Daily Times

Pakistan needs to withdraw unnecessary subsidies and tax exemptions given to the export-based industries, mostly on energy prices, experts said.

“Subsidies have adverse effect on industries and damage their competitiveness,” said Dr Ishrat Hussain, former governor of State Bank of Pakistan (SBP), while talking to WealthPK.

He said that subsidies and tax exemptions are short-term solutions, not long-term ones. “Subsidies and tax exemptions cannot guarantee competitiveness and high growth of an industrial sector,” he added.

Dr Ishrat was of the view that concessions to the industry, especially on energy tariffs, is catastrophic for the economy of a country like Pakistan which is already dependent on loans to meet its budgetary expenditures. He said that despite pumping billions of rupees in export-oriented industrial sectors each year in the name of subsidies and concessions, the country’s exports are still below expectations.

He suggested the government reorganise the subsidies for the industry. “There should be targeted subsidies and tax exemptions for industry if necessary, and that too for short term,” he maintained.

The former SBP governor said that International Monitory Fund (IMF) has also objected to the subsidies provided by the Government of Pakistan to various sectors and to the public.

“Pakistan must fulfil its commitments to the IMF to get back into the lender’s programme sooner,” Dr Ishrat said, adding that abolishing or reducing the subsidies of industries is important for the economy in the long term.

Dr Aneel Salman, Chair Economic Security at Islamabad Policy Research Institute (IPRI), was of the view that subsidies have to be designed carefully.

“Subsidies may lead to inefficiency and protectionism instead of enhancing competitiveness and growth,” Dr Aneel said, adding that subsidies also result in higher inflation because of their negative impact on other sectors.

He said that Government of Pakistan provided Rs29 billion in subsidies to sugar mills from 2015 to 2020, while this sector submitted Rs22 billion as taxes during the same period.

“The government doesn’t need to subsidise rich sectors like sugar mills,” he emphasised.

He was of the view that subsidies and tax exemptions were making industry more dependent on government instead of making them efficient and competitive.

Dr Aneel said that export-oriented industry is consuming around Rs100 billion annually in subsidies and concessions on electricity and gas tariff.

“These subsidies to the industry are rather a burden on national exchequer if we analyse their long-term repercussions,” Dr Aneel said, adding that the government is borrowing excessively to absorb the cost of these concessions.

He said these subsidies of electricity and gas tariffs are among the reasons of circular debt in the energy sector of the country.

The Government of Pakistan in October last year announced a revised subsidy plan for five export-based industries. According to the plan, per unit electricity cost for these five industries was agreed at Rs19.99 per unit. However, the worsening economy forced the government to suspend the electricity package in March 2023.