July 21 - 27, 2008

Despite crossing the psychological barrier of one trillion rupees in tax revenue collection in the fiscal year 2007-08, there still exists a gap of 400-500 billion rupees.

Without enhancing our tax-to-GDP ratio from existing 11% to 15-16%, this gap cannot be bridged; analysts told Pakistan and Gulf Economists.

In next seven years, we need to achieve the target of 15-16% tax-to-GDP ratio with an annual growth of a least 0.5%, they said, adding that promoting both local and foreign investments are necessary to meet the challenges of the globalised competitive environment.

In 2007, they said, the agricultural sector recovered strongly, growing by 5-percent from just 1.6 per cent in 2006, while the manufacturing sector's growth sustained at 8.4 per cent in 2007, marginally down from the 10-per cent recorded in 2006. Both domestic private and record foreign direct investment (FDI) inflows doubled from 2006, touching 8.4 billion dollars in the year 2007, as investment in real terms increased by over 20-percent, they added.

According to them, Pakistan's inflation rate was 7.8 percent in 2007, the main concern is higher food prices, which rose by 10.3 per cent with its effects felt most strongly by "people living on low and fixed incomes". Inflation in current year (2008) is increasing in the country mainly due to global increases in some commodity prices, higher utility tariffs, and local supply and demand-driven factors. "We have to change ourselves with this rapid changing world to face the challenges of modern times, they argued.

They said there is huge potential in Pakistan's economy because despite all constraints and difficult situation, we have been able to expand our tax base in last four years form one million to 2.2 million taxpayers at the growth rate of 20% per annum.

They, however, called for consolidating the national economy by reducing fiscal deficit to benefit vulnerable groups and increasing their incomes through targeted programmes like Benazir Income Support Programme. The government must pay immediate attention to curtail current account deficit and check trade deficit besides ensuring financial discipline at all levels, as inflation can be effectively checked through effective monetary policy, they asserted.

In the budget 2008-09, they said that against a revised fiscal deficit of 7 % of GDP for this year, the government has planned a budget deficit of 4.7 % of GDP, which represents a significant fiscal adjustment and promises stability in public finances. To a query, the analysts say there are procedural irritants that add to the cost of doing business in Pakistan. Further, a number of inefficiencies inherent in the provision of infrastructure services such as electricity have led to increased cost of production, thereby adversely affecting our competitive edge. They further say that there is tendency in the country of living beyond its means and the trend is continuing. Now the provinces, public sector corporations and private sector can borrow, with or without federal government guarantees though the burden would ultimately be borne by either the government or the national economy. The international financial institutions are also toeing with the idea of starting lending to district governments directly.

They said that the biggest burden on the Pakistani people is the spiraling inflation, which has eroded the standards of living. To cure a patient the disease must be diagnosed. The disease of surging prices lies in consumption-oriented policies, excess liquidity, lower growth of essential agricultural crops, supply-side inefficiencies and growing cartelisation of the economy.

A widening trade deficit was partly covered by remittances from migrant workers, which in 2007-08 rose to a record amount of over $6.451 billion, beating the previous record of $5.494 billion received in the preceding 2006-07 fiscal year.

At the same time, they said, that the current account deficit is expected to further widen in 2008-09.

The current account deficit would remain an issue for both Pakistan and other South Asian countries due to higher oil prices and the impact on the garment and textile trade with the lifting of quota restrictions on Chinese exports. "To reduce the risk of depending too heavily on a single sector, export diversification should remain an important part of the government strategies," they said.

"In Pakistan, public debt growth during the 1990s was unprecedented. A credible debt reduction strategy and fast economic growth cut the public debt burden from 84 per cent of GDP in 2000 to 57 per cent by 2006," they said, adding that Pakistan successfully reduced its external debt burden through rescheduling, a debt swap for social spending, debt cancellation and the prepayment of expensive debt.