spent on paying taxes, filing tax returns, maintaining records and obeying other administrative orders, business activity surely gets discouraged. It is empirically found that investors shy away from making investments in a country where either tax burden is relatively high or tax system is unfair and obscure. Despite the fact that the Federal Board of Revenue (FBR) has adopted a series of measures such as online registration, e-filing, e-payment and e-notices to facilitate firms for filing and paying taxes, still one wonders why the country is ranked on such a low position among 190 countries in terms of time to comply tax procedures – even higher than world average. For example, taxpayers in the country require considerably more hours for paying taxes. On the other hand, average number of hours required for paying taxes in the Asia Pacific countries is much lower. It means either Pakistani tax laws are not so simple to comply with easily or the tax officials are not facilitating the taxpayers in filing returns and paying taxes. The tax authorities have to do more to improve tax environment in the country and facilitating measures are needed to improve tax culture in the country.
Other factors that have direct impact on business environment include uninterrupted power supply, adequate infrastructure, smooth supply of inputs, better marketing system, etc. Acute power shortage has also been discouraging the business activity.
Above all, widespread illiteracy is a hindering factor for promoting shared values and societal cohesion. Low gross and primary enrolment ratios, sizeable gender gap at primary level, less than regional overall adult and female literacy rate and out-of-school children are the challenges the state is confronted within the education sector. Illiterate people are easily exploited by violent actors with offers of some petty gains. Improved literacy rate is also essential to enhance tolerance level in the society. In the past, we have seen that the country has been deprived of the invaluable services of leading doctors, engineers, educationists, politicians, scholars and researchers in the wake of growing religious intolerance.
In a nutshell, the state has to establish peace through improving law and order situation so as to provide enabling environment for business firms to operate over a longer period of time. It needs concrete measures such as improving education to integrate the society that has been alienated in several sects on religious grounds and is posing serious challenges to ensure peace and to deliver security as a public good. Additionally, it is the need of the hour to develop tax culture wherein the taxpayers must be provided facilitation in following tax procedures. Simplification of tax laws is also needed for broadening tax base. Of course, there are many other policy issues that must be addressed at government level in order to create an environment that is conducive to firms so as to improve position on Ease of Doing Business Index.