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
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.
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
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
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
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
They urged to resist any pressures for easing
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
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
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
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.
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
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.
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.
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.
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
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.
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.