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Current economic situation

Two different opinions exists on the economic condition of Pakistan. Government claims that economy is back on track whereas independent analysts portray a different picture. There is no doubt that there is some improvement in some areas whereas a lot of improvement measures are not even under consideration. Government claims that they are now in a position to fulfill their election promises. Recently government has passed the first review of IMF, which is being presented as an endorsement from an international organization on the economic performance of the current government. Yet, independent economists have different opinion on the economic performance of the government. One of the points which every economist is highlighting is related to the growth of the economy. At a time when country needs development, businesses and job creation whereas focus of IMF program is on economic reforms and documentation of the economy instead of on the development and growth. Consequently in next few years the growth requirement would be multiplied and thereafter Pakistan’s entire small to medium enterprise set up could collapse. Continuous hike in electricity and gas prices has put a lot of pressure on the businesses, their profit margins have squeezed, and top of that, fear of unknown and uncertainty prevails in the market. These factors have completely jammed the industry, be it small, medium or large, the issue is across the board. This will further aggravate in the three years of IMF program.

Government is apparently satisfied with the level of forex reserves now and we also see some stability in the forex rate these days. This is just because of hot money. Forex and interest rates will not change in next 12 months or even more till the time, foreign investors are not taking their money out of Pakistan. Keeping forex at a constant level incentives foreign investors to invest in Pakistan’s debt market. Getting return of over12 percent in Pakistan means best returns in the world with no forex impact as such. Meaning thereby, Pakistan’s debt market has become so attractive for the foreign investors but this can simply grind the local businesses due to high interest rates.

Pakistan has cleared the first review of IMF but no details are available except for a press release by IMF itself. May be in coming weeks, IMF will release a detailed assessment report, which can give a full picture of economic performance. Current account deficit, foreign currency inflows, stability in forex rate are few of the performance parameters where government has performed well in all of these parameters. The trouble is when there is no growth, jobs are not being created and poverty is spreading. There is no doubt that people are very disturbed mainly because of high inflation. Food inflation has dropped from 15 to 13 percent yet prices of daily use commodities are on the higher side. There are two aspects to this, policy and natural climate. Government has stopped trade with India thus prices of tomato have increased many times. Pakistan being an agri country doesn’t have enough tomato, sounds weird, but it is a fact these days. And then there are untimely rains in some areas which has destroyed the crop.

Government announced a provincial GDP number of 3.3 percent for the fiscal year 2018-19 but we see Federal Minister for Finance saying the GDP number for the fiscal year 2018-19 would be around 1.6 percent instead of 3.3 percent when the numbers would be finalized in next few weeks. As per IMF’s estimate, GDP rare would be around 2.4 percent. As a practices, IMF, the World Bank and other similar institutions, always add few basis points in their estimate as a margin of error or doubt or you can say benefit of doubt. Essentially, GDP rate for the fiscal year 2018-19 would be around 2 percent, which is seriously not a good number. Government would blame last government for this but the question is how long this government will keep blaming the past and from when the performance meter of this government will start. As a matter of fact, just for political gains, it is said that Federal Bureau of Statistics and other government departments temper the numbers, which is not correct. World’s best practices are being followed and all institutions (IMF, the World Bank, ADB, S&P etc.) use the same data and have not questioned the integrity of the data.

 

The Federal Board of Revenue (FBR) has been actively taking steps, especially in the recent past, to increase documentation of the economy. Along with increasing the tax base in the country, this is basically to decrease the informal sector of the economy, which according to some estimates is at least one-third of the GDP of Pakistan. Government drive to document the economy is not going anywhere, it was started without enough deliberation, and half cooked idea was launched. It should have been in phases rather than doing in such a manner. May be because of FATF pressure. But it has harmed more than bringing any good for the economy. Asking NTN from a customer for buying goods worth more than PKR 50,000 is beyond my understanding. This is then the documentation of a customer as well and presenting it as a condition from FATF is not understandable. FATF is related to terror financing, which means FATF wants to implement internal controlsin the financial system so that criminals don’t get access to the finances and banking system. It’s a good and logical reason. But I fail to understand how can FATF asks for NIC from a buyer, think logically, a criminal would need cash to finance his activities or a criminal would need a TV worth PKR 75,000 to continue his activities? If someone buys jewelry then it makes sense to ask for NIC but what is the purpose of asking someone buying electronic goods for NIC. Electronic appliances, alaptop, cell phone, watches, and even pen cost over PKR 50,000.

Basically government wants to document the sales of the traders, which should be documented. But the government’s approach is defiantly not in the right direction as far as this documentation of economy is concerned. There are precedents available from around the world where countries have documented the economy without creating panic and didn’t put such conditions.

Growth in tax collection is just 16 percent in first four months of current fiscal year, whereas the target was 45 percent. This means that monthly target of remaining eight months would have increased from 45 to around 55 percent, which is not going to be achieved in remaining time of the current fiscal year. FBR must be thinking how to achieve the target of PKR 5,555 billion in fiscal year 2019-20. Government has not yet released the data related to its expenditures. It is expected that fiscal operation data will be published in next few days, which will give provide the details on the expenditure. In coming months, almost every ministry will ask for supplementary support, which were not factored in the budget. Recently Prime Minister has announced that government is going to establish Pakistan Revenue Authority instead of using Federal Board of Revenue (FBR). This authority will have same the fate as we have seen with the Sarmaya Pakistan. As this new proposed authority will have an impact on every province therefore provinces will have to approve this as well, as per the constitution of Pakistan. It is quite certain that not all provinces will support such concept. As a matter of fact, there is no need to reinvent the wheel, instead of reforming FBR, creating a new body is just waste of time, energy and resources. Pakistan cannot afford wastage of any of these three components.

As a first step government should control smuggling. This alone factor will have a serious positive impact on the economy. Smuggling goods into Pakistan but taking goods out of Pakistan is mind boggling. Pakistan cannot progress without controlling its boarders, be it security or economic situation. The sooner we realize this, the better it would be. It’s never too late, government should focus on revival of economy instead of following some unrealistic targets.

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