UNDERSTATED GDP NUMBERS

THE BENEFICIARIES ARE FROM THE CORRUPT TAX COLLECTION REGIME.

SHABBIR KAZMI
(feedback@pgeconomist.com)
July 4 - 10, 20
11

There is a growing consensus among the experts that Pakistan's economy is grossly understated and so is the tax to GDP ratio. Some of the experts are of the view that only one-fourth of the economy is documented. This poor state of the affairs can be attributed to many sectors enjoying exemption from paying tax and also due to the corrupt tax collection regime. They take money only to keep their eyes close. This is an event from an expression that the black hole sucks nearly Rs300 billion every year. Over the years, the government has been introducing ėmoney whitening schemes' which encourage people to conceal their income.

The major components of Pakistan's GDP are agriculture, manufacturing, and services. While agriculture and manufacturing contribute one-fourth share each in the total, remaining half is contributed by the services sector.

Agriculture remains the most undocumented, partly because of its tax exemption for decades and partly because of inability of the tax collection regime to recover tax from the rural elites. Finance Minister Dr. Abdul hafiz provided the disappointing numbers of tax collection from agriculture. Earlier, Governor State Bank of Pakistan had also warned the government about an emerging trend therein incomes were masquerading to get tax amnesty given to the agriculture sector.

Many of the taxpayers take advantage of the fact that agriculture output is dependent on favorable weather condition. Over the years, the country has been suffering due to floods and acute shortage of the irrigation water.

During financial year 2010-11, agriculture produce has been really good keeping in view the deluge. This was mainly due to high cotton prices, bumper wheat, sugarcane and rice output. To help the farmers overcome losses from flood the government also announced concessional financing for oil seed growers, mainly canola, sunflower, and corn. However, the outcome has been disappointing because financial institutions failed in meeting agriculture loan disbursement target.

While textile sector benefited from high cotton prices in the international markets, sugar industry gained due to late commencement of crushing season. However, the sector output was impaired due to excessive load shedding of electricity and gas. Let one point be very clear that load shedding is not the outcome of demand surpassing supply but running power plants on lower capacities in a bid to contain fuel consumption and T&D losses hovering around 40 per cent. At present, the average daily electricity load shedding spell extended to 12 hours in urban areas and 16 hours in the rural areas.

The worst victim of gas load management program is the fertilizer manufacturing units. Reduced supply of gas (feedstock) to fertilizer plants is affecting capacity utilization. This results in increase in cost of production and persistent hike in urea prices adding to the cost of inputs of farmers. This gas curtailment and its diversion to power plants are done in an attempt to bring down cost of generation. However, little attention is paid to the fact that power plants can be run on alternative fuel but closure/running of fertilizer power plants on lower capacities is costing a fortune to the country because lower local production necessitate import of urea, which erodes foreign exchange reserves of the country and also payment of huge subsidy because the landed cost of imported urea is around US$575 per ton as compared to locally produced one costing less than US$200 per ton.

Service sector has emerged the worst victim of subdued economic activities in the country. The 'Big Five' commercial banks have emerged the biggest beneficiary of huge investment in the government securities enabling them to earn up to 7.5 per cent spread. Despite being rising delinquency, provisioning, most of the banks has not been able to meet the minimum paid-up capital requirement stipulated by the central bank. The practice of investing in government securities has deprived the private sector as the banks are contended with risk-free return on government securities.

During 2010-11, financial institutions failed in meeting agriculture credit target, partly because of lower credit demand and partly because of losses incurred due to devastating floods. According to the banking sector experts, the losses would have been far lower had the financial institutions acquired insurance cover for the credit extended to the farmers.

Insurance companies, particularly non-insurance companies have also been the victim of economic slowdown. The added issues have been hike in claims due to poor law and order situation and devastating floods. It is necessary to mention that for the last five years the country has been facing one calamity after another. Since 2008, equities market has also remained under pressure affecting income of the insurance companies.

Mutual funds have also been failing in enhancing funds under their management but substantial rise in sovereign Sukuk issue has bode well particularly for the Shariah compliant funds. The size of funds under management remained more or less stagnant around Rs250 billion. This is partly because of subdued equities markets. While the local investors have remained shy, foreign funds managers have emerged most active, which has kept the prices of stocks at the modest levels.

Equities market has lately suffered mainly due to lack of investors' confidence. In the pre-budget rallies, a lot of funds flew to the bourses on the hopes that the government will abolish capital gain tax, at least for the individual customers. Lack of interest of public is also evident from disappointing number of new issues, both equities and debt instrument. Market was supported by foreign fund managers, but they were mostly on the selling side around the word, particularly in the emerging markets both Pakistan and India.

Government is failing miserably in luring fresh investment in manufacturing and power generation. A major reason for the declining oil and gas production is circular debt plaguing the entire energy chain.