NEED OF PRAGMATIC ECONOMIC MEASURES
July 05 - 11, 2010
The country's Gross Domestic Product (GDP) growth in the year 2007-08 was 1.2 percent that took upward trend in 2009-10 and reached 4.1 percent, while in the fiscal year 2010-11 the target was set at 4.5 percent.
Economic experts believe that achieving 4.5 percent GDP growth is a gigantic task and the government needs to ensure strong resolve to achieve the target.
There was a substantial decrease in inflation, as it was 20.8 percent in 2008-09 and the government was quite confident of bringing it further down to 9.5 percent in 2010-2011. Fiscal deficit has been reduced from 7.6 percent in 2007-08 to 5.2 percent in 2008-09, while the government intends to bring down to four percent in 2010-11.
Official circles are of the view that the government had adopted prudent economic policies during last three years and as a result the economy had started showing resilience despite severe challenges.
According to them, Pakistan's economic policies were being highly appreciated by international economic organisations, saying "Pakistan's international credit rating has been upgraded from CCC to B(-)."
The government delayed the implementation of the Value Added Tax (VAT) for three months to take provinces on board. On one side the government expressed resolve that VAT would be definitely implemented but differences among provinces and reservations of major stakeholders pose a challenge for the government.
It may be noted that the government had an agreement with the International Monetary Fund to implement the reformed form of General Sales Tax (GST) from July 1. As per its rules, the IMF also has to consider how a country asking for a loan could repay and for this purpose it proposes measures for mobilising the internal resources.
Experts believe that the issue of VAT has been inflated adding that if implemented, it would have an impact of not more than 0.5 percent of GDP.
In the budget 2010-11, the government had announced cut in the current expenditures of the government but critics of the government said that high expenditures would lead to further increase in inflation. "Cut in the government's current expenditures would have positive impact on the inflation, if the decision is implemented," they said.
They were of the view that the GST needs to be reformed, as duplicity is hampering its growth. GST reforms are necessary to eliminate multiple tax rates and replace it with a single lower rate of 15 per cent. One percent increase in the GST would cause inflation, they added.
Head of the IMF has praised Pakistan's commitment to an 11.3 billion dollar rescue package, despite a delay in setting up a nationwide tax.
IMF managing director Dominique Strauss Kahn said that while Pakistan could not be considered a "normal country" in light of its wave of violence, the government has made a "good step forward" on economic reforms. "There is a lot of concern but no real problem. I think they are going ahead rightly," Strauss-Kahn said in an interview.
The IMF in 2008 approved a rescue package for Pakistan as the country struggled to cope with bloody attacks by militants, 30-year-high inflation and fast-depleting reserves.
As part of the IMF bailout, Pakistan agreed to impose a nationwide value-added tax to bolster government coffers and drum up badly needed funding to fight poverty. But Pakistani leaders are squabbling over how to set up the tax. Some Pakistanis have voiced fear that the delay could lead to a cutoff in IMF support.
Strauss-Kahn acknowledged the IMF had "questions" about the tax and energy prices, but added: "I must say that a lot already has been delivered by the government."
Another concern, Strauss-Kahn said, was to ensure that donor nations -- grouped as the "Friends of Pakistan" -- follow through with pledges. "The question is... does the so-called Friends of Pakistan set of countries... really deliver and provide the resources, because all the resources needed are not supposed to come from the IMF," he said.
Donors met in April 2009 in Tokyo and pledged 5.28 billion dollars to help stabilise Pakistan, which is the Islamic world's only declared nuclear weapons state and lies on the frontline of the US-led war on extremists in Afghanistan. The US Congress last year approved a five-year 7.5 billion-dollar plan to build roads, schools and democratic institutions in Pakistan. Business leaders have urged the government to promote financial discipline to overcome the deficit, reduce non-developmental expenditure and provide relief to poor masses.
They stressed that the government needs to impose strict financial discipline and monitoring of spending by enterprises like PIA, Wapda, Pakistan Steel and Pakistan Railways.
Former Federal Minister for Industries, Jehangir Khan Tareen mentioning to variations in different targets and tax generation measures set in the budget 2010-11 said tax collection target may not be achieved. "How the government will earn an additional Rs50 billion through Pakistan Post and how it can assume that provinces will raise additional money," he questioned.
He demanded to check, smuggling in the name of Afghan Transit Trade, under invoicing and custom duty evasion "Let us be bold. Let us take decisions," he said.
He said progress of private sector is necessary to generate more jobs, cut in interest rate and give 10 to 15 years Energy and Investment Plans to win the confidence of the investors. "But, all this needs a political will."
The PML-N senior leader and businessman Mohammad Pervez Malik said the budget lacked innovation and direction. "We are passing through bad times. The government could not address any issue during two years," he said adding the growth has diminished, cost of business increased, compatibility in international market affected, inflation rose and the power tariff went up to 60 per cent during last two years. "Pakistan is 155th out of total 180 nations with regard to tax to GDP ratio. Only 1,300,000 pay tax and they have to bear extra burden every time," he added.
He also proposed austerity, increase in revenues, reduce interest rate on loans and adopt new and innovative techniques for tax collection. He opposed imposition of VAT and said it will exert extra burden on poor.
The government would have to show strong will and resolve to tackle the economic challenges of today. The situation is grim and time is running fast. If pragmatic steps are not taken by the government it would lead the country's economy to further downward direction, experts said.