Ask the economic managers of the government, the opposition and independent economic observers, there seems an unqualified consensus that with a budget deficit of around 6-7% of GDP, 14% inflation, dismal rate of 2.4 % growth, unprecedented higher rate of un-employment , foreign debt of US$59 billion and internal debt hovering around Rs.5000 billion, the economy of Pakistan is really in a bad shape and urgently needs structural changes dictated by the economic realities rather than political considerations to stem the rot and fix some of the perennial maladies that have hampered our march towards a sustained economic growth and stability.
The only silver lining, if the official figures are to be believed, is that our exports will touch US$ 24 billion mark and the remittances will be in the vicinity of US$ 11 billion this year (an unprecedented happening) that explains achieving 2.4 % GDP growth rate despite unfavourable international and domestic economic climate; a consequence of the prudent policies pursued in these areas, as claimed by the government.
The reason for this dismal state of affairs, put simply, has been the aversion of our economic managers and successive regimes to the conventional wisdom of living within ones means. While they have been spending recklessly on prestige projects with little economic significance and allowed the administrative and non-development expenditure to increase exponentially, they paid scant attention to the revenue generating avenues. In a country of 170 million only 2.7 million pay taxes and the most sordid aspect of the problem is that the rich and privileged who have the capacity and ability to pay more somehow do not pay taxes.
Our tax to GDP ratio is around 9% which is the lowest in the world. The obvious outcome of this irrational approach was heavy borrowing from outside and from the banking system within the country that in its wake accentuated the problems that Pakistan is, today, confronted with.
Any effort aimed at reviving the economy has first of all to focus on reducing the budgetary deficit drastically through expansion of the tax base, changing the culture of across the board subsidies, adoption of a regime of targeted subsidies that benefit the poorer sections of the society only and reduction in the non-development expenditure. Pakistans tax system is based on direct taxesthe tax on incomes and indirect taxes-taxes on consumption. The taxes on consumption increase inflation and therefore are not a desirable option for a country like Pakistan. It has to focus more on direct taxes by bringing all kinds of incomes, including incomes from agriculture into the tax net and to eliminate the menace of tax evasion. Countries around the world have used a mechanism called Value Added Tax to tackle these two issues, as the system helps in documenting the economy. Taxation system is irrefutably the life-blood for socio-economic development of any society and therefore has to be progressive enough to ensure equitable distribution of economic benefits and at the same time act as a catalyst to investment and growth.
Unfortunately, while there is a general consensus that we have no other choice than to broaden the tax base, the efforts of the government to enforce RGST have been met with stiff political resistance from the parties represented in the parliament including some of the allies of the government. There is also resistance to government efforts to minimize subsidies which is again untenable from the perspective of future economic prosperity, though in certain cases it might hurt. The government presently is paying a sum of RS.250 billion as subsidies on different items. Similarly Rs.300 billion annually are being provided to the PSEs. That is totally unacceptable for a febrile economy like Pakistan. It is time that all the stakeholders adopted a rational approach to economic issues and their management instead of resorting to imprudent thinking aimed at gaining political mileage.
Nevertheless, what I have gathered from my discussions with some economic managers of the government and the government high ups, there is an absolute agreement on the fact that the government must not hesitate from taking tough decisions in the long term interest of the economy and consequently efforts are under way to persuade the political parties to agree on the implementation of RGST and also to increase the tax net.
The finance minister has already indicated that about 700000 new tax payers have been identified and will be brought into the tax domain. The government is contemplating a revenue target of Rs.1952 million which represents 16% increase over the target of Rs.1588 million for the current fiscal year. Further all types of incomes including agriculture income are likely to be taxed through the coming budget. That again is a very rational and daring step with far reaching impact.
The contemplated reforms in the PSEs and their eventual privatization will also be a great help in narrowing the budget deficit. The system of targeted subsidies and the social safety net provided in the shape if BISP, Waseela-e-Haq initiative, direct cash transfers from Baitul Mal and Zakat Fund and assistance being provided to the people affected by floods, are some of the measures through which the government envisages to provide relief to the poorer sections of the society.
Another departure from the past strategy of government leading the growth process, is the emphasis on private-sector-led growth through enhanced investments and increased productivity. The government will only be playing the role of a facilitator. That strategy was used in the 1960s and 70s for the industrial led growth in the country and it also helped in addressing the problems of un-employment and rising poverty. The share of industry to GDP almost doubled.
That indeed is an imaginative and realistic approach and could help in reviving the economy provided the government is able to tackle the energy crisis and make sure that the energy needs of the existing industry as well as the industrial units likely to be established in the future are adequately met. The government is understood to have added 2000 MW to the system and 1200 MW is in the final stages to be made available.
Chashma-II has already started producing 340 MW of electricity and the Chinese have indicated readiness to install more units. That is quite encouraging but the country still has a gap of well over 30000 MWs that needs to be bridged in the shortest possible time for the new growth strategy to deliver.