PAKISTAN ON INDEX OF ECONOMIC FREEDOM

SYED ALAMDAR ALI
Hailey College of Banking & Finance Lahore
Aug 13 - 19, 2007

The Index of Economic Freedom is a joint project of The Heritage Foundation and the Wall Street Journal. It has ranked Pakistan 89th out of a total of 161 countries evaluated. The index results that the economy of Pakistan is only 58.2% free and even after the so called rigorous steps taken by the Government of Pakistan its overall score has fallen by 1.3% compared with last year. The ranking of the country in Asia Pacific region is 15 out of 30 and the score is also below compared with the regional average. This Index is composed of many sub-indexes and an analysis of those components will reveal why they are so.

The bar in every chart represents of world standard and the bar itself represents the performance of the country.

BUSINESS FREEDOM: Pakistan is doing better on business freedom issue. The average time required to establish a business in the country is 24 days whilst the world average is 48 days. The entrepreneurship is very easy as it should be in order to establish successful business units. The starting and closing of business is also relatively simple alluring enough the international businessmen to invest in the country.

TRADE FREEDOM: Although the weighted average of tariff in the country is 13.4% but the authorities in the country have imposed severe non-tariff trade embargos due to which the Index operators have added another 20% to this average rate of tariff. Pakistan's position on trade freedom index is well below the world average that makes the country unfavorable for doing any trade. This trade freedom needs to be balanced always. It should neither be completely free that it will destroy domestic industry neither it should be so adverse that it will deter the international trade performance and trade relations of the country.

FISCAL FREEDOM: The Fiscal Freedom is what consists of the revenue and expenditure policies of the government. Pakistan is the country with the highest rates of taxes. The highest individual tax rate is 19% and the highest corporate tax rate is 37%. The recommendations of ACCA Pakistan are vital and need to be followed. The salaried pays many of the taxes that are very difficult to be claimed. Like the WHT on cell phones and even on utility bills. The procedure to claim such payments is so difficult that the individual concerned finds to avoid it. Pakistan score on Fiscal Freedom Index is slightly below the world average.

FREEDOM FROM GOVERNMENT: The government is spending huge amounts on transfer payments and transfer payments. With the total of around 80% going for debt servicing and defence over the last a few years, the government has spent about 14% of GDP on consumption and transfer payments. Therefore the government has to pass many obstacles to free its resources to spend directly or indirectly Human Resource development that also includes infrastructure development.

MONETARY FREEDOM: Inflation in Pakistan seems to be uncontrollable phenomena. Over the past a few years the State Bank of Pakistan has strictly adopted the policy of tightening the monetary policy. The ratios of CRR and SLR have been raised. The discount rate has been raised. Mark-up rate on Export Refinance for the exporters have been raised for controlling the supply of money in the country but the results do not seem very encouraging. The Rupee is losing its value on daily basis due sharp rise in the prices of products of daily use. Although the supply of money is a monetary policy that is to be tackled by the State Bank but it needs support from the government to make and implement successful economic policies that stimulates the supply of goods and services. The monetary policy cannot function itself effectively unless it has sound support of non political fiscal policies.

INVESTMENT FREEDOM: The government of Pakistan has given huge incentives to foreign investors that they can establish businesses in Pakistan on 100% ownership basis except in the field of except in arms and munitions, high explosives, currency and mint operations, radioactive substances, finance, and new non-industrial alcohol plants. There are still certain restrictions in the allowed fields. For instance, a minimum investment is required in the field of agriculture. Also the companies establishing automobile and motorcycle units are required to buy certain percentage of parts in their vehicles from the local manufacturers. There are also restrictions of Foreign Currency Accounts that the international payments to be made in the name of the company oversees require prior approval from SBP and many other like this. Still there are capital transactions that require prior approval from the monetary authorities.

FINANCIAL FREEDOM: The Banking system in Pakistan is far much developed compared with many other developing countries. But unfortunately the whole of the Banking system is in the control of five big banks that were nationalized previously. About 75% of the Assets and 70% of the deposit rest with them. The government also maintains significant ownership interests in all of those five commercial banks. The State Bank of Pakistan has already issued minimum conditions to operate for the commercial banks i.e., how much branches they must open in the country and what should be the level of Tier-I Capital. Keeping in view these increased requirements many mergers have taken place like PICIC Commercial Bank has been acquired by NIB Bank. Many new Banks like HSBC, Atlas Bank, Crescent Commercial Bank, Bank Alfalah have already started their operations in Pakistan. The International Banks that were already operating in the country like Standard Chartered and CITI Bank have already started their operations. The establishment of these Banks is huge milestones in achieving the Financial Liberty in the country.

PROPERTY RIGHTS: Historically the Judiciary of Pakistan was really affected by poor security for judges and witnesses, active role of establishment in the judicial matters and etc. At present the reinstatement of Chief Justice of Pakistan has changed the whole of the scenario. The lights of hope are all around and the expectation of Justice to everyone is now very common in the country. This will surely raise the ranking of the country in the next year.

Freedom from Corruption: The condition of the country is very bad with regard to the corruption. Pakistan ranks at 144th position out of a total of 158 countries according to the report of Transparency International 2005. This situation needs drastic improvement if any kind of development is required. With the improvement in the freedom property rights the situation is also expected to be improved.

LABOUR FREEDOM: There are very few laws in the country that relate to improved employment practices and productivity growth. There are many laws that relate to worker rights. There are very remedies available to the employer to escape from the ethical assaults of its employees. For instance, an employer cannot do anything when an employee works in such a way that it gets unchallengeable hold on work in the organization and then threatens to resign, or he adopts a go-slow policy. However, the situation is still better than many other countries of the world as the employers are in any ways in better position of choose from the available supply of labour.