INVESTMENT-TO-GDP ON THE CONSTANT DECLINE

KANWAL SALEEM
(feedback@pgeconomist.com)
July 4 - 10, 20
11

Pakistan's economy requires immediate stir to broaden the tax base to benefit from the growth in untaxed sectors such as agriculture. Pakistan has one of the lowest tax-to-GDP (gross domestic product) ratio in the world, which is currently around 10 percent. All sectors of the economy need to be taxpayers beyond a certain level of income irrespective of the source of income. The government needs to focus on including all sectors in the tax net, along with rationalizing its expenditure, as those would be more structural and sustainable measures.

Inflation, the budget deficit and the availability of credit for the private sector remained a concern. The large-scale manufacturing sector picking up and a favourable external accounts situation, the country might see a better-than-expected economic growth in the fiscal year 2011-12.

In the year 2010-11, as per official claims different sectors performed as under:

Major crops accounting for 31.1 per cent of agricultural value added registered negative growth of four per cent compared to a negative growth of 2.4 per cent last year and a target of 3.7 per cent.

- Minor crops registered a growth rate of 4.8 per cent compared to the target of three per cent and massive negative growth of 7.8 per cent last year.

- Output in the manufacturing sector has witnessed expansion of three per cent in 2010-11 as compared to expansion of 5.5 per cent last year on the back of strong performance from small and medium manufacturing sector.

- Large-scale manufacturing grew by 0.98 per cent (July-February 2010-11 incorporated in the national accounts but the growth is now 1.7 per cent in July-March 2010-11) as against 4.9 per cent of last year.

- The services sector grew 4.1 per cent against the target of 4.7 per cent and actual outcome of 2.9 per cent. Within services sector wholesale and retail trade sector grew at 3.9 per cent as compared to 4.6 per cent last year and the target for the year of 5.1 per cent.

- Finance and insurance sector recorded negative growth of 6.3 per cent in 2010-11 as against contraction of 11.3 per cent last year. Public administration and defense posted a stellar growth of 13.2 per cent as compared to 2.5 per cent in last year.

- Social services sector grew by 7.1 per cent which is slightly higher than the target of five per cent but lower than last year's actual growth of 7.8 per cent.

- Pakistan's per capita real income rose 0.7 per cent in 2010-11 as against 2.9 per cent last year. Per capita income in dollar term rose from $1073 last year to $1254 in 2010-11, thereby showing tremendous increase of 16.9pc. This is mainly because of stable exchange rate as well as higher growth in nominal GNP.

- Real private consumption rose by seven per cent as against four per cent attained last year. However, gross fixed capital formation lost its strong growth momentum and real fixed investment growth contracted by 0.4 pc as against the contraction of 6.1 pc in last fiscal year.

- The total investment declined from 22.5 pc of GDP in 2006-07 to 13.4 pc of GDP in 2010-11. Fixed investment decreased to 11.8 pc of GDP from 13.4 pc last year.

- The national savings rate decreased to 13.8 pc of GDP in 2010-11 as against 15.4 pc of GDP last year. Domestic savings also declined substantially from 16.3 pc of GDP in 2005-06 to 9.5 pc of GDP in 2010-11.

Pakistan continues to pay a heavy price in terms of both the economy and security in the war on terror and has suffered huge losses of more than US$67.93 billion during last ten years.

The country's economy was subject to enormous direct and indirect costs which continued to rise from $2.669 billion in 2001-02 to $13.6 billion by 2009-10.

Pakistan continues to witness a devastating social and economic upheaval in its industry due to this war. As a result of war in Afghanistan the western countries including the United States continued to impose travel ban for their citizens (investor, importers etc.) to visit Pakistan. This affected Pakistan's exports, prevented the inflows of foreign investment, affected the pace of privatization program, reduced import demand, reduced tax collection and expenditure overrun on additional security spending.

Domestic tourism industry also suffered badly, hundreds and thousands of jobs could have been created had economic activity not slowed. Thousands of jobs were lost because of the destruction of tourism industry.

Investment-to-GDP ratio also nosedived from 22.5 percent in 2006-07 to 13.4 percent in 2010-11 with serious consequences for job creating ability of the economy.

Pakistan needs enormous resources to enhance productive capacity of the economy. Obviously, continuity of war will continue to bleed the economy and society of Pakistan.

Pakistan Industrial & Traders Associations Front (PIAF) has urged the government to redesign all economy-related policies in consultation with private sector to bring the country out of IMF and World Bank shackles.

The PIAF Chairman Engineer Sohail Lashari urged the federal commerce minister Makhdoom Amin Fahim and chairman FBR to restructure and reform valuation system of customs in consultation of stakeholders. He also demanded the posting of director general valuation in Lahore because the Lahore is a hub of business activities and posting of DG Valuation in Islamabad makes no sense.

According to him, the business community is fully patriotic and always rendered marvelous services, not only for the trade and industry but for the country. Despite several crisis, business community helped FBR to meet with the revenue collection target. Business community has the ability to pull the country out of heavy debts but first of all government has to end the power crisis in the country.