Pakistan Economy (Important Articles)
Raising the growth rateMarch 16, 2012
Pakistan needs to ramp up its growth rate because the country faces a population bulge for almost the next 35 years; 230 million are projected to be in the labour force by the end of that period. This huge number of young men and women will have to be provided productive jobs to avoid social unrest and reduce the recruitment queues for Taliban-like forces. To absorb this youth the growth rate will have to be boosted from its present lacklustre levels.
How fast must the economy grow to accommodate these annual entrants to the labour force? All estimates suggest a seven-percent rate per annum. However, to reduce both the previously unemployed and underemployed, a rate of eight percent per year may be necessary, as against the average rate of five percent that we have achieved since the mid-70s – reflecting the existing potential of the economy, ignoring one-off events like an exceptional harvest, a spike in export prices.
How can this shift to a higher growth path on a sustainable basis be achieved? I would preface the discussion to follow by arguing that, for reasons of efficiency, the bulk of this growth must come from the private sector. And achieving such growth rates will:
a. Require a much higher rate of investment than our average historic rate of less than 19 percent of GDP. It is not possible to generate a growth rate of around eight percent per annum over a 30-year period without an investment ratio of 30-percent-plus: the East Asian Tigers averaged 30-35 percent, while India is now averaging just under 40 percent and China 46 percent.
b. Necessarily require a sharp increase in domestic savings (less than 15 percent of GDP for most of our history, compared with India’s 35 percent) to finance the investments needed to attain and then maintain such rates of growth. And this can only be achieved gradually over time, and provided adequate incentives and reforms are in place (see discussion below). And—
c. Need continued improvement in the productivity of the resources – capital and labour – employed. Higher growth rates will not only require more capital but, more importantly, higher productivity from all factors of production – necessitating a combination of greater technological progress and more efficient use of these inputs. Between 1970 and 2005 increases in productivity contributed only 20 percent of the growth in our GDP, while between 1998 and 2008 its contribution fell to a mere 11 percent, well below that of India, Sri Lanka and Bangladesh. The impediments to productivity increases include availability of reliable energy at reasonable rates, an educated, skilled and healthy labour force, and entrepreneurial and managerial skills. In our case, entrepreneurial skills hav e not developed partly because of our history of the state providing different industries protection against competition through policy crutches. The deficiency in managerial skills is a product of our weak educational systems, poor work ethic and the incentive structures that do not create a demand for professional skills – an entrenched culture of SROs to protect different sub-sectors of industry renders irrelevant the need for quality skills to improve industrial competitiveness.
Going forward we will have to look at domestic sources to meet our growing investment requirement since international capital flows are destined to become more volatile, the country’s poor image will only make it more difficult to access such funds at affordable rates. This will require more savings both “public” and private. How will these be raised?
Private savings can be stimulated through incentives and the right mix of economic policy and financial, regulatory, goods and labour-market reforms, institutional reforms (the last in the form of better and more accountable civil service structures), availability of skilled labour, technological readiness, etc. – the “software of growth” that the Planning Commission argues for. These are expected to boost investment rates by reducing the cost of doing business – we presently rank lower than other South Asian countries on ease of doing business – and most of these reforms will not require sizeable volumes of expenditures to implement. This will make businesses profitable, thereby providing an incentive to save and invest – a virtuous circle.
As for ways to support the growth in household, savings I would propose: (a) improvement in financial intermediation by ensuring real and increased returns on financial savings, say, on instruments of national savings schemes: this will incentivise the acquisition of financial assets and reduction in currency in circulation, today Rs1.7 trillion (close to 35 percemt of deposits!) and force banks to compete to mobilise deposits; and (b) introduce new institutions and instruments like portable and mandatory savings/pension schemes.
The above reforms to facilitate private investment and savings will need to be supported by complementary government investments in physical infrastructure. However, the financing of infrastructure, education, health, etc., related investments to improve both quantity and quality, will require significantly large resources. Unfortunately, our track record in terms of generating adequate resources (the public savings referred to above) to fund such spending has been abysmal. On the one hand, we have one of the lowest tax-to-GDP ratios and, even considering developing countries, we are amongst the bottom-ranked nations in terms of the proportion of the population registered as taxpayers – less than 5 percent of household population. And on the other hand, these limited resources are deployed on the basis of skewed priorities. And the issue here is not just creation of more assets like schools and hospitals but ensuring that there are adequate budgetary allocations for doctors, nurses, teachers and medicines to keep these facilities functional, providing quality services for which they were established. The enhancement in these public savings can only come through a credible time path for bringing the fiscal deficit under control – more tax revenues and less unproductive expenditures as a percentage of GDP – through a combination of policy, procedural and administrative reforms (tax and expenditure reforms will be subjects of forthcoming articles). The increased fiscal space will enable the financing of social sector expenditures and physical infrastructure, an outcome that will require more than just higher rates of economic growth.
Future economic growth will also face a slowing down of demand in our traditional export markets of Europe and the US, which are struggling with their own recession-like conditions. To overcome this demand insufficiency for our products, we will have to look towards the East, especially our neighbours, with young consumers and growing markets, as opposed to aging populations and contracting Western markets. Growth in exports has become critical for financing our rising import bill, especially with doubts about the continuing robustness of remittances from sluggish Europe and America.
However, to support export enhancement and the competitiveness of the economy, apart from a competitive exchange rate, one would not recommend any generic support to a sector (to avoid creating distortions) but to factors of production and cross-cutting activities (like skill development, investment in key infrastructure or incentives for exports as a way of incentivising performance) that are likely to have an impact upon a broad range of sectors and can draw in other complementary investments or technology or knowledge spill-overs.
(To be continued)
The writer is a former governor of the State Bank of Pakistan.
Raising the growth rate
March 17, 2012
What other sectors of the economy would one support to absorb the large annual increments to the labour force and enable them to earn a respectable livelihood? The relevance of this question stems from the fact that our success in achieving better “inclusiveness” in the “economic growth” that we registered in the first six-seven years of this century has not been noteworthy. Much of this growth was concentrated in the relatively capital- and skill-intensive sectors of finance, telecommunications, IT, oil and gas and motor-vehicle assembly which favoured those at the upper end of the income scale; the bulk of the population, with limited education and skills, was unable to participate meaningfully in the growth witnessed in these sectors.
Sectors like housing and construction, information technology (especially in the form of BPO services) and communications, wholesale and retail, our range of merchandise exports and SMEs are essentially labour-intensive, with relatively higher employment elasticities. Even sub-sectors of industries like consumer appliances, auto assemblers, engineering, and communications, which are relatively capital-intensive, generate large employment opportunities through their backward and forward linkages – especially through the development of the vendor industry and the related service sector for the sale and after-sale maintenance of these products. Their growth will be stimulated by both the software and hardware referred to above and through appropriate amendments in banking regulations and credit schemes – e.g., by restricting export refinance to SME exporters.
Furthermore, to facilitate the growth of labour-intensive SMEs there is need for a programme to develop secondary/intermediate cities and towns by adopting a cluster-based approach (with the cities/towns to be connected, if necessary, through expressways) on the basis of economic potential (in terms of available markets and commercial centres), returns to the economy and payback period, instead of selecting individual cities in different parts of a province.
Such an approach will lower additional investment costs for both the government and the private sector. For foreign investors, in particular, the costs of investment or doing business and locating assets will become lower for each new venture as more clusters are developed in other geographical areas of the province. These investments could attract large multinational retail chains like Metro, Makro, and Carrefour to locate in these areas creating opportunities for the development of high quality supply chains and related skills, especially for agro-processed products. There would be a huge multiplier effect associated with the operations of such retailers. The experience and expertise gained by those supplying goods to such franchises, those providing services of warehousing and transportation and by those trained by such branded outlets in managing the entire range of services linked to retailing and timely delivery of goods and services would enable them to improve the standards of their products so that they can market their products and services internationally through the global networks of such companies, especially their stores operating in the Middle East.
One sector that will require special attention at the national level, despite being a subject in the provincial domain under the Constitution, is agriculture. Inclusive, robust and sustainable pro-poor growth has to be anchored in agriculture and livestock, from which 44 percent of the workforce (72 percent in the case of females) directly earns its livelihood. The sector requires support not only for poverty reduction and more equitable development of regions but also to bring more stability in growth in a manner that ensures that gains accruing from this process are safeguarded. The sharp rise in international prices for food crops and the opportunities arising for Pakistani farmers to trade in other cash crops and enhance their earnings (especially with the gradual removal of subsidies in OECD countries and the resulting increases in prices of such crops) can contribute significantly to the rapid enlargement of the middle class in rural areas.
The yields per acre can be doubled through modern agronomic practices using available technology, without aimless subsidisation of outputs like wheat and inputs like fertiliser and irrigation services. Furthermore, for achieving higher growth in agriculture earnings we will need to shift effort away from food crops to horticulture, dairy farming and crop varieties that are less dependent on water. Since horticulture produce is perishable, logistics of its transportation, storage, etc., (the value chain) will acquire importance, which will in turn require changes in the legislation relating to market committees which restricts the sale of such produce directly to the private sector.
Admittedly, however, to achieve such increases in productivity requires a package of several initiatives, the most important of which will be better management (both quantities and timing) of a key input – water. For the efficient use of water, greater focus will have to be placed on methods like land levelling, zero-till cultivation, drip irrigation, greenhouse and tunnel technology (for horticulture, fruits and vegetables) and policies to facilitate development of private cold storage chains.
Moreover, since there is lot of underemployment in agriculture, the challenge would be to increase the productivity of this labour from its movement out of the sector, but not as forced migration out of misery but as a shift to more remunerative non-agricultural employment. Ideally, so as not to aggravate the pressure of rural-urban migration, this would require its absorption in non-agricultural activities in the rural sector.
In view of the impending crisis in the availability of water, the importance of the efficient use of this scarce resource cannot be overemphasised. However, it will not be easy to conserve water use and improve use efficiency through the pricing mechanism. It is difficult to get public understanding, let alone acceptance, for the need to appropriately price the consumption of water by treating it as a scarce resource – the general perception being that it is a natural resource given to man by Allah. The demand for heavily subsidising electricity or diesel for running tubewells, the under-recovery of cost of canal irrigation services and the subsidy in providing water for drinking, washing and sanitation are examples of what efforts to curb its consumption are up against.
To address both transient and permanent poverty of different groups in society there will be a need to initiate employment guarantee schemes for unemployed able-bodied youth and administer transparent safety nets system for the disadvantaged, vulnerable and indigent. In this context it is important to note that although the more labour- intensive and less skill-intensive agricultural sector, from where a greater part of the population derives its earnings, also benefited from good weather, higher support prices for wheat maintained by the government and higher commodity prices internationally which kept domestic prices high as well. It was mainly the province of Punjab, with a relatively less skewed ownership of land holdings, which saw a wider distribution of this prosperity. Punjab also profited from the growth in the sectors referred to earlier above (a) because of a sounder educational and skills base (admittedly Karachi also benefited from this factor), a more competent bureaucracy, greater ethnic and lingual homogeneity, better access to the bureaucracy in Islamabad and stable single-party governments.
This writer fears that as Islamabad’s role is reduced in financing/providing services or infrastructure because of resource constraints, the disparity between Balochistan and, say, Punjab and Sindh will widen even more sharply unless the residents of this province are given total control over their oil, gas and mineral resources – their resource base on which their development can be founded.
Finally, “poverty” or deficiency when measured in terms of the controversial and much debated access to basic social and economic services (since we lag behind most developing countries similarly placed economically or faring even worse than us) has over time become more severe than the poverty estimate on the basis of nutritional intake. In this context the foremost issue requiring attention is not just poor enrolment and retention levels in schools, but the quality of the schooling available to the poor, the biggest hurdle in the way of their social mobility. Such improvements in schooling will need to be supported through skill development initiatives anchored in public-private partnerships, with international certification of those graduating from this system to enable them to achieve mobility, domestically and overseas, thereby enhancing their earning capabilities.
The writer is a former governor of the State Bank of Pakistan.
Judicial reforms and economic growthMarch 17, 2012
By Ishrat Husain
Growth rates in Pakistan since 2008 have declined to almost half of the level achieved in the preceding four years. The investment ratio in 2010-11 has been the lowest in the history of Pakistan. Most of the discussion on the stagnation and decline of the economy has rightly focused on fiscal deficits, energy shortages, inflation, and high interest rates. But the relationship between the rule of law and investment and business development is not much talked about in popular discourse. In the absence of a conducive legal environment, uncertainties created by other factors such as political instability, security, law and order, energy, etc., would make matters worse. But a well-functioning judicial system can reassure the investor and act as a countervailing force to these other negative attributes. An investor will part with his financial savings and share his expertise and experience only when he is assured that the firm will make profits. To achieve this, non-discriminatory and impartial application of law, enforcement of contracts, protection of property rights and speedy disposal of cases are necessary.
The recent judicial activism and suo motu actions by the Supreme Court and High Courts have done a great deal of good in establishing a new equilibrium between the Executive, Parliament and the Judiciary. This movement while commendable, should not distract the attention from the more mundane tasks of (i) ensuring broad based access to justice; (ii) revision of outdated procedures and laws; (iii) use of modern technology in case management; (iv) encouragement of Alternative Dispute Resolution (ADR) mechanisms, (v) tracking and enforcement of National Judicial Policy 2009; (vi) directing the Special Courts and Tribunals to abide by the deadlines for the disposal of cases. These measures will have a more lasting impact on the economic governance of the country and help remove some of the obstacles in the way of investment and equitable economic growth.
Access to judiciary is limited to only those who can afford good lawyers and pay their enormous fees and expenses. Unequal access to justice is one of the main factors that perpetuates the patronage capacity of politicians and, in turn, leads to poor economic governance. Feudalistic ethos that pervades our governance structure cannot be altered until all citizens are treated equally by law. Today, it is only the rich who can manipulate the system to their advantage.
The laws governing economic transaction, such as the Contract Act, the Evidence Act, the Registration Act, the Transfer of Property Act, and the Stamp Code, were made in the 19th or 20th century. They are not only deficient, defective and outdated but in some instances their applicability is limited. The most important law that needs updating is the Land Revenue Act to make it more germane to the modern demands. Land use for industrial, commercial and agricultural purposes is critical to the production of goods and service. Land disputes on title and possession in both, urban and rural areas, form the bulk of civil litigation at the local levels with appeals escalating all the way to the Supreme Court. The process of adjudication is not only tedious, cumbersome, expensive but time consuming. Transparency of land sales through clear land titles and market-based transactions would reduce the volume of litigation and promote efficient use of land — both urban and rural.
Case load management in our courts, particularly at the lower level is ridden with inefficiencies. For the last decade, an attempt is being made to manage the load through a transparent computerised system but the results have been sporadic. Unless the top judicial leadership assigns a strict deadline, there is little chance that it will be completed. Rigorous supervision of the lower courts and taking penal actions against non-performers and rewarding those who are quick and fair in disposal of cases should be institutionalised.
While we all rightly criticise the informal jirgas, sardari practices and Qazi Courts, the fact remains that we have been unable to extract the essential ingredients of these informal systems and enrich the formal legal systems. The uprising in Malakand Division was inspired by the mullahs who contrasted the speedy and expeditious justice of the Shariah Courts in the days of Wali of Swat, with the established judicial system applied in the area since the merger of Malakand in the province of Khyber-Pakhtunkhwa. The Federal Board of Revenue had implemented an Alternative Dispute Resolution mechanism until 2008. As soon as the new government took power it abolished the mechanism rather than fixing its defects and weaknesses to make it more effective. Small Causes Courts and properly functioning village level Masalahit Committees and other means of ADR can take a lot of load off the present congestion in our courts and also provide access to justice at very little cost.
A ray of hope appeared in 2009, when the National Judicial Policy (NJP) was announced. The policy made some very radical pronouncements such as that cases relating to banking and different taxes and duties such as income tax, property tax, etc., should be decided within six months. All stay matters should be decided within 15 days of grant of interim injunction. Rent cases should be decided within four months in trial courts and appeals within two months. Cases regarding suits upon bill of exchange, hundies or promissory notes should be decided through summary procedure within 90 days.
The banking system cannot simply work if willful defaulters obtain stay orders from the courts and bank loans remain stuck. Even where the courts have decided cases in favour of the lenders, the execution of decree takes a long time. The same is the case with income tax, sales tax, and customs pendency. Special Courts are either without judges or some of their judges do not have full competence over the specialised laws and regulations. The cases are adjourned and remain undecided for decades. The NJP should involve a more proactive monitoring mechanism.
As one of the leading Pakistani lawyers has so aptly commented that the English model –– on which the Code of Civil Procedures (CPC) 1908 was based –– was discarded even in England, a long time ago. The English model “preferred form over substance on account of this fundamental flaw, litigations continue in Pakistan for decades while lawyers squabble over issues of virtually no consequence. In each litigation there is a lawyer seeking justice for his client and an opposing lawyer who will very successfully prolong and delay the litigation, while liberally drawing upon various dilatory provision of CPC. Knock outs on the basis of hyper-technicalities and the causing of abnormal delays are, in fact, appreciated and considered ‘assets’ and ‘qualities’ of astute lawyers.”
The Express Tribune
For a fiscal social contractMarch 24, 2012
Weak fiscal structure is one of the major policy areas Pakistan seriously needs to concentrate on to strengthen public finances through revenue mobilisation and cuts in wasteful and low-priority expenditures. This has been recommended by the IMF Country Report released in February, 2012 in pursuance of Article IV consultation and post-programme monitoring with Pakistan. The IMF’s advice is not misplaced especially in the context of yawning fiscal deficit and low tax-to-GDP ratio. The fiscal deficit of Pakistan has widened to the unsustainable limit of 6.6 percent of the GDP, whereas the tax revenues constitute only 9-10 percent of the GDP, one of the lowest in the world.
Tax evasion is widespread. You will hardly come across a person in Pakistan who believes that tax collection is fair, or that he should pay due taxes for a larger purpose of state building, or that he can associate himself with the benefits dished out by the state in return of taxes paid by him. .
Due to low revenue collections, large fiscal deficits are hard to finance and the hammer of austerity always falls on the development budget. As pointed out by the IMF report, the budgetary management simply means containment of investment spending and borrowing from the banks. It is almost impossible to reinvigorate the weak fiscal structure unless a consensus is reached through renegotiation of the fiscal social contract among all the stakeholders for domestic revenue generation and its spending. Currently, the social fiscal contract, if at all it exists, is very weak due to a palpable absence of any relation between the revenue raising and spending preferences. This model serves the interests of the powerful groups where revenue collection and public spending are separate domains to the detriment of the citizenry at large. The present fiscal model can best be described as what is called ‘the state capture paradigm.’
In such a paradigm, the state becomes an instrument for furthering the interests of the elite and the powerful who use the state apparatus to enrich themselves. The revenue collection and public spending patterns are clearly determined by the vested interests of such groups and not the collective benefit of the citizenry at large. Consequently, the powerful and the rich do not pay due taxes. The tax machinery remains weak, and horizontal and vertical inequities get sharp. Tax evasion becomes rampant and compliance cost rises. In such a model, the taxation system does not work as an instrument of state building and redistribution of resources. What need redefine the fiscal social contract – an agreement between the state and the citizenry to the effect that the people will pay their taxes honestly and in return the state will provide good governance and public goods like education and health etc.
In order to reconstruct such a contract, we need to answer three basic questions. First, what will be the major sources of revenue to reduce fiscal deficit (aid, borrowing or domestic revenue mobilisation)? Second, what will be the priority areas of spending (butter versus guns tradeoff)? Third, how will it be ensured that the allocated budget is properly spent on priority areas and value of money is returned to the tax payers (ie control of corruption and good governance)?
Traditionally, Pakistan has remained heavily reliant on borrowing, foreign as well as domestic and aid to bridge the fiscal deficits. The efficacy of aid as development strategy is questionable on several grounds especially on the perverse incentives it generates for the recipient country. Even if we believe in the efficacy of aid as viable option, it will not be forthcoming liberally at least in the near future due to economic downturn in the US and Europe.
As for borrowing, it has got its own costs. The dollar denominated debt has severe balance sheet effects if the currency of the country is not strong. Depreciation/devaluation of the domestic currency against the dollar increases public debt besides the point that more funds are required for debt-servicing in future.
Excessive borrowing from domestic banks has at least three detrimental effects. First, it creates inflationary pressures. Second, it results in high debt servicing due to high domestic interest rates. Third, it crowds out the credit demands of the private sector. Heavy reliance on borrowing is not a sustainable solution to the problem. Without exploiting domestic resource mobilisation, solution of the large fiscal deficits is not possible on sustainable basis.
For domestic revenue mobilisation, the issue of horizontal and vertical inequities needs to be addressed. Taxation of the sectors of the economy which are still out of the tax net should become part of the debate while reconstructing a fresh fiscal social contract. New tax avenues need to be explored especially by the provinces after grant of autonomy through recent constitutional amendments. Taxation of land value improvements, and simplified taxation schemes for small businesses operating in the informal sector can be some of the potential areas for broad basing of taxation. Broadening of the tax base will not only enhance revenue but also contribute towards state building.
In order to reduce tax evasion and large tax gap, improving the quality of tax bureaucracy is another area deserving. The efficiency of public bureaucracy is determined by the fact as to how effectively it collects taxes and detects tax evaders. The empirical literature recognises the quality of tax bureaucracy as one of the major determinants for tax revenue. If the majority of the tax-payers do not repose their trust in the fiscal competence and fiscal integrity of the tax machinery, enforcing the tax compliance will remain a difficult endeavour.
Second ingredient of the social fiscal contract relates to the spending priorities. It is what economists call “butter versus guns tradeoff.” According to the IMF country report, subsidies especially electricity subsidies and interest payments consume almost half of the government’s revenues while security spending uses up another quarter. The portfolio of expenditures in our case has got two salient features: first, most of the revenue is consumed by non-developmental budget like interest payments and defence. Second, whatever is left is consumed by wasteful expenditures. Thus very little budget is allocated for sectors like education and health etc. Resultantly, a large number of the population is not a direct beneficiary of the fiscal choices. While negotiating the social fiscal contract, we need to resolve, once and for all, whether we should secure ourselves through guns or by investing in our people.
The third question relates to the control of corruption and good governance. It is a matter of common observation that whatever little is allocated for the human and infrastructure development does not reach the intended targets. According to the IMF report “patronage, weak management, poor service delivery and other governance issues have created fertile ground for rent-seeking and corruption in Pakistan”. Good governance is critical not only to growth and development but also to raising tax revenues. In order to collect the due taxes, legitimacy of the state is highly important, which the state derives from good governance. If the governance is poor, the level of trust in the state’s ability to spend wisely and efficiently will also be low. Consequently, people will have little incentive to pay taxes.
A big debate needs to be initiated to reconstruct a fresh fiscal social contract by seeking answers to the above questions and all the stakeholders, irrespective of their political, ethnic and religious affiliations, should come forward to steer the country out of the economic morass.
The writer is a graduate from Columbia University with a degree in Economic Policy Management. Email: email@example.com
Delusional and destructive
Our leaders are acting like ostriches in that they are oblivious of the dangers that the economy is facing. The economy is in dire straits. Even its nominal growth is on the strength of huge, unmanageable borrowing.
The president, in his speech to the joint sitting of parliament, boasted that the economy would grow by 4 per cent this fiscal. This was an exaggerated estimate, as all economists, the donor agencies and the State Bank estimate the growth to remain between 3-3.5 per cent this year. The president conveniently forgot that the economy grew at an average of 7 per cent in the previous four years prior to PPP rule. In the four years of the PPP government, the growth has averaged around 3 per cent.
He has a point that the floods impacted growth which he claimed was to the tune of 2 per cent of GDP. However, he was ignorant of the fact that Pakistan faced severe devastation in the form of an earthquake in 2005, annihilating cities along with population, buildings and infrastructure and still a high growth was maintained. Nations face calamities, international sanctions and bad luck but, even then, emerge successful through prudent and transparent measures during periods of stress, adhering to rules of good governance.
However, if someone uses natural disasters for milking aid from global donors, the impact of the disaster multiplies. The present PPP-led regime lost the trust of donors, including most concerned Islamic countries, on the way it tackled the floods of 2010. It did not get any assistance in the subsequent floods that affected Sindh in 2011.
The assistance we received during the 2005 earthquake was, at least, spent on the affected people with the result that we see new towns and colonies flourishing in the KP and the Azad Kashmir. The farmers in Sindh that suffered from the floods in 2010 are still awaiting government assistance. Water in some regions of Sindh has not yet receded from the floods cause in 2011. The loser was not the government. The losers were the affected people. The government has increased its borrowing every year during its past four years of rule. The money has not been spending on welfare of the people or building infrastructure.
The president in his speech boosted that this government completed the Mangla raising project. The fact of the matter is that the project was completed in 2008, and it was un-operational since then because rupees six billion compensation to the affected residents was not released by this government for three years. This stopped the dam authorities from filling the dam for three years. So the credit of launching and completing the dam goes to previous regime and dragging its operation for three years to the present government. We lost hundreds of billions of rupees worth agricultural productivity due to lethargic attitude of this government.
The president also claimed that the second nuclear power plant at Chashma was completed during the tenure of his government. It is true, however, the credit goes to the Chinese government that started the projected much before the assumption of power by the present regime.
The Chinese provided the funding and expertise for the project and completed it on schedule.
President's assertion that Pakistan's foreign exchange reserves reached peak of $18 billion during the PPP rule conceal the fact that $8.5 billion of these reserves are the IMF support that is due for return in next three years. The reserves have already started depleting as the government paid back the first installment of $400 million to the fund in February. Another $800 million are due in June.
Pakistan's exports have definitely gone up in recent years. The government could take partial credit for this increase. However we must realize that there was much higher demand for Pakistan products in the international markets that could not be fulfilled due to extra ordinarily high energy and power mismanagement. The Pakistani entrepreneurs deserve the actual credit for high exports as they increased their efficiencies the highest possible levels to successfully confront their competitors. The rulers in fact must be made accountable for depriving the nation of a golden opportunity to market its products globally. The most painful aspect of the industry specific power shortages was that the government doled out Rs. 1.3 trillion subsidies to the power sector monopoly during the past four years most of which has been lost to corruption. This fact was revealed at a conference of the Institute of Engineers by none other than a high ranking PEPCO official in Lahore, last week.
This government is not publishing poverty figures for the last four years. All economists agree that the poverty has increased substantially during the past four years. Some experts opine that 74 million people out of 170 million populations are living below the poverty line. They have solid reasons for these estimates. Thousands of industries in country have gone sick. Most of the surviving industries are operating at 40-50 per cent of their installed capacities. The large scale manufacturing sector has registered a nominal growth of 1.5 per cent. None of the industry is operating anywhere near their production levels in 2007. Millions of workers have lost their jobs. No new jobs are being created while the nation is adding two million youth every year in its workforce. All these facts call for serious efforts to revive the economy and not to rejoice the so called achievements of this government.
Pakistan needs governance of highest order. The cronies of the rulers sitting at highest levels would not only have to go but also have to account for their corruptions and misdeeds. Pakistan simple cannot afford further bad governance and looting of its resources. The gap between the rich and the poor has been increasing at an alarming rate.
The privileges of the rich would have to be cut. The taxation should provide relief to the poor only. The rich should be taxed adequately, there should be no exemptions. The rulers would have to adopt simplistic life style as adopted by Iranian rulers. Even in the developed world the British Prime Minister lives at a modest one bedroom flat at London's 10 Downing Street. There is extra ordinary security or guards outside his home.
Source: WEEKLY CUTTING EDGE
Concatenation of policies
Food security is not just about providing enough food to the people that satisfy their hunger. The quality of food is important as well.
Unfortunately, these two aspects of food are looked after by different departments that lack coordination.
In Pakistan, the Ministry of Food and Agriculture ensures that the country produces enough food for its 180 million people. If there are any shortages it arranges imports with the coordination of the Ministry of Finance. The aspect of malnutrition is dealt with by the Ministry of Health. There is no connection or little interaction between the Ministry of Food and Agriculture and the Ministry of Health. This is the reason that during years when the country produces enough grain and livestock the problem of malnutrition remains unresolved. The nutrition experts need cooperation of the Ministry of Education in school-feeding programs.
The distribution of quality food having enough nutrients to ensure the uniform health of the entire population is a dilemma for the developing countries and efforts are being made to ensure multi-sector coordination to achieve this objective.
Experts agree that multisectoral programs are the most effective way to tackle malnutrition. Still, despite general agreement that multisectoral actions (if not programs per se) are the best way to reduce malnutrition, many observers believe that multisectoral planning and coordination are simply too difficult to carry out.
Doing more and doing it systematically has appeal when most of what is done (in regard to interventions for nutrition) is so limited and inadequate. The dilemma is that comprehensive understanding often leads to highly complex interventions with lots of interdependencies; and these overwhelm the capacities of weak institutions and make action reliant on coordinated efforts by lots of different actors who do not particularly appreciate being harnessed to, and subordinated by, the requirements of a comprehensive plan.
The main question is how to facilitate collaboration vertically and horizontally across interrelated sectors, ministries, and actors inside and outside government.
Commonly cited obstacles to such cooperation include the following:-
Each agency seeks to preserve its autonomy and independence, which can be compromised through cooperation with other agencies.
Agencies have different visions, goals, routines, and procedures.
Agencies and individuals may conflict in terms of technical understanding of the problem and appropriate solutions. Organisational capacities and power may be uneven across the partners in collaboration, affecting abilities to make and implement decisions.
They may also face different timelines for action. Organisational coordination, alignment, and synchronization can become difficult.
Agencies have different political constituencies to which they respond and, often, different structures for accountability. Different constituencies can bring different expectations and pressures to bear on each agency. The various pressures for action can actually pull agencies in different directions.
Working multisectorally may not be a guiding principle for government or for outside interest groups, including potential beneficiaries.
Thus, incentives (political, organizational, and personal) for multisectoral action may be weak, as perceived benefits do not overcome the costs of coordination. This factor seems to be particularly relevant in the case of nutrition.
International and national commitment to the Millennium Development Goals (MDGs) has further galvanized support for social and economic development. The MDGs include nutrition as an indicator, and many of them are interrelated and so encourage multisectoral analysis and action. Some observers have predicted that a collective initiative like the MDGs that explicitly recognizes the cross-sectoral and synergistic causalities will motivate increased interaction among sectors and ministries to treat problems as a set rather than individually.
Although many factors are likely to contribute to the success of multisectoral programs, effective collaboration is likely to be central among them. Collaboration is not a natural state of affairs for organizations. Government ministries and development organisations rarely place high premiums on collaboration outside of the sectors in which they work, and incentives for individuals in these organisations to step outside their sectors are unusual.
Collaboration requires adaptation of one's own way of doing things as well as understanding how to motivate others to participate in joint action. To take advantage of opportunities to work multisectorally, policymakers and programmers must clearly understand the motives, conditions, mechanisms, and processes that trigger and sustain multisectoral activities. None of this is easy to achieve.
Collaboration implies the existence of a partner, one who is interested in participating because of the potential to receive some benefit.
Often experts in nutrition who try to work across sectors or organisations seem to have forgotten the role of incentives and motivation, of demonstrating the benefits of collaboration to potential partners. Instead of understanding the needs of others, they use a nutrition-(or nutritionist) centric view. The question becomes less about how to promote collaboration between agencies and more about how to force uptake of one's own nutrition interests or perspectives into existing organisations, policies, projects, or programs.
The simple knowledge that cross-sectoral collaboration might help reduce malnutrition more rapidly, perhaps in a less expensive way, seems to have been the main element of persuasion. Because operational, individual, or institutional benefits were not clear and actors could apparently achieve reductions in malnutrition even without collaborating, individuals and institutions had little reason to vigorously pursue multisectoral efforts.
This lack of motivation may have much to do with the institutional culture and professional preparation or perspectives of those involved. Nutrition programmers or advocates often have backgrounds in science or research. The usual process is to conduct the research and then produce and present the evidence to decision makers. The approach is almost to say, "Here is the evidence. Now use it." There is limited planning or implementation of strategic communications that might help convince potential partners to cooperate, especially those in fields largely unfamiliar with nutrition who have different institutional missions and interests.
Using cooperation, agencies may be able to employ the same institutional channels to deliver or monitor services. Organisations can reduce transaction costs by avoiding redundant activities or creating dedicated mechanisms for cooperation. For example, cross-sectoral delivery systems between Ministries of Education and Health could complement one another in school feeding programs.
Different agencies may work to avoid duplication efforts as in conditional cash-transfer programs with nutrition-related conditions (such as requiring attendance at scheduled prenatal care visits), or when implementing a system for health and nutrition information-management and planning.
Collaboration itself can foster empowerment. Organising in support of a collaborative purpose can help participants understand how to work together (including through the integration of outside resources) to reach their agreed-on goals. Rapid Results Initiatives have taken this tack in addressing micronutrient malnutrition in several African countries, using time-bound, results-focused efforts to help normally rather disparate players come together and work to quickly achieve a common goal.
Source:WEEKLY CUTTING EDGE
Which ‘fiscal deficit’?March 27, 2012
Dr Meekal Ahmed
It is obvious that the government is in a pre-election mode, spending freely. Funds, including “discretionary” funds, are being released quickly for new “uplift” schemes. Even our “awam-dost” (“Friends of the People,” for the foreigners reading this) have received new money to spend; on what, no one seems to know. Yet we are hearing soothing words from the government that all is well, the fiscal deficit is “on-track,” “structural reforms” are being implemented and everything is under control. However, we are not being told which fiscal deficit the government is talking about. Is it only the federal government deficit? Does it include the provinces? Is their combined surplus promised at budget time close to materialisation? What about the circular debt and the losses of the public-sector enterprises? After all, these are all public-sector operations and therefore must be considered, definitionally and analytically, as part of the public-sector deficit which needs to be financed.
The fiscal deficit could therefore not be “on-track” if borrowing to finance it, plus borrowing for commodity operations, the circular debt and the public-sector enterprises is soaring and pre-empting some 84 percent of the total money and credit in the economy, with little left over for the private sector.
Lucky for us, however, this huge injection of borrowing/liquidity is not leading to an expansion in money supply (or M2). This is because the spectacular rise in domestic money and credit is being offset almost entirely by a similarly spectacular fall in our foreign-exchange reserves. so that M2 (the net effect of the two variables which are presently moving in opposite directions), has grown very slowly.
Whether this “offset” is by design or default is not clear. Either way, it is a dangerous game to play. The fall in our foreign-exchange reserves cannot endure for long before panic sets in. The external side, at some point which cannot be determined ex-ante, will go into a cumulative and self-reinforcing downward spiral punctuated by capital flight, a plummeting exchange rate, a rating downgrade and a stock-market crash. Then we will find ourselves right back to where we were in 2008, facing the prospect of a full-blown balance-of-payments crisis and debt-default.
This time, however, the IMF, that institution of “sinister omnipotence,” is unlikely to be easily conned into another bailout with a promise of some phoney reforms. Of course we like to think that all it would take is for Ambassador Sherry Rehman to make a call to Hillary Clinton and she makes a call to the new managing director of the IMF and they have a friendly woman-to-woman chat which ends with a nod and a wink. We grossly over-state the power and influence of the US. The US has a strong voice in the IMF but there are 23 other executive directors sitting on the IMF executive board who think they are just as important and who will vote on a new Pakistani programme. Some may reject it, as has happened many times before, a fact unknown to the public since the deliberations of the IMF executive board are confidential. And unfortunately for us, executive directors have long memories and look most disapprovingly at member-countries that take IMF money and cut and run.
It is possible that some of the assumed foreign financing comes in. This could stabilise the foreign-exchange reserve position or it may even start to build backup. But there are problems in that scenario too. The infusion of foreign reserves will add to the on-going excessive expansion in domestic money and credit (and not subtract from it as at present) and send M2 soaring. This would be the harbinger of sharply accelerating inflation down the road.
The government, it seems, is caught between a rock and a hard place. It has impaled itself on the horns of a dilemma and has two choices: sharply accelerating inflation or going bust. Possibly both. To be fair, it has not been easy going at home with many fatal distractions and the external environment remains unpropitious. Surging oil prices are likely to crimp global growth and stoke inflation while the growth in emerging markets which helped boost the global economy appears to be waning. All these factors impact adversely on Pakistan via trade and capital flows. But, having said that, Pakistan’s present plight is all about a fundamental disinclination to take the bull by the horns and alter course. You reap what you sow.
The writer has worked at the Planning Commission and the IMF. Email: meekalahmed2 @aol.com
The beg and borrow policyAbid Hasan
Tuesday, March 27, 2012
For decades, the political and military elite governing Pakistan have followed a beg and borrow strategy for financing government expenditures, rather than raising taxes. In addition, this elite stole from these resources to benefit themselves, and their family and friends. This financing strategy has made Pakistan much more dependent on foreign grants and loans, compared to other countries of similar size, endowment and level of development. Foreign borrowings for bad projects and programmes have mortgaged our future generations, while excessive foreign grants have mortgaged our national sovereignty.
Over the last two decades, Pakistan has received close to $40 billion in foreign grants (mostly from the UK and the US) and loans from the World Bank, the International Monetary Fund and the Asian Development Bank. As in all developing countries, the impact of this aid on Pakistan’s socio-economic development is directly linked to Pakistan’s own performance in respect of structural reforms and the effectiveness of the current and development spending by government. Since the effectiveness and accountability of total spending by government remains low in Pakistan, the effectiveness of foreign assistance has also been low. The “results on the ground” from the $40 billion of foreign assistance have been disappointing. While there are many examples of programmes that have helped Pakistan, there are as many, or more examples, of failure and less-than-satisfactory results.
Around half foreign assistance, roughly $20 billion, was for development projects. Of this, around $10 billion has been put to good use. These include Ghazi Barotha Dam, national highways, barrage improvement efforts, power-generation, pipelines, ports, earthquake reconstruction, banking-sector reforms, micro-finance and polio eradication. These projects have yielded visible and lasting results.
Foreign aid has supported some small islands of excellence-like LUMS and the Pakistan Poverty Alleviation Fund. A stellar example of donor-supported programmes in the 1960s and 1970s was the Indus Basin Dams and Irrigation Systems Development.
Another $10 billion in project aid has financed projects with limited impact. These include support for education and health, the water sector, institution-building and access to justice. Despite decades of donor support for health and education, results have been disappointing.
While many of these projects showed good results in the short term-a new school, additional teachers, increase in piped water-these improvements were short-lived. Within a few years: the school building deteriorated and its toilets became dysfunctional; new health centres neither had doctors nor medicines; new piped water systems became non-functional because there was no money the repair of pumps. All donor supported efforts to establish an accountable and efficient civil service, improve access to justice in lower judiciary, or reduce corruption have not yielded the desired results. The accountability and capacity of departments providing these front line services has continued to remain weak. Consequently, despite the large quantum of aid, Pakistan continues to have some of the worst human development and service delivery indicators in the world.
About $20 billion or so of aid was provided as policy loans and grants, in the form of cash to finance persistent foreign-exchange and fiscal deficits. Some of the these loans, especially those from the international financial institutions (IFIs), helped Pakistan avert foreign-exchange crises and avoid defaults in 1999 and 2008. However, the majority of these loans have not achieved the developmental objectives, and most reforms supported by these loans have been short-lived and have been reversed.
A major focus of policy loans and grants has been to support Pakistan achieve sustainable macro-economic growth and poverty reduction through better fiscal, monetary and structural policies. But achieving this goal has been elusive. Pakistan’s long-term growth trend is declining. Its share of exports has dropped in the last two decades, while the tax-to-GDP ratio has remained almost static for two decades. When the leaders and the elite don’t want to pay taxes, donor-driven tax reforms will simply not work.
Because of decades of borrowings to finance high fiscal deficits, Pakistan now has one of the highest interest expense in the developing world as ratio of tax revenues. Despite billions of dollars of policy loans from IFIs, Pakistan’s economy is stuck in a “low growth-high inflation” trap and Pakistan could soon once again face a foreign-exchange crisis.
Another key focus of policy loans was reforms in the energy sector. However, sector efficiency and viability have actually deteriorated despite decades of IFI support. All the billions of dollars of policy loans and grants essentially kept the country afloat, by financing wasteful and extravagant expenditures of corrupt and irresponsible governments and ruling elite. They provided the corrupt ruling elite the soft option of evasion of taxing themselves to finance fiscal deficits or increasing exports to reduce balance of payment deficits.
There are two key reasons for poor impact of aid. First, poor performance by the government itself. For decades Pakistan’s reform efforts have been Tango 1-2-3 movements: One step forwards, two sideways and three backward. There is no penalty within government for bad borrowing decisions or poor project implementation. And in respect of improving delivery of “pro-poor” services, the mindset of the political/bureaucratic elite is similar to Rhet Butler’s famous last words in Gone with the Wind: “Frankly, my dear, i don’t give a damn.” Second, donors have become part of the problem, rather than being part of the solution. They have willingly gone along with this tango like reform efforts. The same conditionalities have been repeated again and again in successive Policy Loans. Donors have been ever ready to provide loans and grants, becoming financiers of first resort for corrupt and incompetent governments
Pakistan needs a new aid strategy. First, Pakistan must get out of its shameful begging behaviour. Addiction to aid has become opium for the country. Second, aid effectiveness must be improved so the country does not incur foreign debt with no benefits to the economy or ordinary citizens.
Pakistan should welcome grants, because it is “free money,” provided they are in support of Pakistan’s development priorities and not priorities of taxpayers and NGOs in aid-giving countries. Excessive bilateral grant aid in the past has compromised our national sovereignty, without any tangible benefit to the people. The big donors, especially the US and the UK, have a very large footprint in Pakistan, becoming excessively involved in our politics and national affairs. Worst, they have given refuge to corrupt leaders and their ill-gotten wealth in their countries.
Foreign borrowings should be very selective to avoid increasing debt burden without any benefit to the country. Over the next few years, Pakistan should only take concessional loans, and use these mostly for large infrastructure-dams, highways, power, railways, pipelines and ports. It should not borrow for “soft” projects, unless there is far high degree of certainty-than in the past – that project objectives will indeed be achieved. Until quality of governance improves, Pakistan should avoid policy loans-except where it becomes necessary to avert a foreign-exchange crisis.
This paradigm shift in foreign aid strategy can only happen if responsible elements in the political system, civil society, the media and senior civil servants become the agents of change and restrain government from contracting unnecessary foreign loans and going around the globe with a begging bowl. It is also incumbent on donors to be much more selective and stringent until such time as Pakistan scores high on quality of governance, soundness of policies, effective use of public money and implementation capacity. As a nuclear state, and the sixth largest state in the world, Pakistan should be an economic powerhouse rather than an international beggar.
The writer is a former operations adviser at the World Bank.
Divergent views on economy
Dr Ashfaque H Khan
Tuesday, March 27, 2012
There appear to be divergent views on the current state of Pakistan’s economy. The government’s economic team would have us believe that the economy is moving in the right direction. According to the team, exports have touched an all time high at $25 billion and foreign exchange reserves have risen to $18 billion, they further contend that the tax collection has doubled, the current account shows a surplus, and economic growth is on a path of recovery. In addition, the new NFC Award is hailed as a great success.
On the other hand, four reports that appeared in the last two months on Pakistan’s economy have painted a rather dismal picture of the economy. These reports include the IMF Report under Article IV Consultation (February 2012), Moody’s and Standard and Poor’s (the two international rating agencies) reports (March 2012) and the Second Quarter Report of State Bank of Pakistan.
A number of well-known experts have been consistently highlighting the weaknesses of the economy and suggesting various policy measures to address them. Either these institutions and experts are wrong or the government’s economic team is misguiding not only their political leadership but also the people of Pakistan.
The above-listed institutions and experts have pointed out several weaknesses which include weak economic growth, higher inflation, high debt burden, re-emergence of balance of payments crisis, and most importantly, fiscal indiscipline which is believed to be fuelling macroeconomic instability. In addition, energy shortages continue to plague industrial and commercial activities in the country.
The economic performance of any country is often assessed by the degree to which national outputs are growing. Economic growth is therefore the most critical indicator of any country’s economic performance. Higher economic growth on a sustained basis can bring the country in the limelight of the comity of nation. India is a classic example. India has maintained its economic growth in the range of 7-10 percent per annum since the mid 1990s and has drawn the attention of global investors and leaders which finally helped the country to join the league of the ‘rich man’ club – the G-20.
Pakistan sustained an average economic growth of 7.0 percent per annum for five years in a row (2002/03-2006/07) and drew the attention of global investors and Goldman Sach which included Pakistan in the ‘Next-Eleven’ club. Whenever a country is consistently growing in the range of 2.5-3.5 percent per annum, it loses the interest of global investors and prestige in the comity of nation.
Pakistan’s economy has been growing at an average rate of 2.9 percent per annum since 2007-08. It needs to grow by 7.0 percent annually to absorb two million new entrants in the job market. A growth of less than three percent in four years in a row cannot have created enough jobs for the new entrants, hence giving rise to unemployment and poverty. Pakistan’s growth performance would remain disappointing as long as fiscal indiscipline persists.
On higher inflation, the IMF report writes “in the decade prior to 2008, Pakistan’s inflation performance was good. In 2008, however, inflation rose sharply with spillover of high international commodity prices and accommodating domestic policies”. A variety of factors appear to have contributed to the persistence of double digits inflation for over 50 months in a row. These factors include central bank financing of fiscal deficit, criminal increase in support price of wheat, the sharp depreciation of exchange rate, frequent upward revision in government administered prices of electricity and POL products, and erosion of state authority reflecting weak governance.
Moody’s report has linked the high debt burden with “low” government financial strength. A highly indebted country would see the persistence of macroeconomic instability, low economic growth, rising unemployment and poverty, low prestige in the comity of nations, and hence risk being overlooked by global investors and “friends”.
All the reports have termed financial indiscipline as the ‘mother’ of economic crisis. Persistence of large fiscal deficit is one of the critical sources of high and rising debt burden. Reducing fiscal deficit is central to addressing debt burden, safeguarding macroeconomic stability and laying the foundation for higher economic growth. A substantial increase in revenue is necessary to reduce fiscal deficit for which the implementation of RGST, improvement in withholding tax regime, bringing income originating from agriculture and services under a direct tax net, and improvement in tax administration and tax compliance are absolute necessary.
On the expenditure side, the resolution of the power sector ‘subsidy’ and rotten PSEs are a must to remove large drains of budgetary resources. Improvement in current NFC Award is sine quo non for a meaningful fiscal policy. The government should not make it a point of prestige. A mistake has been committed because the NFC Award was finalised in extraordinary haste. A simple adjustment would make the award functional.
With reference to the re-emergence of balance of payments crisis, all the reports argue that the current account gap is expected to widen on account of rising oil prices and slowing export growth. Although the current account deficit would be in a modest range, the financing of this gap has already emerged as a serious challenge for the government. Pakistan may overcome these difficulties by drawing down its foreign exchange reserves during the current fiscal year. It will, however, face serious difficulties during the next two years when trade balance is likely to worsen on account of the surge in oil prices and slower exports growth on the one hand, and heavy debt repayments to the tune of $9 billion on the other.
My sincere advice to the economic team is to present the true picture of the economy to political leadership and to the people of Pakistan. Transparency is the best policy. Be transparent, communicate with people and attempt to make serious efforts in addressing the multi-dimensional economic challenges confronting Pakistan today.
The writer is principal and dean, NUST Business School (NBS), Islamabad. Email: ahkhan @nbs.edu.pk
Pakistan’s economy – some positivesMarch 28, 2012
By: Dr Kamal Monnoo
Pakistan is routinely accused of either standing at the brink of an abyss, or being right in it, or fast becoming a failed state etc. There are critics who consistently moan about Pakistan losing its competitiveness, the continuously dwindling domestic and foreign investment in the country, growing unemployment and rising poverty, widening gap between the haves and the have-nots, gross mismanagement in the public sector enterprises, rising national debt, naked fiscal imprudence of the government, a rising current account deficit leading to an alarming and worsening of the balance of payment situation that if not timely corrected can see us default on our debt obligations and, last but not least, about a painfully extended cycle of low economic activity and high inflation is testing the patience and resilience of the Pakistani people like never before. Corruption is rampant, internal law and order is seriously compromised and sadly a perception of Pakistan is fast emerging in the international financial and corporate communities of a country difficult to engage and, perhaps, best avoided unless necessary!
While there is no denying the fact that Pakistan’s economic health, its global ratings and image per se are all taking a serious dent and, of course the recent (released in February 2012) IMF report on the state of the Pak economy notwithstanding, the reality also is that it has a very resilient and robust side that continues to surprise. A picture that depicts the glass to be at least half full, points to the sectors that are consistently growing and adding value and, more importantly, exposes the huge underlying economic potential which despite poor governance keeps taking the national economic activity to the next level. Amidst great adversities and serious financial challenges, there does exist a silver lining on how the economy has performed over the last 12 months and some of the positives going forward.
On the back of a slowly but surely evolving middle class, there exists a visible consumption boom in the economy where companies are going through a period when domestic sales have never been higher. An exceptionally high percentage of young employable youth is unearthing new dynamics, as these fresh minds strive to create their own opportunities, thereby unleashing a wave of innovative entrepreneurial benefits. For example, the quality and speed at which the Pak urban consumer and service sectors (fashion wear, eateries, home decor, healthcare centres, private education, beauty salons, leisure and entertainment etc) are growing has but a few parallels in the world.
The inflow of foreign exchange remittances by Non-Resident Pakistanis (NRP) has never been stronger and provided its current rate of growth does not stall, the government envisages that the final figure is well on course to touch the $18 billion per annum level. Add to this, the fact that our exports registered $25 billion in 2011 and the possibility that if we can somehow supplement these inflows from NRP remittances and national exports, by re-attracting the presently dried up Direct Foreign Investment, there actually exists a strong case for successfully balancing our current account status – Pakistan as we know (even with the oil prices are high) is an economy that traditionally imports between $35 and $38 billion per annum.
The reserves in the meanwhile have held their ground at around the $17 billion mark and when doing a regional comparative analysis on parity with the US dollar one finds that the Pak rupee has also fared better than most of its neighbours. In fact, against the European currencies, like the Euro and the Sterling, the Pak rupee has gained in value when comparing its parity during the pre- and post-European crisis periods.
Further, according to the latest data released by the FBR, the revenue collection this year is on target and is likely to cross the Rs2,000 billion mark for the first time in history. If this drive by the centre for revenue generation can serve as an inspiration for the provinces to play their due role (post-Eighteenth Amendment) in resource generation, our tax to GDP ratio can start looking quite respectable – India collects nearly 40 percent of its tax revenue through states and the growth rate in revenue generation at the state level is significantly higher than that for the centre. The corporate sector may be underperforming, but, in spite of the odds loaded against it, has posted some impressive results.
Large Scale Manufacturing (LSM) has begun to turn the corner by registering a 1.50 percent growth from negative 0.80 percent in 2011, more than 1.50 million motorcycles were sold last year and Automobile Sector’s sales are about 30 percent above from the fiscal year 2004-05 (regarded by auto pundits to be their best year). Companies and banks in general have announced healthier profits with especially the consumer goods companies leading the pack by churning out some unprecedented results. This coupled with the new policy announcement on investment in the shares markets has given a boost to the stock markets with the KSE (Karachi Stock Exchange) Index climbing to near 14,000 points. If the returns can continue to be interesting, such an opportunity is bound to even lure back foreign investment into the Pakistani markets.
However, the above in no way should be regarded as a narrative in favour of the government, since as explained towards the beginning, these successes are despite the absence of ‘good governance’ and not because of it. Pakistan’s economy has survived the test of time, but sadly has not been able to live up to its true potential. Unless the decline is arrested now, with each passing day the situation will become increasingly difficult to retrieve. The economic management needs to be modified and regulated in a way that it is transparent, discourages corruption, does not stifle growth and innovation, does not severely raise the cost and access to credit for budding entrepreneurs, does not constrain the process of financial inclusion, and ensures equitable distribution of resources. And in doing so, care should be taken that in the process the very spirit of free enterprise does not get stifled.
The writer is an entrepreneur and economic analyst. Email:firstname.lastname@example.org
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