ADB proposes measures to maximize CPEC benefits
The Asian Development Bank (ADB) has proposed certain policy actions to fully explore the potential benefits of the China Pakistan Economic Corridor (CPEC) and raise income from exports and enhance the fiscal capacity of the government.
A case study on Economic Corridor Development (ECD) in Pakistan released by the ADB on Wednesday proposed to utilize the transport infrastructure built under the CPEC more effectively and efficiently to maximize investment return by converting it into a multilateral initiative.
For instance, it said economic connectivity and integration with the landlocked Central Asian countries could provide the CAREC participating countries with efficient and effective access to global markets through the strategically located Gwadar port.
This could help Pakistan maximize its strategic location and become the economic hub in Central, West, and South Asia. In this context, links with the CAREC countries could be strengthened, particularly on trade-related issues, such as standards, sanitary and phytosanitary measures, customs procedures, rules of origin, e-commerce, and intellectual property rights.
Consequently, Pakistan could increase toll and tax revenues while developing mutually beneficial economic partnerships for boosting export income.
The primary objective of ECD is to enhance the competitiveness and productivity of economies to promote a higher, more sustainable, and inclusive development process. Once ECD is successfully installed, ECD becomes a sound industrial and diversified regional base by attracting investments into sectors, such as manufacturing, for both domestic and export markets. Through the process, countries with successful ECD become competitive and productive, which results in poverty alleviation through job creation.
Meanwhile, the study also called for expediting the development of the nine Special Economic Zones (SEZs) planned along the CPEC routes.
Given their high-risk and high-return nature, SEZs should be developed based on global best practices and local knowledge with an aim to attract China’s export-oriented sunset industries.
China’s wage rise and the policy shift from low-end manufacturing to technologically advanced manufacturing have made the production of export-oriented goods and services unfeasible in China. The Chinese government, therefore, is expected to relocate these industries to other developing countries. Pakistan could be well-positioned to negotiate for the relocation of such industries on mutually beneficial terms.
The recent consultation between Pakistan and China on the framework agreement for industrial cooperation through business joint ventures and SEZs development is welcome and could promote Pakistan’s industrial activities. Moreover, the Pakistan government notified in December 2020 a high-level Special Technology Zone Authority with its Board of Governors headed by the Prime Minister.
This should help foster the development of technology zones and high-tech industrial parks to help revive and diversify Pakistan’s re-manufacturing and exports.
The study also suggested undertaking structural reforms to unleash the potential for private sector development.
Structural reforms to support the private sector will enhance Pakistan’s competitiveness, productivity, and access to the global market.
They could be critical to reducing the large trade deficit and boosting the foreign exchange reserves. Possible reforms could include rationalizing business regulations and taxation; improving trade facilitation and logistics; augmenting human capital development and labour market efficiency; strengthening financial inclusion along deepening the capital market.
In addition, the study also called for broadening the tax base to unleash the country’s tax revenue potential while improving the perceived fairness of the tax system.
The International Monetary Fund estimate suggests that Pakistan’s tax capacity is about 22.3% of GDP, implying a tax revenue shortfall of more than 10% of GDP in FY2019. Pakistan’s estimated tax effort at 0.52 in FY2019 is significantly below the average of comparator developing countries (0.64) and high-income countries (0.76).
The government’s recent measures to broaden the tax net are steps in the right direction. But more could be done by implementing a rigorous reform agenda to broaden the tax net, such as cutting tax concessions and exemptions; addressing structural weaknesses in fragmented tax administrations; and improving economy-wide tax compliance.
In 2014, the Government of Pakistan launched the China–Pakistan Economic Corridor (CPEC)
project. The CPEC’s planned investments amount to about $62 billion by 2030. If CPEC is successfully implemented, Pakistan can harness its strategic geopolitical location, improve its regional and international economic connectivity, enhance industrial development, and become an economic hub for Central, South, and West Asia, the study added.
The CPEC is an initiative to build economic connectivity and regional integration between China and Pakistan. However, the CPEC alone will not bring optimal results. Structural reforms for private sector development are needed as well.
Also, tax reforms are essential to broaden the tax base and enhance the perceived fairness of the tax system. Infrastructure built under the CPEC should be fully utilized to expand trade and regional cooperation. Furthermore, the government should expedite the development of the nine SEZs planned along the CPEC routes.
The study added that the ECD can bring about certain perceived benefits including improved national and regional connectivity resulting from faster, cheaper, and easier movement of people and goods within and across borders;
reduced cost of national, regional, and global trade, and reduced poverty as a result of improving poor people’s access to economic opportunities, lowering the cost of goods and services they consume, and providing better access to essential infrastructure services such as electricity.