THE YEAR END REVIEW

The on-going tussle between the governments and the opposition spanning over last five decades has served no good for the people of this country rather adding to the problems of the people.

By AMANULLAH BASHAR
Dec 27, 2004 - Jan 02, 2005

The government, the opposition and the people of this country, the partners in our system have their own agenda, target and desires respectively.

The agenda of the government is to improve the economic, social and political environment in the country, besides gaining more and more time to rule. Traditionally speaking, the focus of the opposition has always been to weaken and dislodge the government. The common man, who comes on the lowest priority despite the tall claims made by the rulers and the opposition for improving the lot of the people, more or less have assumed the role of the silent spectators in the given circumstances.

The on-going tussle between the governments and the opposition spanning over last five decades has served no good for the people of this country rather adding to the problems of the people.

The issues like Uniform of President General Musharraf, LFO, and Kalabagh dam were some of the highlights on the political fronts during the year 2005 which obviously lent no helping hand to accomplish the targets aimed at improving living standards of the people, addressing the formidable problems of poverty, unemployment, health and education faced by the people. Unless a consensus is developed on some of the national priorities concerning to the national integrity and solidarity, the three partners would continue to move in different directions and serve no purpose except fragmenting the society like an unruly crowd.

The change of Jamali government, appointment of Ch. Shujaat Hussain as the Prime Minister for a stop gap arrangement and finally election of Shaukat Aziz as the third prime minister during the year was the political event of the year.

In a way, the re-election of President Bush of the United States had its impact on Pakistan scenario especially in view of better understanding between President Musharraf and President Bush. It is generally said that close relationship between the two presidents was of the personal nature and does not matter in terms of ties between the two countries. This assessment sound unrealistic because the two states are the real basis for understanding between the two leaders. Such relationship could not have developed if Mr. Bush was the president of Uganda, hence the better understanding should be viewed with a positive spirit, instead of criticizing for the sake criticism.

Release of Asif Ali Zardari, the spouse of the former Prime Minister Benazir Bhutto after 8 years in jail was another event of the year which made headlines in media across the world.

No doubt, it is for the first time in the history of Pakistan that the most chronic issue of Kashmir has been raised at the international level and it is said that it is very close to the solution. Credit certainly goes to the present leadership, however, the opposition continues to criticize the government on its efforts to resolve the issue.

Now is the time that the Kashmir issue should be resolved so that the poverty ridden peoples of this region especially both in India and Pakistan could benefit the available resources for social and economic good instead of draining them out in border conflicts.

It is claimed by the government that the economy is likely to achieve 7 percent GDP growth at the end of the current financial year. It is estimated that the growth rate of 7 percent might be achievable due to higher cotton and wheat crops and higher investment in the industrial sector and robust growth in the financial and large scale manufacturing sector of the country. It is also claimed that the government would not allow the interest rate to cross double digit in any case, however, there are concerns for the growing inflationary pressures especially following the increase in POL product prices which usually have their multiplier effects on the general price index. It is claimed that the fiscal deficit was quite comfortable and the macro situation was also stable, however, these claims could be appreciable only when there benefits are passed on to the people. Practically speaking, these strong economic fundamentals are reflected in the economic and social life of the country.

ECONOMY

International Monetary Fund (IMF) has expressed its reservations on issuing tax exemptions, skewed tax net, delay in power sector reforms, low human capital and social sector indicators and complacency on fiscal position.

The Fund directors have asked the government of Pakistan to pass on high international oil prices representing an important risk to the budget.

It has further asked to maintain fiscal deficit at 3 percent of GDP, to divest remaining public ownership of commercial ranks, and early passage of new anti-money laundering legislation in line with international standards.

The IMF executive board concluding 2004 Article IV Consultation with Pakistan attributed Pakistan's recovery to the steadfast implementation of sound economic policies and broad-based structural reforms, nothing that external support has also played a part.

The directors observed that notwithstanding significant achievements, poverty remains widespread and social indicators are weak in Pakistan. It is still ranked low in the 2004 UNDP human development index. This, they considered that the key policy challenges for the medium strong economic growth and to ensure that this translate into a significant reduction in poverty.

The directors expressed concern abut new tax exemptions granted in 2004-05 budget and urged the government to safeguard the integrity of the tax system, which has been strengthened over last years through hard-earned reforms. They also noted that the fiscal strategy calls for subsidies to the energy sector to be reduced significantly.

They expressed concern about the increase in inflation over the past year. They welcomed the recent increase in interest rates, but urged the authorities to tighten monetary policy promptly and more forcefully to avoid inflationary expectations becoming entrenched.

The Directors recommended that monetary policy be focused primarily on maintaining low inflation. They noted that a further tightening of monetary policy would also alleviate recent pressures on the exchange rate.

They regretted the recent delays in implementing energy sector reforms and urged the authorities to speed up the reform process, in close coordination with the World Bank.

In this regard, they supported Pakistan's ambitious growth targets, but cautioned that these would be realized only if the reforms agenda laid out in the Poverty Reduction Strategy Paper were fully implemented and external factors were favorable. In particular, they emphasized the need for deepening structural reforms to improve the investment climate and governance, including through continued privatization and trade liberalization.

At the same time, they noted the importance of enhancing human capital and labor productivity through greater and more efficient spending on health and education. The Directors also underscored that accelerating growth would require the continuation of sound macroeconomic policies. They encouraged the authorities to take advantage of the current favorable conditions in pursuing these challenges.

They urged to resist any pressures for easing financial policies.

The IMF welcomed the planned increase in social spending, which they considered a necessary condition to move towards the Millennium Development goals.

They emphasized that raising social spending while lower the still high debt to GDP ratio was possible only if the targeted increase in the revenue ratio is realized. In this regard, they encouraged the authorities to pursue more ambitious revenue targets and to expand the tax base further into the services and agriculture sectors.

Nonetheless, given the still high external debt burden and the dependence on external non-tax revenues and grants it would be crucial to limit the budget balance, excluding grants, to about 3 percent of GDP over the medium term, as envisaged in the fiscal strategy.

FINANCIAL SECTOR

Pakistan's financial sector grew robustly during last year adding Rs.542.7 billion worth of assets which represent an increase of 15.3 percent over the base of 2002 and now account for almost 85 percent of the country's GDP, says the third annual report of the State Bank of Pakistan. Corporate sector was the major recipient of the financial system credit with 54 percent share followed by SME sector 19 percent, agriculture 8 percent and consumer finance slightly less than 8 percent, according to the report titled 'Pakistan: Financial Sector Assessment' which is a comprehensive assessment of the financial sector of Pakistan. Fixed investment during the year formed 26.2 percent of total credit to corporate sector.

Rapid growth took place both in SME financing and agriculture credit. SME financing registered a growth of 72 percent and rose from Rs.145 billion to Rs.251 billion by June 2004. Agriculture Credit disbursements grew in the same period by 27 percent increasing the outstanding loan stock from Rs.804 billion to Rs.846 billion, says the report.

For the second year in a row, the country's financial savings growth rate was in double digits. The last fiscal year witnessed 15.8 percent growth in financial savings on top of a 10 percent growth in the previous year. As a result, financial saving as a percent of GDP increased to 70 percent. Almost one half of national savings are now generated by the financial sector. Three years ago, this ratio was only 28 percent. This remarkable achievement has been possible because of the improved efficiency and soundness of the financial sector. This can be seen from the fact that the average spread earned by the banks has declined to 4.4 percent in 2003 from 7.1 percent in 2001. The decline took place despite a much larger fall in the average return on advances and investment (from 13.3 percent to 6.6 percent - 670 basis points) earned by the banks compared to the lowering of the deposit rate (from 6.2 percent to 2.1 percent 410 basis points), the report added.

PETROLEUM

The POL prices were kept unchanged by the government during last six months despite formidable increase in oil prices touching to the level of $55 a barrel in the world market. Consequently, the government has absorbed a huge subsidy to the tune of Rs34 billion during last 6 months on account subsidizing the exorbitant increase in oil prices. It is learnt that the recent increase in oil prices has been made following the pressure from the IMF.

Over the past three years, Government of Pakistan has been undertaking restructuring and reform of the oil and gas sectors, as part of an overall program of economic liberalization. In this regard, deregulation of petroleum products and natural gas markets was initiated, independent regulatory institution was established, consumer prices were made market-related, products quality was upgraded, safety and environment-compliance was strengthened, and privatization of a number of oil and gas assets completed. The restructuring and reform program was generally well-received by the stakeholders, and oil and gas sectors became the largest recipient of Foreign Direct Investment (FDI) in the past three years. Progress in implementing reform program was also duly acknowledged by the International Financial Institutions.

On the completion of the first phase of restructuring and reform program, Ministry of Petroleum & Natural Resources (MPNR), Government of Pakistan has decided to undertake a review of the achievements of restructuring and reforms so far, take cognizance of impediments ahead, and chalk out a road-map for further reform measures in the next three to five years.

IRAN-PAKISTAN-INDIA GAS PIPELINE

It is for the first time that India has officially expressed its willingness to join $4 billion cross border pipeline project. However, release of statement by the relevant authorities makes no tangible progress on this highly important economic project during the year 2004.

PRIVATIZATION

During the year, the government privatized some of its share in the major Organizations like PPL, OGDC and SSGC through stock exchange and has a plant to further off load its shares in Kot Addu Power Project, strategic privatization of Karachi Electric Supply Corporation and Pakistan State Oil. However, the privatization of PSO and KESC has been delayed as some quarters of the vested interest are opposing the privatization of these huge government organizations.

STOCK MARKET

The Karachi Stock Exchange Index-100 hit the land mark by crossing the record level of 6000 points in the last week of the year 2004. This certainly places the capital market at a prestigious level of performance. However, the insiders feel that growth in volume at the stock market gives an unrealistic picture of the situation especially when the institutional buyers were asked to assume the role of the bears. The bearish rally witnessed in the last week of December 2004 was the outcome of the support extended by the institutional buying to pain a healthy picture of the capital market, said market players.

WTO

The end of the year 2004 will be the beginning of World Trade Organization (WTO). Although Pakistan has excelled in the required areas to comply with the requirements of the new environment, yet there was still room for improvement in certain areas so that the economy could face the challenges of the free trade under WTO regime.

Following are the areas where immediate improvement is required not only in Pakistan but the entire region:

Investment in Human Development: Investment in human resource development has made a significant contribution to growth, reduction in the incidence of poverty and improvement in social indicators in the East Asian countries. The average years of schooling in Korea are 9.6 years; 6.3 years in Malaysia and 6.0 years in Singapore compared to 3.2 years in Pakistan. The emphasis on female education led to reduced fertility, thus mitigating the adverse effects of population pressure and increased supply of educated labor. In Pakistan, female education rates remained dismally low with the attendant problems of high fertility rates, high population growth rates and a low labor participation rate. There is an urgent need to bring women in the mainstream and give priority to their education, health care, nutrition. This will not only control the rate of population growth but expand the base of educated and skilled labor force in the country. Almost half of the population in Pakistan is illiterate and it is imposing a heavy drag on achievement of Pakistan's economic potential. On the other hand, most Asean+3 countries have almost 100 percent literacy rates with high life expectancy, low infant and maternal maternity and universal primary education. The productivity effects of such elevated social indicators on the economies of these countries are quite obvious and productivity is the key variable determining how fast the economy can grow.

LABOR FORCE QUALITY: Related to this phenomenon is the training and skill up gradation of the labor force. Asian countries do not only hire educated and literate workers but provide continuous training to these workers in acquiring new knowledge, techniques of production or improvement in processing. In 1991, a U.S. manufacturing worker was 40 times more productive than his Chinese counterpart. The gap had narrowed to only 10 times. Chinese labor productivity has increased four fold in the past decade thus lowering the unit labor cost in manufacturing. China's wage rate is 61 cents per hour compared to the US rate of $16. Taking into account the labor productivity differences between the two countries, the unit labor cost in China is still only $6.10 per hour. The firms in Pakistan consider training expenses as additional costs and not investment. This short sighted view has kept the unit cost of labor i.e. taking into account labor productivity differentials quite high relative to China and Asean Countries.

OPENNESS OF THE ECONOMY: Another fundamental which has served the Asean+3 countries well are openness of their economies to trade and foreign investment. Tariffs rate are uniformly low in single digits and non-tariff barriers are hardly existent. Market access to these countries has stimulated both import and exports of goods and services to the extent that in Malaysia the trade-GDP ratio exceeds 100 percent. China and India both had almost identical level of exports of $10 billion in the late 1970s. A relatively more open trade policy pursued by China has enabled it to increase its exports to more than $400 billion last year while India was able to each about $60 billion.

Similarly, FDI flows are welcomed by all the Asian countries as they benefit the domestic economies in form of new technology, better managerial skills, networking with the global supply chain and infusion of foreign capital. FDI flows to East Asia during the last four years amounted to $208 billion. China alone receives $50 billion annually and most foreign enterprises produce goods not only for the Chinese markets but also for exports. 65 percent of China's increase in exports in the last ten years was generated by foreign firms and their joint ventures.

This policy of openness makes a lot of sense. Our entire economy is $100 billion and even if we are able to double it within ten years, it will only grow to $200 billion whereas, as world exports today are $7 trillion and if we aim at capturing 2 percent of world trade, our exports alone will increase to $140 billion ten times the 2004 level. So you can see what a tremendous difference it will make in boosting Pakistan's economy if we aggressively integrate ourselves into the world economy. This is the way the Asean+3 countries have done it. Those who favor inward like strategies relying simply on domestic economy and argue against exploiting the opportunities offered by globalization are, in fact, condemning us to a perpetual state of backwardness, poverty and misery.

TAX CULTURE: One interesting feature of the development story of Asean+3 countries is the high tax compliance by the population and low incidence of tax evasion. In the 1970s, when Japan had not yet joined the ranks of developed countries, tax recovery was almost 96 percent of the total tax assessments. The high degree of revenue collection helps a nation to build infrastructure like roads and highways, bridges, ports, etc. and to spend on education and health. In the absence of adequate tax revenue mobilization, the Government is unable to carry out these basic responsibilities of development well. In Pakistan there is a widespread tendency to evade taxes by concealing incomes. Presently, there were only 1.1 million tax payers in a population of 150 million people. This number should be increased to at least three million. Once the tax base is broadened the tax rate can come down from 35 to 25 or even 20 percent and the heavy burden borne by a small segment of the population can be eased by sharing with a larger segment. As Tax Consultants, you bear an enormous responsibility for the sake of the nation's cause to help plug the holes of tax evasion and maximize the number of tax payers in the country.

ROLE OF THE GOVERNMENT: The role of the Government in Asean+3 countries has been to facilitate, guide and help the private sector in fostering economic growth and development. By maintaining macro economic stability, by charting out a long-term vision and strategic direction and by pursuing consistent and predictable policies, the Governments in these countries gave confidence to local as well as foreign investors.

OUTLOOK

The economic growth achieved by Pakistan during last three years was generally supported by external resources and the government policies of developing better relations with the United States as well as Western world. It is the friendly foreign policy of the government which helped the export regime of the country to perform well. In the backdrop of this scenario, it is vitally important that in the economic interest of the country, the in-house political problems should be resolved within the four walls in the larger interest of the country.