To analyze current economic shortfalls we'll have to go through it as these are the basic sources available to us through budgetry tones!!!


Pakistan Budget for the year 2009-10


is on its way and no one is much concerned as there are a lot of other issues that’s require immediate attention. In any case, we think that we need to initiate a blog post that we will keep updating regarding the news related to Pakistan Budget 2009-2010.

ISLAMABAD: The federal cabinet has approved the upcoming budget proposals on Saturday. The cabinet met with Prime Minister Syed Yousuf Raza Gilani in chair to review and finalize the suggestions of upcoming budget for fiscal year 2009-10.

The government is set to unveil the consolidated budget with an outlay of over Rs2.9 trillion based on uncertain external flows.

The proposed budget has an allocation of Rs 724 billion for debt servicing, funds for which will be financed through local and external borrowing. Non-development expenditures are estimated at Rs 1.55 trillion, Rs 621 billion have been apportioned for the Public Sector Development Programme (PSDP) 2009-10 and the allocation for the defence budget is likely to be around Rs 343 billion.

Pro-Pakistan Comment: Well in line with our expectations. It is very much justified keeping in view the current situation

The budget proposal estimates foreign and domestic debt servicing at Rs 655 billion, Rs 70 billion have been earmarked for the Benazir Income Support Programme (BISP), allocation for the rehabilitation of the internally displaced persons (IDPs) is likely to Rs 50 billion, while the Earthquake Reconstruction and Rehabilitation Authority (ERRA) is likely to get Rs 25 billion for the year 2009-10.

According to the government’s estimates, expenditures in the coming year will amount to Rs 745 billion.

Another proposal considered in today’s special cabinet meeting is a proposed increase in the salaries of government officials by 20 percent, or an alternate remedy of merging two ad-hoc relief allowances in the pay scales and than allowing the 20 percent increase. According to another proposal included in the planned budget, government employees who retired before June 30, 1997, will get a 25 percent increase in their pension and those who retired on, or after July 1, 1997, will allowed an increase of 20 percent.

The tax collection target is likely to be set at between Rs 1.380 and Rs 1.390 trillion, with new taxes and duties amounting to around Rs 100 billion. The existing petroleum development levy may be replaced by a Carbon tax of around Rs 6 to 12 per litre on petroleum, oil and lubricant products, likely to be imposed from July 1, 2009.

Two new taxes are to be imposed under the provincial legislation - 16 percent general sales tax is to be levied on 14 services sectors and 10 percent capital gains tax on real estate sector is also expected.

Pro-Pakistan Comment:This will surely result in huge divestment from the Real Estate of Pakistan. I wonder what made the government impose this tax?

In the upcoming budget 2009-10, the federal government is likely to impose five to 10 percent duties on air conditioners, deep freezers and refrigerators, and around five percent on the import of and local sale of tea and coffee. Two percent additional duty on cosmetics and perfumes, a 10 percent increase in the duty on cigarettes and a five percent additional duty on the import of cigarettes is also expected.

The government is also likely to tax the CNG business with the removal of the 16 percent subsidy on the import of CNG kits and equipment and may also likely withdraw the zero rating tax facility for the pesticides, stationery and dairy products sectors.

Withholding tax on cash withdrawal from bank accounts and a five percent duty on the registration of new cars are also likely to go. The 16 percent GST on computer software and exclusion of some sectors from Presumptive Tax Regime (PTR) are also likely.

Thanks to everyone who have earlier dropped their comments on the topic of Pakistan Budget 2009-2010. We will be looking forward to same response once the budget is made public today.

Excerpts from Budget Speech (highlights)
Budget speech started by Federal Minister Hina rabani Khar
We missed some initial part since internet was giving tough time. Currently Agriculture sector in progress
Excise duty on cellular down to 19%
Excise duty on CKD down by 5%
Regulatory duty on handsets of Rs. 250 abolished
Rs. 50 bn allocated for IDPs
Salaries to be raised from July 1
Rs 264.9 bn foreign aid expected
Petroleum leyv for development to end in Fy10
Witholding tax on domestic vehicles ended
SIM activation charges reduced from 500 to 200
Most importance to be given to electricity and gas
Corporate and rehabilitation act in final stages for Industrial sector
Industrial relations act approved by cabinet for relationship between employer and employees
NHA to get 40.2 bn (increased from 36 bn)
Allocation for agri sector to be 18 bn
Health secotr to get 23 bn (61% increase)
Fata payables for PEPCO to be paid by Govt
Current excise duty on cement to be reduced
Souther Punjab to get power project
Govt approves 2.2 bn for enviornment
Education ministry to spend 2 bn on developing community schools and improve primary education
6419 new towns will be given electricity
4 bn allocated for Diamer Bhasha Dams
11 bn to be spent on PMs disease control program
Tax on Ciggerattes to be increased
Increase in CVT to generate 15 bn in revenue for FY10
Benazir Human rights commission to be set up for Human rights
National internship program to get 3.6 bn for 30,000 internships for youth
583 millions for sports
Govt. employees to get 15% raise in salaries
15% adhoc relief allowance for army men on western borders (this will finish in december, since it is adhoc)
Education to get 31 bn
GDP growth in fy10 expected to be 3.5%
Rehabilitation of earthquake affected to continue. 25 bn allocated
CVT on real estate to increase to 4% from 2%
Clean water allocation 47.2 bn
Hina Rabbani Khar ends her speech with a positive note

Economic Crisis and its implications in pakistan


Yes, the world is facing global financial crisis and credit crunch, and Pakistan is facing economic crisis too. It seems simple. Isn’t it? While our Prime Minister Yousaf Gillani has been busy attending financial summits in Davos (Switzerland), one would think that our economic crisis is linked with the global one that started with collapse of subprime housing mortgages in USA. Not so fast; the economic crisis prevailing in Pakistan has no relation with the global financial crisis whatsoever no matter what our politicians tout about. Yes the crisis in our country can deepen due to the global one since our donors (read masters) will not have the money to give us aid or the foreign investors will not be investing in Pakistan right now. But apart from that the present crisis that we face today is largely due to our incompetence. Let us see how we got ourselves entangled in this cobweb and how our SOS call to IMF will affect us in the long run.

Let me take you back to the happy times under the general and his imported banker Shaukat Aziz. The growth rate achieved in 2003-04 according to the governmental books was nearly 8% largely due to the advancement in automobile sector (45%) and the banking sector (29%). Naturally the average growth rate achieved was high while the main legs of our economy manufacturing and agriculture were crippling low. Who cares? We were filling our treasuries. Exchange rate was also kept stable and Rupee was allowed to appreciate vis-à-vis dollar and that made imports cheaper and attractive. We had money that we had to spend somewhere, so we started importing things. In other words we over liberalized imports, especially non-essential imports (even IMF says that we were more liberalized than India and China at that time). The government started import intensive consumption with focus on stock and real estate and our domestic production sector was largely ignored. Our import bill $10 billion rose to $35 billion in just 9 years, although the rising oil prices also contributed in it. While our trade deficit crossed dangerous level of 5% of GDP we kept financing that through foreign capital inflows. With the World Bank estimate 77 million people in Pakistan are food insecure, the policies of the previous government was putting cell phones in the hands of those who did not have enough to eat. As a result soon we were out of money and we were facing grave problems of account deficit, trade deficit and inflation, and that was the time when we were knocking at the doors of IMF.

We got us approved a $7.6 billion package that would be disbursed over 23 months. But this candy comes with a great price. IMF requires Pakistan to increase taxes to raise interest rates to meet the deficit. In other words they want us to tighten our belts, something we ought to have done a long time ago. Central Bank has already pushed the interest rates to 15% in last December. While countries around the globe are cutting rates to meager values to attract the investors, we have to swim against the tide. .Others are scrambling to boost demand to protect their industry and jobs, we are trying to curb it. This will hit the manufacturing sector since it largely depends upon bank borrowings and consequently we will have a slower growth in the times to come. Rising prices will make our products less competitive in global markets and decline in production will follow. The present energy crisis is due to the shortage of cash and rise of circular debts. WAPDA and KESC do not have the money to pay IPPs (Independent Power Producers), while they are short of cash to buy oil to fire. Our generators are producing much less below their capacities. Everybody in the chain is short of cash right now yet many still complain to the government about the rising petrol and gas prices. Some suggest the services sector that comprises 55% of the total economy should be taxed more instead of going after already handicapped agriculture and manufacturing. We have a hired banker Shaukat Tareen at the helm of the affairs. Let’s see how he plays the ball game differently otherwise I am quite skeptical about bankers being at the reins of our economy.

__________________
“The greatest discovery of all time is that a person can change his future by merely changing his attitude.”

ECONOMIC CHALLENGES FACING PAKISTAN
DR. ISHRAT HUSAIN


There is almost a consensus that the major economic challenges facing
Pakistan are rising poverty and unemployment, heavy external and domestic
indebtedness, high fiscal deficit and low investment. The debate has so therefore
focussed on the means to face these challenges and particularly on the ways to bring
about economic recovery.
The current debate about economic recovery in Pakistan has surprisingly
boiled down to a number of simplified observations. A group of commentators place
the blame squarely at the doors of the IMF and World Bank and this Government’s
sense of docility, submissiveness and helplessness against this powerful instrument
of Western (read: American) domination. Another group of ever dissatisfied and
perpetually critical writers who find every Government to be inept, attribute
malafide motives and lack of decisiveness in taking bold measures. A third group of
well-intentioned and economically literate observers, provide partial solutions
which make perfect sense if each is taken in isolation but can break the back of the
proverbial camel if they are lumped together. I would submit that there are no easy
solutions and the decisions made in choosing any one of the possible options involve
trade offs and choices, which in turn will create a different set of winners and losers.
I will like to focus today on a question which is uppermost on every body’s
mind: why have not things improved during the last 15 months according to
popular expectations?
2
First the decade of 1990s was a lost decade as far as Pakistan’s economic
development was concerned. Frequent political changes and lack of continuity in
policies, poor governance and the last May 1998 developments had together created
very difficult economic conditions in the country by October, 1999. Per Capita
economic growth rates had slided to 1 – 1.5 percent Investment rates had declined
from 20 to 15 percent of GDP, poverty had doubled from 17 to 34 percent, external
debt had doubled from $ 18 billion to $ 36 billion, debt servicing had risen to a level
where it claimed 56 percent of revenues, fiscal deficits were averaging about 6
percent of GDP, Development expenditures, particularly on education and health,
were curtailed by one half from 6 percent of GDP to 3 percent. In 1996 Pakistan
was declared the second most corrupt nation in the world. The challenge of
averting this slide and move the economy out of such critical conditions therefore
was extremely daunting. The task was made even more difficult by the initial
reaction of the international community to the change in the government and the
conflicting demands of various segments of population. Accountability, whereby all
those found guilty of corruption and malpractices in the past, was one of the major
demands articulated by the public at large and the media. But this created a
tension with the objective of economic revival as the businessmen and bankers felt
threatened by such moves.
The lingering dispute with Hubco had during the preceding three years,
damaged the investor friendly image of Pakistan. Foreign currency deposits of nonresident
Pakistanis had been frozen in May, 1998 and had antagonized this
3
important class of investor. Thus investor sentiment did not take a turn for better
and domestic and foreign investment which are key for economic revival did not
flow in to the levels we had expected.
Second, we have to decide as to whose expectations we are talking about.
Pakistan’s credibility was quite low both externally and particularly among the
International Financial Institutions and also domestically with the general public.
This Government had to make a policy decision whether it will seek assistance from
the International Financial Institutions or not. Until June 2000, the country was
able to manage its finances without any recourse to International Financial
Institutions. We serviced our debt and external obligations on time. We liberalized
our foreign exchange regime and restored the conditions prevailing before May
1998 without receiving any assistance from abroad. The exchange rate remained
stable without any major volatility. Interest rates were lowered by 4 percentage
points. Despite this, domestic investors remained shy, private sector demand for
credit was insignificant and the overall pace of economic activity did not pick up to
make any dent in unemployment which had risen during the last three to four years.
The most difficult challenge faced by the country today in the short term is
external liquidity problem i.e., the ability to meet its current obligations such as
imports of goods and services and meet all debt service obligations at the same time.
There is a gap between external receipts and external payments of about $ 2.5-3
billion annually for the next few years. To meet this gap Pakistan has to reschedule
4
its debt service obligations and find ways to obtain new concessional loans after
curtailing its expenditures and maximizing its revenues.
Those who accuse the present economic managers of toeing the lines of the
IMF, being totally submissive to their dictates and (in the eyes of some) acting as
agents of these institutions forget a simple fact : Pakistan has had more than half-a
dozen economic managers during the past 10 years, and some of them were
popularly elected politicians, others were technocrats or former bureaucrats who
had no past relationship whatsoever with the IMF or the World Bank.
Unfortunately they had to enter into as many as 11 agreements with IMF during
past 10 years, had to follow the same course of action and the same policy
prescriptions, even at the time when we did not have the urgent need to reschedule
Pakistan’s external debt. These managers also had the luxury of using foreign
currency deposits of residents and non-residents to finance the external deficit. They
borrowed short-term commercial loans to build up reserves. I am not trying to be
defensive but am laying out the facts that since May, 1998, the country has lost one
important source of external liquidity i.e., foreign currency deposits. This
Government has decided not to borrow short-term commercial debt for building up
reserves. Home remittances through official channels are down by $ 500 million
annually compared to the pre-May 1998 period. Foreign investment flows are down
to less than $ 400 million compared to average flows of $ 1 billion. Oil import prices
have shot up from $ 14-15 barrel to $ 28-$ 30 barrel and the oil import bill has
doubled from $ 1.3 billion to $ 2.6 billion in just one year. During the first half of
5
the current fiscal year, we have already imported oil worth $ 1.7 billion. Despite the
15-20 per cent increase in volume of our textile exports, the unit value of our
exports are down by 7-10 per cent on average. In this scenario, how can any one
keep the wheel of the economy moving in an orderly manner without recourse to
relief or injection by the International Financial Institutions. Japan and other
bilateral donors have also not come to our help as they had before May 1998.
No economic manager worth his grain will like to have his hands tied down
by external agencies, while he has to deliver according to the expectations of
domestic constituents. The sooner we are able to ween ourselves off the IMF
programmes the more liberated will be the economic managers of this country in
pursuing an independent course of action, which balances the interests of the
common man, the requirements of the global economy and, at the same time,
follow a prudent growth – oriented set of policies. It is not that we are not
committed to macro economic stabilization or removal of distortions from the
economy. But we need the flexibility to do so. I can assure this audience that the
present global environment in which we are expected to produce instantaneous
results is highly constrained and does not allow much room for maneuver.
As the debt rescheduling period was coming to an end in December 2000,
and the Government’s capacity to fully service its external debt had not improved
during the last 2 1/2 years period there were two options available – unilateral
moratorium or further rescheduling. The option of unilateral repudiation or
moratorium would have caused such enormous hardships for the country that it
6
would have been simply unbearable. How many of us could have tolerated the
prospect of PIA planes being seized at international airports, the requirement that
all our imports must be paid for in cash and the inflation rates running at 30-40
percent with scarcities and rationing all around. I do not think any Government
would like its citizens to go through this scenario. We therefore rejected this option
as we came to the conclusion that the situation would have been far worse and the
overall suffering to the population would have been more severe.
The second option of approaching the IMF has been severely criticised.
Many learned commentators have questioned why the economic team had to yield
to all the conditionalities imposed by the IMF. Why did not the country negotiate
softer conditions? As I mentioned our only motivation for entering into an
agreement with the IMF was to secure rescheduling of Pakistan’s external debt.
To retain its reputation as a vigilant watch dog, the IMF insisted, before
reaching an agreement, on tougher measures and upfront actions from the
government as we had displayed a poor track record in the past. Their management
was of the view that Pakistan had very low credibility as successive governments
had agreed on a number of conditions but these were either not fulfilled or partially
fulfilled. They wanted the present government to implement all those conditions as
prior actions before they could take the loan proposal to their Board. These prior
actions consisted of the free float of rupee, (without intervention by the State Bank
of Pakistan), agriculture income tax, GST on retail trade, GST on services,
deregulation of petroleum imports, linking domestic POL prices to international
7
prices, increase in consumer prices of gas, adjustment in electricity prices, widening
of the tax base, removal of the subsidies. Naturally the Government had little
choice – if it did not take these actions an agreement with the IMF could not be
reached and thus rescheduling would not have been possible. In other words, we
had to make up for our past lapses – all in one go. There are many on-going time
bound conditions that have to be met during the next 9 months, which are structural
in nature such as privatisation, restructuring of public corporations, financial
sector reforms and civil service reforms. While the fulfilment of these prior
conditions and conclusion of agreement with the IMF has restored the credibility of
Pakistan vis-a-vis International Financial Institutions, Paris Club and G-7
Governments and improved the market sentiment among credit rating agencies and
fund managers abroad, I must confess that it has not been widely welcomed
domestically.
The reasons for this domestic reaction are understandable. There has been
very little investment in the country for the past several years with the result that
unemployment has been rising. Fixed income groups – salaried class, pensioners
etc., have not been granted any relief in the form of salary adjustments.
Depreciation of the Rupee in the last several years has made imported goods and
inputs quite expensive. Public sector investment has declined from 6% of GDP to
3% and lack of adequate tax revenues made it impossible to increase public
spending and offset the slack created by low private investment. Government’s
highly desirable tax survey and documentation would widen the tax base and bring
8
in additional revenues but not immediately as it will take some time to complete the
process and show results. The first year was devoted to get this survey accepted and
put in place. In the meanwhile, those who were profiting from the untaxed black
economy are running scared of documentation, finding ways to dodge the survey
and withdrawing from economic activity. Thus trade, services, real estate,
construction and transportation which were the main beneficiaries of untaxed
income, are under severe strain. The businessmen who were habitual defaulters of
bank loans are being asked to pay back. Tax payers who were registered but were
evading taxes, are also finding it hard to find secure avenues for concealing their
incomes and have thus slowed down their business activities. Utility companies have
embarked on a vigorous campaign to detect theft of electricity and gas and recover
dues from users. These structural changes during a short period of 12-14 months
have altered the basic calculus of profitability and the sharing of costs and benefits
between private businesses and the public exchequer. In the past, a large part of
private investment including the equity of sponsors and profits were generated by
obtaining loans from nationalised commercial banks and DFIs, which were seldom
repaid in full, by evading taxes, concealing income and by underpayment to utility
companies. Under these arrangements, the costs were borne by the public exchequer
and the benefits accrued to those private businesses that indulged in these practices.
Let me hasten to add that it is far from my intention to suggest that all businessmen
were guilty of this malfeasance. Far from it, the majority of the businessmen want
to work honestly. Neither do I wish to ignore the fact that this state of affairs was
9
taking place without the active connivance of public servants, tax officials, utility
company employees and the staff of banks and DFIs. The point which I wish to
make is that the post October 1999 period has witnessed, to some extent, a reversal
of this past trend, however, this has been accompanied by a slow down in the
desired pace of economic activity in the untaxed and informal sectors of the
economy.
This does not mean that there has been no movement on the investment
front. The three areas where investment activities are most brisk are Oil and Gas,
I.T. and Textiles. Oil and Gas is highly capital intensive and thus the spill over
effects to the rest of the economy will remain limited until such time that gas
replaces fuel oil in power generation, cement and other industries. I. T. is highly
skill intensive and is still in its infancy. It will create some employment opportunities
for skilled and educated manpower both within the country and outside, but the
overall impact on employment will again not be not very significant. Software
exports are starting from such a low base that even 100% growth is unlikely to
make much of a difference initially. The majority of young men and women in this
country have obtained their higher degrees in Liberal Arts and Humanities with
very few marketable skills – naturally they are not going to benefit. Textile industry
is undergoing balancing, modernisation and replacement with the revival of a few
sick and closed units. This industry will no doubt record productivity improvement
as a result of this investment but will use the existing labour force without any
demand for new labour. It is thus obvious that while investment is taking place in
10
some areas, its impact on overall employment, exports or import substitution in the
short-term is likely to be limited. Although this will lay the foundation for a
diversified economy in the future, but in the short run, the urban areas where most
of the vocal elements reside, will not notice any perceptible improvement in their lot
immediately.
The other area where substantial income generation has taken place during
the last one year is in the agriculture sector. Bumper crops of wheat, rice and cotton,
concomitant with higher producer prices, have transferred almost Rs. 100 billion to
the rural areas. As most of the poor live in the rural areas, this transfer of
purchasing power through higher demand for labour and the higher prices for cash
crops and consumable products, has improved the well being of the rural
population. This rise in rural incomes is beginning to translate itself in higher
demand for consumer goods, agro-related inputs and equipment, and some durable
goods. But the vagaries of weather and shortage of irrigation water this year may
force the rural population to save some of their earnings as a precautionary
measure to cope with the uncertainty of the future. In some districts, the Poverty
Alleviation program is creating some employment for landless labour. But in the
context of Pakistan, the rural population has always remained a silent majority –
suffering quietly in bad times and living contentedly in good days. They do not fill in
the op-ed pages of our leading newspapers and magazines, they do not make the
rounds at the reception and dinner party circuits, and they do not articulate their
11
opinions forcefully and vehemently. So they aren’t heard either in the corridors of
power or in the spheres of opinion making.
Thus in this overall atmosphere of basic structural transformation, the
implementation of conditionalities such as price increases in POL products, gas,
electricity, transport, increase in prices of imported goods such as sugar due to
depreciation of rupee, has not been well received well. If public sector expenditures
and development projects were being initiated at the same time to give a kick start
to revive the economy, then these conditions would have been perceived in a
different light. But this Government is unable to do so because it has to meet the
fiscal deficit target. Many public sector corporations and enterprises have to lay off
excess workers (who were employed by the previous governments) to become
financially viable. These policies, which have been welcomed by the International
Financial Institutions, are naturally unpopular among the domestic constituents
particularly those living in the big cities.
The second important reason as to why there is a gap between popular
expectations and actual results, is that key economic institutions which are
entrusted with the implementation of economic policies, are either unable or slow
to deliver. They have been depleted of the competence, integrity and dedication of
their staff. Most of these institutions are in financial disarray and have been
saddled with non-professional manpower well in excess of their requirements. Top
appointments were made on the basis of personal loyalty rather than merit and thus
they have lost their direction and sense of mission.
12
The implementation of policies in Pakistan by these institutions has therefore
been highly variable and uneven, as connections, sifarish and bribes had played the
decisive role in final decision making. It is difficult for them to adjust to a more
transparent and open system as it requires skills of a different kind – fact gathering,
analysis and objective assessment. As they are unable to perform on these lines this
particular class does not welcome changes and uses all possible pressure tactics
(including liberal use of print media) to resist against the encroachment of their
power and privileges.
Many of these key organisations such as CBR, WAPDA, Railways, Steel Mill
are being restructured and transformed into efficient, viable entities with the
objective of delivering the services to common man in a cost effective manner. But
this cannot be accomplished in a short period of time as the mind set, attitudes and
value system have to be changed. In the meanwhile, the general public has to pay
the price for their inefficiencies, corruption and suffer humiliation at their hands.
The present Government has directed that all appointments should be made on the
basis of a merit based competitive system through Public Service Commission
taking into account regional quotas. This new crop will hopefully enjoy a different
value system that emphasizes service to the people, dedication to the job and
integrity. But in the meanwhile we are stuck with the old value system.
Thus a combination of deliberate subversion and sabotage by the old guards
and the lack of professional competence and integrity with almost no regard for
public service, has slowed down the pace of implementation of many good policies.
13
I must confess that despite all the deregulation and liberalization, the
bureaucratic hurdles and obstacles at the working level faced by the investors and
common citizen in their day to day operations are still considerable. The maze of
laws, regulations, rules and precedents under which our institutions operate, confer
enormous discretionary powers to those who are to interpret and apply these rules.
They can make you a millionaire or a pauper by a stroke of their pen. The redressal
process is slow and cumbersome. The hierarchy is rigid and too inflexible. The
supervision and oversight processes are weak and penalties for wrong doing or
harassment are very rare.
The third factor, which in my view is responsible for the gap between the
expectations and actual results, is the influence of unanticipated external and
internal developments. All economic projections are based on a set of initial
assumptions. As events unfold during the course of the year, some of these
assumptions are not validated and diverge significantly from the original thinking.
In our case, there have been three unanticipated developments. First, contrary to
our expectations, oil prices did not show any decline but continued to show an
upward trend touching $ 34 a barrel at one point earlier this year. This had adverse
repercussions on the balance of payments of the country and also in terms of the
periodic increases in domestic prices of P.O.L. products. As furnace oil is one of the
main feed stock for electricity generation, these price rises also impacted the
operations of WAPDA and KESC. The latter had to ration the supply of electricity
to its consumers and resorted to load shedding. The impact of oil price escalation
14
was not limited to balance of payments or electricity generation but its linkage to
transportation created upward pressures on the prices of domestic traded goods
also.
Second, there has been a decline in the unit value of Pakistani exports. While
favourable domestic policies and aggressive entrepreneurs can bring about increase
in the quantity and quality of exportable goods, they have no control on the prices
they can fetch. These prices are determined in the international markets. The
narrow export structure under which two-thirds of our exports are cotton and
textile based, does not allow new and non-traditional exports to offset the
deterioration in the unit value of textile exports. While the cynics and pessimists
may keep on moaning about the lack of an exportable surpluses in the country the
fact is that the exportable surplus has been generated by the farmers and
businessmen of this country, but depressed world prices have not allowed this to be
translated into higher export earnings.
Another factor that has not so far helped us, is the non-resumption of
Foreign Direct Investment inflows at the levels we had envisaged. The Hubco
dispute has only recently been resolved, removing a long standing irritant to foreign
investors. Oil and gas and I.T. investments have just begun to be finalised and will
take some time to materalize. In the meanwhile there have been some
disinvestments for global strategic non-economic reasons which were beyond the
control of Pakistan’s economic managers.
15
To conclude, the gap between expectations and the actual economic
performance can be explained by a number of factors but the constraint imposed by
global environment including the conditionalities of IMF, the inability of our key
economic institutions in implementing policies and unanticipated external
developments are the principal factors. This does not mean that we would like to
absolve ourselves of the mistakes we have made or you should ignore the
shortcomings in our decision making. But I can assure you that if this has happened
it is purely unintentional because our commitment and dedication to turn things
around for the betterment of the country is as strong and fierce as any one else's.

__________________
“The greatest discovery of all time is that a person can change his future by merely changing his attitude.”

Challenges and remedies of problems of our economy
1. Introduction

All the serious challenges Pakistan’s economy is facing today like very wide budget and trade deficits, galloping inflation, increase in the level of poverty, power outages, water shortages, closure of industries, food insecurity, etc, has diverted our attention from realizing the very serious challenge that we have overcome. Since the 1950s we had a system in this country where the Ministry of Finance and all the economic ministries were headed by World Bank and IMF officials of Pakistan origin. With increase in the indebtedness of the country the situation got from bad to worse. The worst period was the decade of the 1990s when not only the economic ministries, but even prime ministers came from these institutions. During negotiations between the Government of Pakistan (GOP) and the International Financial Institutions (IFI)s it was difficult to distinguish between the GOP and the (IFI)s, for both sides comprised of IFI officials. These were very trying times for those of us who value independence and economic sovereignty of the country. I wrote several articles questioning the wisdom of a system which even after elections denied the representatives of the people to have anything to do with the ministries that dealt with the wealth and finances of the people (Wizarat 1996). So I personally feel vindicated to see representatives of the people occupying ministries of finance and economic affairs.

Starting with this positive note let us now try to give some suggestions to the new government on crisis management of the economy. But before we venture into discussing specific problems and challenges let me present two broad observations. One, that it is quite acceptable for a country to deviate from its normal course during times of emergency and ultimately come back to the designated path path. For example, the United States of America states that it is committed to liberalization and globalization. Yet, in the aftermath of a crisis it imposed a 30% tariff on the import of steel. Therefore, crisis management warrants we deviate temporarily from liberalization to fix the distortion, and return to the path when things return to normal. Second, in order to retain our economic sovereignty it will be better not to resort to policy based lending.

2. Debt Management
The Debt/GDP ratio needs to be borne in mind when embarking upon further lending from the IFIs. If the Debt/GDP ratio goes up to unacceptable limits, then the involvement of IFIs in Pakistan’s economic affairs will be back and the elevation of elected representatives to economic ministries will be a short lived phenomenon. Our experience shows that increase in debt has led to installation of governments comprising of IFI officials of Pakistan origin. Thus the very sovereignty of the country is at stake. Moreover it is in the interest of the country not to increase the ratio as this is bound to increase the burden on our future generations
The approach of the new Government in dealing with this problem appears to be in the right direction. For example, recently the Finance Minister signed a debt development swap agreement with the Italian Government for $100mn. This is a very desirable approach for it breaks the deadlock between debt and development. This way Pakistan will be able to reduce its debt burden, while at the same time bring development to the country.

At a post budget seminar of the Institute of Chartered Accountants of Pakistan (ICAP) in June 1997, I presented some ideas on debt management, which were later published in the Dawn (Wizarat, 9 June 1997) wherein I had suggested that by using debt development swaps:

“ we can kill several birds with one stone i.e provide debt relief to the country, increase the education level of the country ---- . The best part of the exercise will however be that debt servicing and expenditure on the social sector will not pose a trade off, with both the objectives being pursued simultaneously. And it is this expenditure on the social sector which is so vital if democracy is to deliver higher levels of welfare.”

Similar ideas were expressed by me in my article entitled ‘Debt Management in Pakistan’ published in the Dawn on 20 August 2000 (Wizarat, 2000).

3. Macro economic balance
The rate of growth of the economy during the last three four years improved a bit, but was modest when compared with the rate of growth of our neighbors China and India. Another feature of the growth phenomenon that needs to be looked into is the un-sustainability of the growth rate. When the growth rate becomes a little respectable for two or three years, prices start rising and almost immediately a clamour for a tight monetary policy starts. Compare this with the Chinese experience, where the GDP grew at almost ten percent during the last two decades before prices started rising. Why do prices start rising almost as soon as the growth rate picks up? Are prices rising as a result of excess demand as a result of government borrowings from the State Bank of Pakistan (SBP)? Or are prices rising due to increase in the prices of oil, and the concomitant increase in prices of electricity, transport, etc, which this increase brings about?

The two situations warrant very different approaches. If inflation is of the demand pull type then tightening the monetary policy will, through dampening demand would bring prices down. If, however, inflation is of the cost push type, then a tight monetary policy will make matters worse. And that is what has been happening in Pakistan over the last few years. Monetary policy has been used excessively to contain inflation, irrespective of whether it is of the demand pull or cost push type. Even if prices are rising due to hoarding monetary policy has been used and advocated to contain inflation. But such a tight monetary policy has resulted in reducing the rate of growth of the economy, without reducing the rate of inflation.

What should the new government do to contain inflation? First, it needs to determine whether prices are rising as a result of demand pull factors or cost push factors. If prices are rising due to demand pull factors then tightening the monetary policy will be an appropriate policy. But if prices are rising due to cost push factors then we need to identify the factors that are pushing up prices and find alternatives to these. The excessive use of monetary policy to fix up every problem in the economy is hurting the economy.

Monopolies and cartels have played a major role in restricting output and escalating prices in Pakistan. Most of the members of cartels are ministers and other influentials. It thus took several years for the Government to convert the Monopoly Control Authority (MCA) into Competition Commission. The new Government needs to make it effective, formulate a Competition Policy and enforce it. The Competition Policy is the appropriate policy to deal with the problems of monopolies, hoarding, excessive profit margins, etc. My own research (Wizarat, 2003) shows that several industries have very high concentration ratios and Herfindahl Indices. And when there is collusion between these firms it produces a monopoly situation, with the concomitant reduction of output and increase in profit margins. The Competition Commission needs to compute Concentration Ratios and Herfindahl Indices in each industry and determine the acceptable levels for each industry. And if the concentration level in any industry exceeds the acceptable level, then the Commission should ensure that through promotion of competition, the industries are made to conform to desirable behavior and conduct.

Budget Deficit
The budget deficit for the first six months of FY 07-08 was 3.6% of the GDP and the likely figure for the 12 month period is expected in the range of 6% of the GDP. Most of this was on account of increase in development expenditure in the run up to elections, energy related subsidies and the inability of the government to increase and diversify the tax base.

First let us see how this deficit can be curtailed. First on measures to curtail the expenditure. Here the approach of the new government appears correct. The Prime Minister’s decision to reduce the expenditure on the Prime Minister’s house by 40 % is a step in the right direction. Similar steps to reduce non development expenditure on other federal and provincial ministries and civil administration, along with the Finance Minister’s statement of looking into possibility of reducing the defense budget are steps in the right direction. These need to be supplemented with resolve on the part of the Government to curtail borrowing from the State Bank of Pakistan. This will not only reduce the budget deficit, but also ensure that the demand pull is not the major contributor to soaring of prices. Tightening of the monetary policy will no longer be required and appropriate policies that deal with cost push inflation will take care of the problem.

On the revenue side, the government will have to tap new sources to generate receipts in order to bridge the gap. New sources for generating tax revenues should be those sectors of the economy where profits have increased in the past few years, but have not been brought within the tax net. These include agriculture and service sectors, especially oil companies, banks and financial institutions and real estate.

Current Account Deficit
The external account deficit has widened, and is expected to cross US$10.5 billion in FY07-08, to over 6.6% of GDP. The IFIs will I am sure offer their credits to cover the deficit. But it would be very imprudent to fill up the gap by borrowing from the IFIs. It will not only increase the indebtedness of the country, worsen the Debt/GDP ratio, with adverse implications on the politico-social structure of the country.

The Government has to devise both a short term as well a long term policy to deal with the situation. In the short run the Government should scrutinize the imports of the country and temporarily halt the import of non essential consumer goods, luxuries, etc, so that oil, machinery, capital goods, which keep the wheels of industry moving are not stopped. This would be a temporary deviation from policy and not abandonment of the present policies. This has been the practice in all the countries that are faced with a crisis situation as discussed earlier by the imposition of a 30% tariff on the import of steel in the aftermath of a crisis by the United States. Other countries have also resorted to such deviations from policies in order to crisis manage their economies. The long run solution entails that the Government finds substitutes to the essential imports that are soaring the import bill. We need to switch over to the use of oil substitutes to generate power, transport lubricants, etc, and to cut down on travel cost by providing low cost housing to laborers at the work place, etc. These would result in reducing the dependence on imported oil. If the import bill is getting inflated because of import of machinery and capital goods from Europe, where due to the rise in the value of the Euro, the prices are high and increasing continuously, we need to explore other markets like the Chinese for the supply of these machineries and capital goods to us. Import substitution of these goods within the country also needs to be explored.

4. Agriculture
The government needs to develop its vision for agriculture. How does it want to use agriculture for meeting the needs of the country. My vision for the agricultural sector is two fold. First, use it to make the country self sufficient in food and industrial raw material. Second, use it for providing high value added exports. Export of organic fruits and vegetables can fetch good prices in the international markets. Instead of waiting for any type of land reforms that will redistribute land to peasants, which seems quite unlikely, it will be advisable for the government to distribute fallow land to the peasants and provide bank credit to purchase inputs, manure, seeds, etc. Since this land has not been cultivated before, its yield will be good. These small farmers should be encouraged to produce food items like fruits, vegetables, rice, wheat, pulses, corn, barley, etc, both for the home market as well as for exports. This will make the country self sufficient in food, earn foreign exchange and thus reduce the deficit, improve the environment and health of the population by making healthy food items available to the population.

5. Industry
The government also needs to decide about the kind of industrial structure it should promote. Even during the 1960s when we used industrial policy very effectively, the tendency to produce a wide range of commodities and the grant of across the board fiscal incentives created imbalances. Formulating an industrial policy for the future necessitates that we evaluate our strengths and weaknesses objectively and dispassionately. Both the principles of static and dynamic comparative advantage should figure in such a policy formulation. The industrialization of the under-developed areas should initially be based on the static comparative advantage of these areas. Such industrialization can be reinforced with industry-cum-area specific fiscal incentives. This will ensure a viable industrial structure in the rural and hitherto under developed areas. At the same time, a dynamic comparative advantage should be nurtured in selected industries at the national level. Extreme care needs to be exercised in the choice of these industries. First, these should be a select group of industries and not a multifarious lot. Second, the country must possess some strengths in these industries. Third, the income elasticity of demand for the products of these industries must be high. This is how we can construct a viable industrial structure in Pakistan. (see Wizarat 2002)

6. Water and Power
Water and power scarcity are going to pose a major obstacle to the strategies suggested above. Therefore, development of water and power development projects should be given top most priority by the government. Power policy of the government should have both a short term as well a long term plan. Bridging the gap between supply and demand in the short run, when supply cannot be increased should focus on demand management and reducing transmission losses. Both Commercial and domestic consumption of power has to reflect the fact that there is a serious power crisis in the country. Ostentatious consumption of electricity has to be banned with immediate effect. Lightening of wedding halls, hotels, public buildings has to be banned. Celebration of religious and public events by lighting up buildings will have to be postponed to times when the balance between supply and demand has been restored. Till such time we will have to make do with decorating our buildings, lawns and parks with flags, buntings and balloons. Domestic consumption of electricity can also be brought down by educating the public and making them realize that it is in their own interest not to waste energy. In the long run the increase in supply should be through developing alternative sources of generating power like wind and solar energy instead of oil. This will not only be environmentally friendly, but will also restore balance in the external account. Vertically integrated industrial units producing their own power and selling it to other units also will also increase the supply position as well as help to bring down the cost of production of domestic manufacturing.

Water development projects are an absolute necessity for the agricultural development envisaged earlier. The government should try and bear the following in mind while developing water development projects. One, there are already great deal of controversies with regard to water development projects in the country. Therefore instead of creating any further controversies, it will be better to start with projects which do not arouse the passions of the people of any province. Second, it will be preferable to start off with medium to small projects.

7. Privatization
The government should take an overview of the present privatization policy of the previous government. The typical neo liberal argument in favour of privatization of State Owned Enterprises (SOEs) is government failure, as most of the SOEs have been inefficient and a burden on the national exchequer. But what about institutions in the private sector that have also been failures? What to do when there is both government failure as well as market failure? There are so many such examples in Pakistan where there is both government failure as well as market failure. Take the case of the Karachi Electric Supply Corporation (KESC). Its performance was pathetic and it was a burden on the national exchequer when it was an SOE. But its performance has deteriorated when it ceased to be an SOE and became a privatized unit. It appears that there are certain features which remained constant to both the pre and post privatized KESC. Moreover, the KESC also continues to be a burden on the national exchequer. Since it was not making payments to WAPDA which prompted the City Nazim to offer them money to make these payments. The KESC is thus continuing to be a burden on the national exchequer. Its performance in terms of providing this essential service has also deteriorated significantly. We have many other such examples in higher education institutions, where there is both government failure as well as market failure? The new government needs to do some innovative thinking on how to respond to these situations.

The government also needs to evolve a policy towards the privatization of strategic assets of the country. For we see that in-spite of being committed to liberalization policies, governments do protect their vital national interests. For example, when the privatization of some port services to an Arab country was going ahead, public opinion forced the US government to back track from its earlier stance and refrained from awarding the running of the port to an Arab company.

8. Poverty and Income Distribution
Over the last about two decades policies have been generating poverty and the poverty alleviation programs instead of making a dent on poverty, have resulted in elitist capture. Pakistan has been converted into a country of ten millionaires and ten million baggers, with the state having to take care of the ten million baggers. How should the government deal with poverty and income distribution issues? Provision of infrastructure, giving assets like land to agricultural peasants along with the development of a viable industrial structure will through expanding employment alleviate poverty. These could be supplemented by micro finance schemes to encourage small entrepreneurs.

Distribution of income can also be improved by targeting the supply of education and health services to the poorer segments of the society. In view of the serious problems encountered in the past in the supply of these services to the population, particularly in the rural areas, totally different and innovative approaches will have to be adopted. These are not being discussed here, but can be presented in a seminar on provision of health care and education to the poor in Pakistan. Another suggestion to reduce the disparity between the wealthy and the poor is to increase the share of direct taxes in total taxes, for in the past the tax structure has become more regressive as a result of increase in the share of indirect taxes in total taxes.

9. Institutional Back up
Economic research institutes in the country have to play their role by providing their input, evaluating government performance and providing policy guide lines. But these institutes are faced with a decline and/or are being used for political agendas. A public sector economic research organization has a PhD in Mass Communication as its head, another also has a head whose qualifications do not match the requirements of the research institute. Most of the research institutes in the country are under the control of a lobby that itself has political ambitions. So the chattering class of the country is controlled by a lobby which will not be very charitable to the government. Even if the government performs well, it will not be in their personal interest to admit about their good performance. Moreover, the lobby is very powerful and resourceful. So even if any institution is not within its ambit, it will not take very long to bring these under control. In such a situation, who will provide the research input to the new government? Who will evaluate the performance of the government honestly? And who will provide correct policy guidelines to the government free of any personal interest or axe to grind? In this scenario should the government establish new institutes to provide these services to the government? Or should it try to reform the existing institutes, purge them of politics, bring competent and independent leadership to the fore front? It is the latter option that will be preferable as it will avoid wastage of public resources and extend the control of the government to institutions which will be beyond reform if left any longer.

__________________
“The greatest discovery of all time is that a person can change his future by merely changing his attitude.”

consult these webs for exact figures....

http://www.statpak.gov.pk/depts/index.html

http://www.cbr.gov.pk/

http://www.pide.org.pk/

http://www.statpak.gov.pk/depts/fbs/...pi_details.pdf



if all of this work is done then economic topics can be covered at any phase.......no more obstacles i.a

__________________
“The greatest discovery of all time is that a person can change his future by merely changing his attitude.”

is there any related publishing booklet available?

dear it was all by internet browsing and research

Every topic has its own requirements....Dont really be a kid by requiring all material in books...
every subject is provided on internet with immense depth and updation
so u may search it out with a bit mature outlook
hope you will share some good material here for us as well, not just related to economy but related to other subjects as well

__________________
“The greatest discovery of all time is that a person can change his future by merely changing his attitude.”