Wither Pakistan Economy?

Written by Sohaib Jamali  •  Region  •  January 2011 PDF Print E-mail

For a year that began with business shut down in the country’s biggest metropolis, 2010 couldn’t have been expected to offer great promises to Pakistan.

January 1, 2010 saw Karachi’s industrial and commercial hubs closed on account of the multiparty strike initiated by the Sunni Rahbar Council to express solidarity with the victims of the Ashura procession blasts and the affected traders.

The theme of strikes and lockouts continued throughout the year, as political infighting between ethnic groups was taken to the streets of Karachi – leaving scores dead, and dozens of shops, busses and other means of livelihoods blazed to the ground. This mayhem came side by side with the regular diet of terrorist-attacks, conducted sporadically across the country, allegedly by the TTP, Lashkar-e-Jhangvi and the likes.

In an environment like this, foreign direct investment (FDI) could only go down – even if the global financial situation was favorable and even if Pakistan’s top FDI recipient sectors (financial and telecom) weren’t saturated.

In other impediments, cited by a few foreign players, was the rising cost of doing business. The country’s production centers were marred by persistent rise in electricity prices that came in the face of all too frequent instances of power and gas shortages. According to the latest available data, large scale production, measured by the Federal Bureau of Statistics, eased by 1.47 percent in Jul-Sep 2010-11.

And just as the country’s economic mangers expected the farming sector to lead overall commodity production, in came the floods and washed away the hopes.

According to the Damage and Needs Assessment report prepared by the multilateral agencies World Bank and the Asian Development Bank, agricultural losses mounted to $5.04 billion – half of the total damage of $10.05 billion.

What was needed in the aftermath of floods was a combination of monetary and fiscal stimulus to reinvigorate the economy. However, both ends of the jumper wire were beyond use.

In the yesteryears, cheap and ample money supply had boosted consumer demand that kept the productive engines up and running. But in 2010, the scenario was completely different.

High interest rates kept most of the private sector shy of borrowing; other private borrowers were shoved on the sidelines by the government. The elbowing out of private sector from the credit market continued throughout the year as the government scrambled for finances to plug the yawning gap between its revenues and expenditures.

Tax revenues fell short of forecasts on account of slow economic growth. Non-tax revenues also remained lackluster, since the government’s failure to revamp the ailing Public Sector Entities resulted in zero privatization, whereas a fragile security environment, amongst other things, resulted in non-materialization of the planned sovereign bond issues in the fiscal year ending June 2010.

According to the central bank’s credit data, the government took Rs201 billion from the commercial banks and around Rs244 billion from the State Bank itself during the Jan-Oct period. The rise in government borrowing forced the State Bank to remain hawkish for most part of the year; the SBP jacked up policy rates thrice during the year to 14 percent that further squeezed the room for private businesses.

A major reason behind increasing government borrowing was the withholding of its tranche by the IMF, owing to which the government faced shortage of finances to meet its day to day requirements.

Failure to end power subsidies completely and fully rollout the controversial Reformed General Sales Tax (formerly branded as VAT) had earlier scorned off the IMF – forcing it to delay its sixth tranche that was originally due in August 2010.

Until the time of writing this article (Dec 11, 2010), the government was still struggling to roll out RGST, with major opposition parties standing unanimous against the tax. The bill when tabled in the lower house, is seen to attract severe public backlash even if it’s approved by the lawmakers.

Expressing their dissent against the RGST, the masses argue, and aptly so, that the government must get its own house in order first and broaden the tax base instead of taxing those who are already in the net.

Bringing its own house in order would require the government to tax the elite and the farming landlords – who form a majority of the lawmakers – and root out corruption from government institutions that lay waste huge swathes of money each deal, each year.

According to the National Corruption Perception Survey 2010 released by the Transparency International Pakistan, the country’s power ministry, police, taxation department and even the judiciary are in the top ten list of corrupt.

Unless the federal government clips the size of its cabinet, and the provincial governments start taxing the agricultural income, the country’s tax system will remain heavily skewed towards indirect taxation, which in itself is inflationary in nature.

So while the year may be 2011 outside Pakistan, inside the country, it is still perhaps the 90s. Threats of debt-trap loom large with major repayments to the IMF due from this year onwards.  The road to salvation lies in increasing tax revenues, though not necessarily the RGST.

Even if the RGST is implemented, its success can not be ensured given lack of documentation in the economy and public mistrust against the government. RGST is also feared to increase consumer prices in economies that lack effective documentation like Pakistan, owing to which inflationary expectations are soaring high in the country.

That, coupled with gradual removal of power subsidies, commodity price shocks, and misadministration of domestic food supply chain is feared to cause hyper-inflation in 2011-12; even the State Bank recently warned of the risks of double-digit inflation in FY12.

So in a sense 2011 is crucial for Pakistan’s economy. If the government is unable to provide timely support to those displaced by the floods, fears of food price hike wouldn’t seem exaggerated.

Similarly, if the lawmakers do not turn around the white elephants (read: public sector entities), boot out corruption and start taxing the elite as well as agricultural income – as also advocated by the U.S. and multilateral agencies – the public could be expected to create unrest. For lack of finances and lack of the will to reform, 2011 could be worse than the last. 

Sohaib Jamali is Political Economist and a research editor at the Business Recorder.
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