March 28, 2012
Shahid Kardar

Pakistan has one of the lowest tax to GDP ratios and, even considering developing countries alone, it is in the bottom ranked nations in terms of the proportion of population registered as taxpayers – less than 5 percent. of household population. There is rampant tax evasion, partly with the collusion of the official machinery. Whereas 3.1 million people have the National tax Number, a mere 1.2 million filed an income tax return in 2010/11. What is even more startling is that of 47,800 companies that have NTNs, less than 16,800 filed an income tax return against 400,000 industrial electricity connections.

As admitted by FBR, there is a tax gap of 79 percent. (the difference between potential revenues under the existing system and that actually collected). Revenues can be raised through broadening of bases, improving the equity of the tax regime, incentivising documentation, checking evasion by embracing a zero-tolerance policy, checking harassment of, or collusion with, taxpayers by simplifying tax returns and making FBR a faceless bureaucracy, with interaction between taxpayers and tax officials limited through greater reliance on automated computerised systems.

The general tax reforms would include taxation of all incomes of same levels equally irrespective of source, with a swift reversal of the travesty of the recent amnesty granted to trading in shares. There is also need for legislation that will render all Benami Transactions illegal and subjecting all cabinet members, who should all be taxpayers, to detailed tax scrutiny throughout period of office, and they should all be taxpayers. The tax returns and Wealth Statements of all parliamentarians and holders of key public offices and their spouses (including Secretaries, Chief Justices, Chief of Army Staff, Governor State Bank, Auditor and Attorney Generals) should be public during period of office and one year thereafter. Finally, following good results of tax mobilisation initiatives, individual and corporate income tax rates and the GST rate could be lowered under a phased programme.

The specific reforms under different tax heads would be the following: For Income Tax: Greater dependence needs to be placed on technology and through that on the CNIC for tracking commercial transactions to identify potential tax evasion/evaders, including movements in bank accounts of large deposit holders. The FBR should periodically reconcile the property tax registers of all provincial governments, names of credit card holders and members of private clubs with those allotted National Tax Numbers, for the system to generate notices to non-filers. All presumptive taxes should be replaced by withholding taxes (which presently contribute 60 percent. of income tax revenues). And the rates of all withholding taxes should be increased by at least two percentage points as a revenue enhancing measure, to incentivise documentation and penalise those trying to avoid capture in the tax net.

To prevent tax arbitrage by major shareholder executives the tax differential between the highest individual tax rate and the corporate income tax rate should be narrowed sharply, if not fully eliminated. For individuals there should be a Minimum Asset Tax of 2 percent. which should be allowed as a tax credit. Such a measure is being proposed for reasons of equity and for ensuring that large farmers do end up paying some tax, considering the poor success that provincial governments have had in collecting tax on their incomes. Any CNIC holder receiving remittances of more than US$50,000 a year should be required to pay a tax at 5 percent. on receipts in excess of US$50,000.

There is also a need to consider re-introducing the scheme whereby unlisted companies paying a 20 percent. higher tax than that paid n the previous year would not be subjected to any audit. Adequate safeguards should be built into the system to prevent incentive abuse by entrepreneurs closing down existing companies/businesses and starting new ones. Bills in excess of Rs.10,000 per month of domestic and all bills of commercial consumers of electricity should be subject to a withholding tax of 10 percent. and 15 percent. respectively. Compared with 3.2 million commercial electricity connections (excluding countless illegal connections) in the country today (including retail and wholesale outlets, offices of companies, partnerships, restaurants and hotels) last year only 22,000 wholesalers and 12,000 retailers paid income tax of Rs.6.2 billion and Rs.1.8 billion respectively paid income tax, either directly or under the withholding tax regime. By levying a minimum flat rate of Rs.12,000 to Rs.25,000 on small retailers more revenue can be raised. Large, well-known, retailers would be assessed for income tax in the normal way. However, it is recommended that the withholding tax on cash withdrawals in excess of Rs.25,000 be abolished to incentivise the entry of the Rs.1.7 trillion currency in circulation into the banking system thereby helping lower the government’s debt servicing costs.

Moreover, provincial governments should tax agricultural incomes, using lease rates in the area or the revised produce index units as proxies of taxable income from agriculture. The current exemption limits for income tax purposes should continue to apply. However, to ensure that the database in the system at the Federal level is up to date all farmers with holdings of more than 50 acres should be required to file a tax return.

To augment revenues from the under-exploited provincial property tax, “rental values” for determining property tax liability of residential accommodation should be assessed at 1 percent. of property “market values” with a small tax credit for self/owner-occupied residential properties and appropriate exemption limits for small sized residential space. For commercial properties “rental values” should be assessed at 3 percent.

In the case of GST the proposed reforms are: the rate for sales to entities registered for GST should be 12.5 percent. while for unregistered it should be retained at the base rate of 16 percent., the latter being the rate that is charged to the final consumer. For extending sales tax to retail trade, we need to examine the possibility of a single-stage sales tax to be levied by a provincial government based on location, shop area and nature of business.

For Customs Duties, to check abuse we need to identify items prone to dumping and under-invoicing and a system of ITPs should be introduced. As long as this list is a short one, the country will not run-foul of WTO rules and regulations. To both enhance revenues and simplify the tariff structure there is a need to consider levying a minimum rate of duty on all imports other than those protected by sovereign agreements (currently Rs.1 trillion worth of imports are duty free). We have a highly distortionary tariff regime that levies different rates of import duties on the same material based on the consuming industry, thereby creating opportunities for “extracting rent”. There is a need to simplify the tariff structure further by considering a system of “one-chapter one-rate”.

Finally, to address issues related to Afghan Transit Trade, we should consider incentivising use of Pakistan Railways for transportation and employ use technology-tracker and GSP systems. We can also consider using quantitative restrictions for items prone to smuggling.

On the administration side, focus should be a) on improving the quality of FBR’s data warehouse and IT systems; b) ensuring that the taxes collected by the “withholding agents” or from the end consumer in the GST are eventually deposited in the governments’ coffers; and c) on audit/tax notices being generated electronically stating in detail the reasons why the system raised the notice. And to check collusion, two tax officials should be required to sign the notice and interview the assesee.

The above should represent the minimum tax reform agenda for any new government to assume office after the forthcoming elections. It should be able to generate additional revenues of 1 percent. of GDP per annum. However, while some proposals will be politically tough to implement as they will require legislative changes or face resistance – not to mention the estimate of additional revenues each year looks ambitious in a sluggish economy – the continued postponement of fundamental revenue, expenditure, policy and institutional reforms is also no longer sustainable.

The writer is a former governor of the State Bank of Pakistan.
-The News

March 29, 2012
Syed Kamran Hashmi

The popular idea of a welfare state runs through our democratic political discourse. From Zulfiqar Ali Bhutto (ZAB) to Imran Khan, almost everyone has flirted with this concept. ZAB claimed socialism as his economic policy, Mian Nawaz Sharif distributed agricultural lands in Sindh, and Imran Khan has unambiguously announced to convert Pakistan into a welfare state.

Traditionally, the right leaning political parties like Pakistan Tehreek-e-Insaaf (PTI) or Jamaat-e-Islami are against state-sponsored beneficiary programmes, but in Pakistan they get their ideological inspiration from religion. They allude to a Muslim caliphate that ostensibly had the lowest poverty rate in the history of mankind. They also refer to Zakat as a key contributor in the process of even distribution of wealth and boast about the contribution of tax reforms in the fair allocation of resources.

Nonetheless, they fail to emphasise that the economy in the Arab-led Muslim empire soared because booty was regularly collected in wars and then distributed among the people. The accumulated wealth, in turn, led to an exponential increase in the per capita income and a precipitous fall in the poverty rate.

In the contemporary world, our political parties get inspiration from the welfare model of the Western European countries. They promise to provide free healthcare, social security benefits and disability allowances to the people of Pakistan. Yet they do not recognise the root causes of the financial turmoil of Greece, its extraordinary public spending and lucrative retirement benefits.

Even the US economy is flailing because of the two major financial obligations of the federal government: social security and healthcare. In Pakistan, the idea of a welfare state can actually be devastating for the economy. If rushed towards dependency projects, they can steer the system towards an economic collapse and a failed state. We have a GDP of roughly $ 210 billion with an annual revenue collection of $ 26 billion. Our annual budget is approximately $ 40 billion. Total defence expenditure is $ 10 billion and our annual budget deficit is $ 15 billion. Currently, the PPP government is running a limited dependency project, Benazir Income Support Scheme, and spends almost $ 1 billion annually on it. It distributes Rs 1,000 rupees per month ($ 12) to five million families, which comes to $ 150 per year.

The programme is insufficient and ineffective to combat poverty amid the rising rate of inflation. It only supports a limited number of families and the financial assistance provided through the programme is also negligible. In order for any programme to be effective and meaningful, the welfare assistance would need to be increased by five times and the number of families tripled or preferably increased four times. Even then it will only serve minimally; Rs 5,000 per month to 15 million families will barely put some food on their tables. But the financial obligation for Pakistan would be multiplied and would easily reach $ 15 billion every year. It is two thirds of our current revenue collection and 150 percent more than our defence budget.

At present, it is not even possible. However, parties like the PTI claim that they would increase our revenue collection to 15 percent of our GDP from the current rate of 10 percent. In terms of actual dollars, it means an increase to $ 40 billion a year from $ 26 billion. It is a doubtful and a debatable target to obtain without negatively impacting the economy. But for a moment let us consider this to be true. An additional $ 15 billion in revenues would only cover our annual budget deficit and we would then be able to just make ends meet. In order to pay for an effective welfare programme, we will have to borrow more money and run into a larger deficit.

It would also mean that the extra revenue would be spent directly for the beneficiary programmes instead of institution building. Establishment of an effective and highly skilled department for federal investigation would be ignored. Restructuring of healthcare, the reorganisation of the police force or investment in development projects, each one of them would either be delayed or continue to get worse — as is happening now.

Studies have shown that welfare programmes not only have a negative impact on the economy, they also hurt the poor. These programmes take away the incentive to work and encourage laziness. Through the handouts, they inculcate dependency instead of hard work and the families who rely upon welfare continue to be poor for generations to come.

Pakistanis cannot afford the luxury of laziness nor can we promote it religiously or politically. For us, the foremost task of any government is not to hand out cheques to the poor, it is to create an environment of equal opportunities, protect the lives of its people and safeguard their assets. It is also to elevate educational standards, provide better vocational training, invest in research and develop accountable and effective systems to maintain continuity. Therefore, our premature turn towards welfare can actually be a financial nightmare, reaching its climax in the form of an economic catastrophe.

The writer is a freelance columnist residing in the US and can be reached at skhashmi@yahoo.com
-Daily Times

Farooq Sulehria
March 29, 2012

Blaming the Pakistan People’s Party (PPP) and holding President Zardari responsible for every ill in the country is fashionable. On the other hand, the performance of the fourth PPP government leaves hardly any room for its defence. While the incumbent government’s poor performance is used as a pretext by anti-democratic forces to backstab the democratic process, every criticism on the PPP government is also dismissed by Zardaristas as an attack on democracy.

A democratic approach would have been to fully respect the PPP’s right to complete its constitutionally mandated tenure and siding with the PPP every time it is subjected to subversive campaigns; and at the same time, criticising the PPP government for its gross inefficiencies albeit without reducing it to the person of President Zardari. Focus on persons has occluded debate on the structural constraints holding Pakistan back. For instance, the foreign debt has become the biggest hurdle in any meaningful reform within the system. And it is no chance occurrence that it is not our elected governments but military dictatorships that accumulated the foreign debt and mortgaged our future to foreign donors.

When Gen Pervez Musharraf was finally humbled, for instance, Pakistan was paying Rs250 billion annually on debt servicing. With this amount Pakistan can build 250,000 new three-room houses in the flood-hit area, recruit 12.5 million nurses, and establish 27, 778 primary schools with 200,000 teachers employed.

The country’s external debt was $45 billion in June 2008, compared to $33.352 billion in 1999. This despite the fact that the Musharraf dictatorship received $15 billion in US aid besides the $25 billion coming through remittances from overseas Pakistanis. Had the Musharraf regime stopped borrowing, the Pakistani chapter of Campaign for the Abolition of Third World Debt (CADTM) believes, Pakistan’s debt would have declined to $23.646 billion after the payment of the principal amount by end-2007.

It also is no incident that the International Monetary Fund, the World Bank and the Gulf states become lavish when a dictator is at the helm of Pakistan. Pakistan joined the IMF in 1950 and for the first time begged for an IMF loan in 1958 just ahead of the first military coup. It was a Stand-By Agreement (SBA) worth $25 million. The IMF’s financial czars rejected the Pakistani plea. Under the Ayub dictatorship, however, the IMF granted two SBAs: one in 1965, the other in 1968. His successor, Gen Yahya Khan, was blessed with four more SBAs. The Yahya dictatorship was granted $330 million in loans.

While the first PPP government headed by Zulfikar Ali Bhutto was given a cold shoulder and an enraged Bhutto told the IMF “Go to hell, we do not want your money,” the Fund enthusiastically embraced the Zia dictatorship. In November 1980 alone, the Fund extended the huge amount of $1.27 billion to the Zia dictatorship through the long-term Extended Fund Facility (EFF). The amount was three times the entire amount ($460 million) lent through seven SBAs in the preceding 20 years (1958-79).

When Pakistan returned to a moth-eaten democracy (1988-99), the IMF became more demanding, while Uncle Sam began to worry about Pakistan’s nuclear programme. The IMF, like its Siamese twin the World Bank, operates through the UN. However, when it comes to decision-making, Washington rules the roost, since it commands 17 percent of the deciding votes. Understandably, when the Pressler Amendment was applied on Pakistan, the number of conditions attached to the structural adjustment loan granted to the then PPP government (1988-91) increased from 27 in 1985 to 56 in 1989. The conditions attached to the 1988 IMF package were the harshest in the history of IMF-Pakistan dealings.

During Benazir Bhutto’s second tenure (1993-96), the IMF suspended the Extended Structural Adjustment Facility (ESAF) and the Extended Fund Facility (EFF) after differences with her government over reduction in tariff rates. Finally, the third PPP government capitulated to accept all stringent conditions in order to get a package worth $1.2 billion in 1995.

The heavy-mandate, second Sharif government (1997-99) also obediently obeyed the IMF commands. Over 66 industrial units were privatised during Nawaz Sharif’s second tenure. But with Gen Musharraf’s arrival, followed by 9/11, the IMF softened up. As a reward for his joining the “War on Terror,” the IMF began to extend financial support under the Poverty Reduction and Growth Facility (PRGF). Today, Pakistan spends three times as much on debt-servicing as on healthcare, in a country where 38 percent of children are underweight.

Regrettably, much of the media and mainstream political parties rarely engage in a debate on Pakistan’s debt crisis, either out of ignorance or ideology. Liberals in general consider foreign loans a blessing. The mullahs can’t think beyond conspiracy theories. In the meantime, by 2014, the country’s debt is expected to reach $75 billion.

The writer is a freelance contributor.

Email: mfsulehria@hotmail.com

Tahira Mansoor


The ruling elite either does not realize the gravity of the situation or is deliberately taking Pakistan to the brink of disaster, as its economy is becoming unmanageable with every passing day.

It seems that the rulers embarked on a well thought out plan to milk money during their tenure, as they assumed that there would not be another chance. But, as they near the end of their first term in office, they have started realizing that they might get another opportunity, as the political divide in the country is such that they could scramble to form the government after the next election, with the support of their regional coalition partners.

The problem, however, is that the economy has been damaged to such an extent, that it would not be possible for the present rulers, or for any one else, if given power, to manage even the day-to-day affairs of the country. We are adding domestic debt of over one trillion rupees a year. This fiscal, it is going to be much higher. In the first six months of this fiscal the domestic borrowing has already reached Rs. 953 billion. The total domestic debt now stands at over seven trillion rupees.

It is pertinent to note that domestic debt is almost 10 times more expensive than foreign debt. The highest mark up that the government pays on domestic debt is on National Savings schemes. The amount that the state owes through Nation Saving Instruments is 2.9 trillion. The borrowing from the commercial banks carries an interest of current central bank policy rate of at least 12 per cent. Some bank loans were obtained at a premium ranging from
2 to 3 per cent above the policy rate. With debt servicing, at an average we add another 3 per cent on the 2.9 trillion NSS and some premium on commercial loans there will be addition of another Rs. 21-24 billion. Do we have the resources to pay back even the yearly interest? The principal amount would remain intact while the government government's appetite for further loans would continue to increase.

We are talking about the domestic loans only. The present regime has added over Rs. 4 trillion in domestic debts in its first four years of rule. The debt servicing on domestic debt has shot up from Rs. 360 billion to Rs. 744 billion in four years. Now the government is borrowing more just to service its domestic debt. This vicious circle has made the fiscal management an uphill task. The most painful aspect of past four year's governance is that the non-development expenditure has multiplied while the development is much below the 2008 level. If we take into account the double digit inflation of past four years and the massive decline in rupee value the development expenditure is only one fourth of what it was in 2008 when this government assumed power. This means that the amount needed to complete any development work is now four times higher than in 2008 while the allocation are lower than they were in 2008.

The foreign assistance has dried in Pakistan but not before adding over $16 billion in our sovereign debt. Is it not an irony that even after toeing the lines of the United States more faithfully than the military dictator's the foreign donors have lost faith in this government about the fair use of foreign assistance?

The prudent step under these circumstances should have been to curtail the non-development expenditure with a solid belt tightening strategy.
Instead the wasteful expenditures have increased by over 14 per cent this year. The tax revenues have increased by 25 per cent but the non-tax revenues have declined by over 30 per cent thus increasing the budget deficit further. No steps have been taken to reviving industry.

The cost of production has risen due to high inflation and weak rupee.
At the same time, the cost of borrowing has increased beyond the levels that encourage new investment. This government is committing the folly of rapidly opening trade without facilitating its industries to cope with high cost of production. Even a five per cent interest rebate on upgrading of technology has been denied to the industry while the Indians have supported their industry with this rebate for the past seven year. We must keep in mind that the level of inflation in India during this period has been much lower than Pakistan.

What worries economists is that how the government that comes to power after 2013 elections manages the economy. The present regime if able to cling to power has exhausted all resources. It has borrowed heavily both domestically and globally. It has received billions of dollars in grant that have been wasted. It has printed notes. In fact, it has taken any step desirable or otherwise to run the government affairs.

Now it has been cornered. Friends of Pakistan do not trust the present ruling elite to use the aid transparently. If some other party comes to power it would face the dilemma of abolishing many populist measures of present regime. The Rs. 80 billion Benazir income Support program for instance is one such scheme. Abolishing the program would make the next government very unpopular among the millions of beneficiaries. This amount could be used to revive the industries that would create millions of jobs. However, achieving this will take two to three years and our electorate do not have the patience to bear that long.

Short-term public appeasing policies have devastated our infrastructure. The elected representatives are more interested in small community based road or sewerage projects in their constituencies then a mega project that would prove beneficial in three to seven years. The resources for prudent sustainable long-term projects are crowded out by small constituency based development work.

The way to survive respectfully is to take some harsh measures that are resisted by vested and powerful interest groups. The poor need to be spared in any future taxation policies. All exemption granted on taxes should be abolished. The documented should be fully documents with lowering of general sales tax to five per cent. This would bring relief for the consumers while the broadened tax base would more than compensate of GST loss of 11.5 per cent.

http://www.weeklycuttingedge.com/index.html

April 3, 2012
Beelam Ramzan

“You may delay but the time will not.”

— Benjamin Franklin

The long-awaited trade concessions proposed by the European Union were finally approved by the WTO. This was a move intended to help Pakistan recover from the colossal humanitarian crisis caused by the devastating floods in 2010. Rejecting conditionality-loaded aid packages in those critical circumstances and, preferring a trade package, instead, was a step in the right direction.

It will provide a much-needed boost for our besieged economy, battered by the fallouts of the war on terror, energy shortages and poor law and order condition. However, the real test of success will be to see how well this trade package is utilised in the face of emerging global and national challenges and given the enormous delay in seeking these trade concessions, almost sixteen months.

The Pakistan specific trade concessions consist of a ‘waiver’ on customs duties for 75 items, mainly textile related, to help the country strengthen the textile sector that account for almost 60 percent of the country’s export earnings. Twenty products will be subject to quantitative limitation, in other words quotas. Waiver means the duty will be reduced to zero for a period of two years.

Acquiring this waiver was not an easy job and it was only due to effective negotiations, that Pakistan was able to surmount the enormous opposition from competing textile exporters led by India, Bangladesh, Brazil, Indonesia and Argentina.

At present, the average existing tariff on the import of 75 products included in the package is 7.19 percent within EU. Despite facing this tariff structure, Pakistan’s exports of these products to EU were worth 1.4 billion Euros for January-October 2011. Hence, it is clear that Pakistan has considerable potential to increase its share manifold from the present, if it fully avails the waiver on duty within 27 EU countries. The net impact of zero custom duty to EU will, consequently, increase Pakistan’s exports by at least 40 percent, or in other words add exports worth 800 million Euros for two years, according to official estimates.

The duty free trade concessions are effective for two years starting from January 1st, 2012 to December 31st, 2013. Two months have passed already and the implementation of concessions is not in sight. Hence, many exporters fear that within two year’s time-frame, Pakistan’s industrial sector’s ability to derive full benefits from this duty waiver may be hindered greatly by the changed circumstances. Truly, the package came at a time, after a delay of almost one year and half, when the industrial scenario changed dramatically by an acute energy crisis, domestically, and a spiralling Euro-zone economic crisis, globally. In the wake of these emerging challenges, reaping the full gains of trade concessions will be a daunting challenge.

The acute energy crisis alone has taken a heavy toll on the textile industry in the country, especially in Punjab and Faisalabad. Almost 40 percent of textile manufacturing units remain inoperative, resulting in loss of export orders and massive lay-offs. Forced shut down of industry, at large scale, means that the true potential to export is in jeopardy. Hence, our major exports in cotton made ups and garments declined by 20 percent and those in textile reduced by a staggering 40 percent during a period of eight months, from July 2011 to February 2012. This translated into a phenomenal loss of $4billion, in export value. If the energy crisis is not managed skilfully and timely, utility of hard-acquired trade concessions will be in doldrums.

Apart from the energy crisis, our exports are also very badly hit by the global recession. Although the jitters are being felt equally from China to India with an unprecedented slide in their export figures, in our case the slowdown in Europe is weighing heavily on our main engine of growth; textiles and clothing sector that accounts for more than 70 percent of our export to the EU. A weak global demand will have an adverse impact on the supply side, thus effecting a negative growth in exports from Pakistan.

Experts fear that the slowdown in exports will continue in the coming months because the demand from the EU is unlikely to revive. If that is inevitable and beyond control, the government can at least ensure uninterrupted supply of electricity and gas to the ailing industry, enabling them to function at their optimum level and increase their share in the bearish EU markets by being more competitive.

It is feared that due to these impediments, Pakistan is likely to miss the overall export target of $25.618 billion, whereas the textile and clothing sector will fall below the projected target of $14billion by June 2012, as estimated by the export associations. If that is the case, we cannot afford to miss our export targets next year too, and with it the much deserved fruits of EU’s duty free trade concessions. Good management is nothing but making up for limitations imposed by unavoidable circumstances, through optimal use of resources. The clock is ticking fast. We must not delay anymore!

The writer holds a degree with distinction in LLM International Economic Law, University of Warwick (UK). Email: beelam_ramzan@ yahoo.com
-The News

April 4, 2012
Jamil Nasir

Food price escalation in South Asia is a matter of grave concern. Measured against the yardstick of $1.25-a-day, the increase in food prices can push millions of people below the poverty line. According to estimates in the recently released report of the Asian Development Bank (ADB), titled “Food Price Escalation in South Asia-a Serious And Growing Concern,” 30 of the increase in food prices is estimated to push 10.4 million more people into poverty in Pakistan.

The reasons of the rising food prices are manifold. Both demand- and supply-side factors are responsible for the price hike. From the Malthusian perspective, growing population is one of the major factors as population growth simply means that we have more mouths to feed compared to scarce resources. If the population keeps on escalating at the current rate, pressure on the food supplies will further grow.

The ADB report mentions the rising incomes as another demand-side factor for price escalation of food items. But here the point is: have the real incomes of all sections of society increased in proportion to the rise in food prices? Prima facie, this is not the case. The escalation of food prices has certainly generated both winners and losers. The profits of big producers have increased, whereas the incomes of rural labourers and small farmers have declined in real terms. So the policy implication from the demand side is: the population-control policy needs to be critically examined and made effective; and distributional mechanisms in the society should be strengthened to compensate the losers.

On the supply side, the major factor responsible for the food security problem is the low productivity of crops like wheat and rice, which constitute the main staple of our people. Arable land for wheat and rice is not increasing due to multiple factors but mainly owing to the prevalent land-ownership structure. The land is concentrated in the hands of a small minority. The big farmers, driven by the desire for profit maximisation are switching over to cash crops like potato and maize.

What has also contributed to the changes in cropping patterns is the agricultural pricing policy of keeping prices depressed compared with global prices, especially the price of wheat, through the instruments of fixation of ceiling price and export restrictions.

Another supply-side factor is low yield of wheat and rice. According to recent statistics of the Food and Agriculture Organisation (FAO), per-hectare production of wheat in case of Pakistan is 2.6 tons, compared to the yields of China and India, which respectively produce 4.7 and 2.8 tons per hectare. In rice our per- hectare yield is 3.1 tons, while China, Bangladesh, Sri Lanka and India respectively producing on average 6.5, 4.2,4.1 and 3.3 tons per hectare.

Pakistan’s lower productivity in the region points to poor performance of agricultural research institutions, the low quality of rural infrastructure and agricultural extension services, weak regulatory environment to control artificial shortages and quality of agricultural inputs, and corruption which increases the cost of agricultural credit and other agricultural services, especially to the small farmers.

The poor performance of research institutions owes to multiple factors. Low public spending for research, low and irrelevant skills of the researchers, a poorly designed incentive structure, appointment of non-professional people as managers of research institutions, lack of coordination of research with other institutions within the country and outside the country are some of the probable causes for their low performance. The policy implication is: the causes of poor performance should be determined dispassionately through an independent study and immediate steps taken to gear these institutions towards high performance.

On the supply side, weak regulatory frameworks and poor governance are also responsible for the low productivity. The agricultural inputs are either provided at the higher costs compared to the price fixed by the government or such inputs are of poor quality. The provision of fertilisers is a case in point. Due to inadequate supply, there is always a big gap between the demand and supply of fertilisers, particularly in the sowing season. Hoarding by middlemen and dealers of fertiliser is a known phenomenon. Resultantly, the farmers purchase fertilisers at inflated prices. If hoarding is controlled, the artificial shortage created by the middlemen can be avoided.

As regards pesticide medicines, complaints about adulteration and poor quality are common. You only need to visit the rural area and meet the farmers there to find about their rampancy. You will be inundated with complaints about adulteration and hoarding of agricultural inputs. The answer lies in improving the regulatory framework and governance for timely and quality supply of inputs to the farmers.

Succinctly speaking, a multi-pronged strategy is needed to enhance the agricultural productivity. Such a strategy should not only focus on the visible areas warranting improvement like overhauling of research institutions and provision of quality inputs but other areas like education and rural infrastructure development should also be the main focus of such a strategy. Indian Punjab is a case in point. According to R S Sidhu and A S Bhullar, agricultural economists at the Agricultural University of Ludhiana, say that spending on education and rural infrastructure development played a vital role in increasing the productivity of the Indian state of Punjab, though agricultural policies on both the sides of the border were almost similar. While delineating the points of difference between the two Punjabs, these researchers say that by the mid-1980s all the villages were electrified in the Indian state. The conditions of the roads in the rural areas was better and about 90 percent of the cropped area was irrigated.

These factors thus contributed towards the agricultural productivity, besides the massive subsidisation of fertiliser, credit, power and irrigation inputs. The governments in Pakistan also provided subsidies to agriculture especially during the era of the Green Revolution. But in our case, subsidies had stronger bias towards the big farmers. On the other hand, in the Indian state of Punjab small and medium farmers were the main beneficiaries, and that made the difference.

It also needs to be mentioned here that production of food in sufficient quantity is not the only condition guaranteeing food security. Rather it is the economic and physical access of the people to food which is equally important. Amartya Sen, the distinguished economist of our age, in his study on the famine in Bengal that killed two to three million people and brought starvation to millions of people says that it was not shortage of food that caused the famine. The main reason, according to Sen, was that people did not have enough command over food. “The years 1942 and 1943 were of unprecedented inflation, mainly resulting from war expenditures, and the absolute level of prices moved rapidly upwards,” Sen wrote.

He considers failure of exchange entitlement as being responsible for famines. If change in exchange entitlement is such that a large number of people are excluded from the ability to acquire food, then famine and poverty are the most likely outcome. Policy implication is: strengthen social security safety net and generate employment opportunities.

In a nutshell, food insecurity is a multi-dimensional problem and deserves to be tackled through a multi-pronged approach. Demand, supply as well as distribution factors need to be taken into account in the formulation of a strategic response to food insecurity. Both the unavailability and structural inaccessibility to food need to be addressed simultaneously.

The writer is a graduate from Columbia University with a degree in economic policy management. Email: jamilnasir1969@gmail.com
-The News

April 6, 2012
By Dr Pervez Tahir

Consensus on the 1973 Constitution, the Eighteenth Amendment and the Seventh National Finance Commission (NFC) Award provide testimony to the collective will of the nation to move forward towards political, social and economic equipoise in a federal structure. An economic consensus is still lacking, but the Seventh NFC is a major step in this direction. Any suggestion to roll it back ought to be viewed with great concern. Chaudhry Shujaat Hussain, the chief political backer of the Pervez Musharraf regime that failed to develop consensus on any issue it touched –– the NFC, Kalabagh, Balochistan, and even the economy –– has proposed to pay power companies out of the provincial share of the divisible pool (The Express Tribune, April 3). Shujaat was only echoing the distaste for the Seventh NFC that economic apologists of the Pervez Musharraf-Shaukat Aziz regime keep showing (The Express Tribune March 29). The line has also been taken by some donors, who are worried about macroeconomic stability without appreciating the political economy of Pakistan.

The case is built around the rising fiscal deficit. It is said that the federal government has frivolously spent its resources without realising the inflexibility of its other expenses. The provinces have been allotted too many resources. One notices a spending spree in the federal government and no expression of fiscal responsibility to help reduce the deficit. However, the cure is worse than the disease. The fiscal deficit was not any lower before the promulgation of the Seventh NFC. Any rollback is unlikely to do much about the deficit. There is only one solution to reduce the gap between revenues and expenditures: a sustained increase in the tax-to-GDP ratio by the federal government. It is, in fact, the federal government that has a gap of Rs515.5 billion between its revenues and expenditure for the period of July-December 2011-12. Only Punjab has posted a deficit. The provinces, as a whole, are in surplus and they should be encouraged to remain more prudent.

Furthermore, there has been a problem of sequencing. The Eighteenth Amendment should have preceded the Seventh NFC. But consensus-building is a complex affair and the outcomes cannot be held hostage to precise sequencing. Once such consensus is achieved, disturbing it can have grave political consequences. The deal was reached with Punjab giving up as much as 5.62 percentage points in its share. This loss became the gain of other provinces: 3.98 percentage points for Balochistan, 0.84 percentage points for Sindh and 0.80 percentage points for Khyber-Pakhtunkhwa. The federal government chipped in to ensure that Punjab did not suffer an absolute decline. If Punjab has been running a deficit in the first six months of the current year, and other provinces have posted surpluses, it is because of the burden it shared by initially supporting the consensus. To entirely blame Punjab for the fiscal deficit is to let macroeconomic fetishism take precedence over inter-provincial harmony, which has been strengthened by the shift from the single criterion of population to multiple indicators –– population, poverty or backwardness, revenue collection or generation and inverse population density. A number of special provisions in favour of smaller provinces are also in addition to these criteria.

Fortunately, those working on building the consensus had anticipated that rollback attempts might be made. The Eighteenth Amendment added a new clause to Article 160 relating to the NFC: “(3A) The share of Provinces in each Award of National Finance Commission shall not be less than the share given to the Provinces in the previous Award.”

The Express Tribune

Public enemy no.1: inflation in Pakistan — I

April 11, 2012
Aqdas Afzal

Pakistani policymakers, embroiled in Machiavellian plots, have missed out on a very important development: inflation in Pakistan has become public enemy no.1. Unchecked, runaway inflation, more than anything else, has become an existential threat for Pakistan. It can lead to the total and utter implosion of our social fabric and political system.

The massive inflation in Germany during and after WWI is a very interesting case in point, especially for those presently concerned by runaway inflation in this country. As Germany entered WWI in 1914, the core group of German policymakers, the men around the Kaiser, were convinced that they were facing a brief and victorious military campaign. As a result, Germany raised barely 10 percent of the massive $ 47 billion it ended up spending on the war. Instead, Germany relied on inflationary finance — printing money — throughout the war. Where money supply doubled and tripled in Great Britain and France during WWI, its increase in Germany was fourfold!

Even after WWI, printing money continued unabated in Germany in order to cover the fiscal gap that arose, in part, due to huge reparations — money that Germany owed to the victors of WWI. This deluge of money issued by the Reichsbank, the German Central Bank, resulted in massive internal inflation and currency devaluation. At the beginning of 1914, you could get 4.2 German marks for one US dollar. In 1920, however, the exchange rate had depreciated to 65 marks to one dollar. During this time, the general price level increased over nine times.

A series of events in 1921 including the French inflexibility over the demand for reparations from Germany and a campaign of political murders by right-wingers shattered the public confidence in the ability of German policymakers to turn around the economic crisis. Foreigners, even Germans, frantically began ditching German marks for whatever foreign currency they could muster. Even as the exchange rate plummeted, the German government kept printing money to cover its recurring fiscal deficits. Panic set in.

By 1923, inflation had acquired a momentum of its own. In August 1923, one dollar was worth 620,000 marks. And in early November 1923, a dollar was worth 630 billion (yes, billion) marks. In the last three weeks of October of the same year, prices rose one thousand times! Basic necessities now cost billions of marks in Germany: a kilogram of butter cost 250 billion and a ride on a Berlin street car 15 billion — it used to cost one mark before WWI. Almost worthless, currency notes were often used as wallpaper and stacks of currency doubled as children’s toys!

Inflation, more than any revolution, transformed the German social structure. Middle-class salaried people like civil servants, teachers, professors and doctors were destroyed as their lifetime’s worth of savings evaporated, almost overnight. Ex-generals in the Kaiser’s army took up jobs as bank clerks, teachers and professors started begging and women from respectable families ‘took to the streets’.

For the past five fiscal years, from 2007-08 through 2010-11, the official average inflation in Pakistan has been close to 14 percent, with 2008-09 peaking at 21 percent. The most recent data from the State Bank of Pakistan (SBP) shows that since 2007-08, the base year, prices have increased by 63 percent through February 2011. Though these inflation rates are not in any way similar to the rates of catastrophic inflation in WWI Germany, the similarities in the causes and potential impact of such consistently high inflation merit more reflection.

Economists agree that one of the main reasons behind consistently high inflation in Pakistan is the inability of the government to narrow the fiscal gap — the difference between expenditures and receipts. As a matter of fact, the government, lacking political will, and the Federal Board of Revenue (FBR), lacking capacity, have been unable to increase receipts in the shape of taxes collected (the four year average federal taxes to gross domestic product (GDP) ratio is 9.7 percent). For 2010, the International Monetary Fund’s (IMF) Fiscal Monitor Database puts Pakistan only ahead of Afghanistan and behind Ethiopia, Nepal and others in terms of general government tax revenue.

As a result, from fiscal years 2007-08 through 2010-11, the average fiscal gap was 6.4 percent of GDP. In the most recent review of the Pakistani economy (Article IV, 2012), the IMF is forecasting a fiscal gap of seven percent of GDP (Rs 1.5 trillion) for fiscal year 2011-12, against a target of 4.7 percent! Government borrowing from the SBP — inflationary finance — has already increased by Rs 182.6 billion (February 2012) in the present fiscal year, against the government commitment to keep borrowing at zero. Such massive government borrowings from the SBP (printing money) in order to cover its fiscal gap have acted as one of the key drivers for inflation in the last five years.

(To be continued)

The writer has taught economics at Lahore University of Management Sciences and presently works for the development sector in Islamabad. He can be reached at aqdas.afzal@gmail.com
-Daily Times

April 12, 2012
Aqdas Afzal

From 2007-08 through February 2011, food prices in Pakistan have increased by 81 percent, according to the official estimates. At the same time, the Food and Agriculture Organisation’s (FAO) Food Price Index, which measures international food price inflation, averaged 228 points in 2011. This present index value is 23 percent (42 points) more than in 2010, exceeding the previous high of 200 points in 2008, the highest level since the FAO started measuring international food prices in 1990.

In an interesting paper, scholars have linked the most-recent social unrest (the Arab Spring) in the Middle East and North Africa to sudden and steep increases in food prices. The authors of the paper further provide a threshold value of 210 of the Food Price Index, beyond which persistent and increasing food riots become a foregone conclusion. In many developing countries, political organisations are perceived to have a critical role in providing food security. The failure to provide this security, the paper argues, undermines the very reason for the existence of the political system. Once that happens, the ensuing protests can reflect a broad range of reasons for dissatisfaction while masking the actual trigger behind social unrest.

Another major negative impact of rising food prices is the precipitous rise in poverty in Pakistan. In a recent report, the Asian Development Bank (ADB) calculates that a 20 percent rise in food prices increases the number of the poor by 4.5 percent through pushing an additional seven million people below the $ 1.25-a-day poverty line in Pakistan. By this calculation alone, the number of poor people in Pakistan has increased by about 30 million in the last four years.

The immediate upshot of this is that just like WWI Germany, persistently high inflation — food inflation in particular — if left unchecked holds the potential to destroy this country’s social fabric and political system. Where it is becoming increasingly hard for the poor to buy food, the life savings of the salaried classes are evaporating. The exponential increase in the number of strikes, protests, processions, go-slows and crime rates are the early rumblings of the not-so-distant storm: full-scale social unrest.

Pakistani policymakers must take heed and devise plans for food production and distribution today to cope with this impending social unrest lest the storm destroys Pakistan’s social fabric and political system. In the immediate term, policymakers must focus on increasing the production of food in Pakistan by removing market imperfections to increase incentives for the small farmers — our key to food security. Pakistan is the seventh largest producer of wheat in the world; however, our yields are significantly below the world average.

Innovative microcredit programmes for small farmers have shown that agriculture production has been negatively affected by the small farmers’ inability to access credit for procuring inputs. Moreover, small famers, in the absence of risk mitigation options like crop insurance, become risk-averse and grow less as they cannot cope with the high risk of producing extra crops. In short, the upfront investment for inputs is high, whereas returns are uncertain. To avoid this, small farmers often retreat into subsistence growing or look for alternative livelihoods.

Policymakers must ensure that farmers have access to quality inputs like seeds, fertilizers, tools, training as well as credit. Coaxing insurers to offer crop insurance to small farmers will also go a long way towards increasing total agricultural production in Pakistan. Priority must also be placed on improving rural infrastructure such as roads, irrigation systems and storage facilities.

In the medium term, Pakistani policymakers must also come up with innovative ways to ensure a more equitable distribution of food. Rationing of the most basic commodities like flour, sugar, ghee, milk powder and tea is one such option. If that is not possible then a new food-support programme — that provides food and thus insulates the poor against food inflation — must be instituted for the deserving. Moreover, the government can also pass legislation that requires those making less than a certain threshold be provided free meals at their places of work.

Finally, in order to check runaway inflation, the government must bring its fiscal house in order. Reducing unnecessary expenditures — Public Sector Enterprises (PSEs) like Pakistan Steel Mills, Pakistan International Airlines, etc, for instance — and collecting more direct taxes is now crucial for weaning the government away from inflation-inducing money printing.

In sum, unchecked inflation, especially in food prices, has placed Pakistan on a very dangerous trajectory. Evidence from other nations shows that in the presence of increasing food prices there is a very strong likelihood of massive social unrest. These domestically created stresses, more than anything else, may lead to a complete and utter implosion: the entire social fabric and political system might crumble. This country may never be able to go back from the ensuing violence, ballooning crime rates and full-scale social unrest. Policymakers must take stock of these alarming developments and focus their energies on ways to increase food production by assisting small farmers — the key to our food security. At the same time, policymakers must devise innovative solutions for making food distribution more equitable — rationing and food-support programmes are some options. Finally, the most effective remedy for checking runaway inflation in this country is to have the government put its fiscal house in order. Wasteful expenditures on the PSEs must be stopped and more people must be brought into the income tax net.

(Concluded)

The writer has taught economics at Lahore University of Management Sciences and presently works for the development sector in Islamabad. He can be reached at: aqdas.afzal@gmail.com
-Daily Times

April 12, 2012
S.M Naseem

IN an impassioned lecture, under the auspices of the Pakistan Society of Development Economics some days ago in Islamabad, the deputy chairman of the Planning Commission, Dr Nadeemul Haque, tried to swing back the pendulum of development strategy in favour of growth.

Some five decades ago, his illustrious predecessor, the late Dr Mahbubul Haq, had set it in motion. The pendulum has hurtled back and forth (in a somewhat disharmonic motion) several times since.

Dr Nadeemul Haque’s lecture was largely based on the New Growth Framework, a document crafted by his colleagues at the Planning Commission. However, the lecture itself was full of scintillating wisdom and witticisms characteristic of him, bringing a breath of fresh air into what is often a sterile debate. This article intends not merely to highlight the
salient features of the talk, but also to provide a perspective on planning and development in Pakistan.

The economic and political landscape that faced the planners in the 1960s was vastly different from the current one. This was reflected in the lecture, despite its deafening silence on political economy matters. When the young Cambridge-/Yale-trained economist, Dr Mahbub, appeared on the planning horizon development economics was in its infancy.

Planning inherited a Soviet New Deal-Keynesian-Harrodian flavour, notwithstanding the Cold War.

Pakistan was firmly in the US-led Cold War camp and had signed a US-Pakistan military alliance while Gen Ayub had staged the first military takeover. That gave the Planning Commission enormous powers to mobilise resources for development, especially with generous US aid and Gen Ayub’s direct support, enabling it to carry out the first real spurt in industrialisation of the country. Dr Mahbub helped Pakistan become the epitome of fast growth in the developing world — much as BRICS are now.

In contrast, while the LSE-Chicago trained Dr Nadeem — who entered the Planning Commission as deputy chairman on completion of his long career with the IMF — may not be ready for his illustrious predecessor’s mantle, he faces considerably larger challenges, both economic and political.

Ties with the US, linked to the war on terror, are unravelling, the economy is in dire straits, and the 18th Amendment has shorn the central government of the already diminished fiscal space available. These factors have had unequivocally adverse consequences for mobilisation of resources for development, crucially impairing the Planning Commission’s
ability to step up — or even maintain — the past rate of growth, which was averaging about half its potential in the last few decades.

A resort to some form of growthmanship is therefore not uncalled for, even though it is hardly a Mahbubian moment. Dr Nadeem rightly lamented the lack of support of both professional economists and donors for giving growth a central place in the development agenda.

However, resource mobilisation constraints have made it imperative for Pakistani planners to look for ways of doing more with less, rather than await improvement in the tax-GDP ratio. For Dr Nadeem, this is being on the wrong track, when, according to him, there was massive, if not well-documented, evidence that the government’s footprint on the
economy was too heavy.

For the neoclassical economist, the new growth theory, with its emphasis on innovation, rather than capital accumulation, provided the inspiration to turn things around and make a virtue out of the necessity to shun the brick-and-mortar type of physical investment, with a lot of consequential corruption and rent-seeking. Instead, he argued forcefully for
relying on ‘software’, rather than ‘hardware’ investment. However, this is a specious dichotomy, since most software improvements come ‘embodied’ as some form of hardware or physical capital. Total factor productivity (TFP) is a measure of an economy’s ability to produce more from the same amount of resources over time. This indicator, along with
many other socioeconomic indicators, is very low in Pakistan, with technology contributing less than 20 per cent to GDP growth. The main culprit for this, according to Dr Nadeem, is a bloated public sector and dysfunctional markets, both stemming from ‘bad governance’, the economists’ favourite whipping boy.

Indeed, while the critique of the functioning of the government is well-founded at a micro-level, decrying the role of the government in overall economic activity amounts to throwing out the baby with the bathwater.

The following cautionary quote from the recent (2008) report of the World Commission on Growth and Development signed by a galaxy of experts, including two Economics Nobel laureates should temper such a stance: “Just because governments are sometimes clumsy and sometimes errant does not mean they should be written out of the script. On the contrary, as the economy grows and develops, active, pragmatic governments have crucial roles to play.”

The most seductive, though not least controversial, was Dr Nadeem’s obsession with cities, the kingpin of his New Growth Framework. He cites considerable evidence to suggest that the centre of growth is shifting to the cities, but to romanticise the cities as the be-all and end-all of development is too enormous a leap of faith besides being a grand
oversimplification.

In Pakistan, the issues of geographical location and agglomeration, neglected in the past, require a less cavalier approach in view of regional diversity and a historical baggage of inequity. Also, the implied rolling back of agriculture and rural development raises doubts about the strategy’s ownership by a still very large section of the population. The
strategy also unwarrantedly assumes that poverty and regional disparities will disappear through a strong trickle-down effect of faster growth.

Despite his commendable effort to break new ground, Dr Nadeemul Haque’s New Growth Framework lacks a historical and a political economy perspective.

The writer is a former professor of economics at the Quaid-i-Azam University, Islamabad.

smnaseem@gmail.com
-Dawn