LEAKAGES IN ECONOMIC GROWTH
TARIQ AHMED SAEEDI
May 21 - 27, 2012
Pakistan's gross domestic product (GDP) is projected at 3.2 to four per cent in the current fiscal year (2011/12). The government has calculated the rate in the band with the base years of 2005/06 or 1999/2000. A recently released report of the World Bank forecast the growth rate at 3.9 per cent this fiscal year while 4.2 per cent in 2012/13.
Price inflation is expected to come down in not only Pakistan but also other regional nations like India and Sri Lanka due to bumper production of major crops. However, retreating foreign capital funds and slowdown in external flows would likely worsen the fiscal and current account positions of the developing countries including Pakistan, said the World Bank's Global Economic Prospects 2012.
Accounting for one-seventh of the south Asian GDP, Pakistan's economy is not performing up to the mark compared with other regional economies. As compared to the economic heydays four or five years back when the growth reached the incredible mark of eight per cent, last few years have proved disastrous because of many reasons from business-unfriendly security environment, lack of policy implementations, misdirected resources, lose-making public sector enterprises, low tax to GDP ratio, and suffocating energy shortages.
Electricity and gas shortfalls are playing havocs with the economic activities in the country holding down growth by three to four per cent, according to a report released by the Asian development bank (ADB) last month.
"Losses arising from power and gas shortages held down GDP growth by 3-4 percentage points in FY2011 and FY2012. Improved management of power resources could ameliorate predictability of load-shedding to allow the private sector to better schedule work and minimize costs," said the report.
"For every unit of power sold, there is a loss to the sector reflected in the form of subsidies. An outstanding accumulation of Rs220 billion was carried into FY2012, and an additional financing of 1-1.5 per cent of GDP is likely to be required in FY2012," it added.
Federal Board of Revenue (FBR) collected Rs1,266 billion tax revenue during the first nine months (July-Mar) of the current fiscal year, up 24 per cent over Rs1,020 billion collected in the corresponding period last year. This year tax collection target is Rs1,952 billion. Last year, tax collection was Rs17,00 billion that was not sufficient to meet the expenditures. Over six per cent of GDP, the fiscal deficit is serious issue facing the economy.
Several times experts have pointed out the anomalies in the tax system that is actually discouraging tax paying culture. Burdening the already burdened is the standard of procedure of the tax machinery in the country to atone for the grave tax evasion and irregularities. Most of the time, soft targets are skimmed off and they are taxed to generate revenue through indirect taxation or unjust direct taxes.
For example, corporate sector in Pakistan contributes 70 per cent of total direct taxes collected by the FBR by paying 35 per cent. Understandably, undocumented sector or small companies do not prefer to expand their businesses in fear of such a heavy taxation.
Substantial economic activities go undocumented, but they are keeping ovens of umpteen numbers of houses burning and generating a sizeable employment opportunities. It is perhaps very difficult to measure actual size of the informal economy, though conservative estimate puts it at half of the country's total GDP of $200 billion. Majority of these activities are taking place in small and medium sector.
It is to anybody's guess what the massive push taxation on the informal economy could give to the revenue level. Currently, Pakistan's tax to GDP ratio of eight to nine per cent is one of the lowest in the world. Besides, documentation will equally share the economic burden as well as benefits across all taxable sectors. This, however, necessitates efficient, just, and flawless tax reformation, without which any attempt to fill tax gap will not come to fruition.
The government needs to control its non-development expenditures that make it overindulged in borrowing from different sources. Excessive printing of money causes rise in inflation. Even tight monetary policy has failed to wean the government from its reckless spending on foreign trips, luxurious lives, etc.
Over 90 per cent of the country's foreign debts (external debt and liabilities) are interrelated to four currencies that include US dollar, yen, SDR, and euro. Depreciation of Pakistani rupee against any of these denominations puffs up liabilities. An estimate calculates yen weight in foreign debts at 30 per cent, SDR 27 per cent, dollar 25 per cent, Euro 13 per cent, and others five per cent. The cash-strapped economy had to sustain more than three billion dollars losses thanks to Pak rupee devaluation in the basket of foreign currencies.
Recently, supply chain association of Pakistan and Terrabiz organized a conference on end to end supply chain management in Karachi in which experts and 250 delegates from different companies brought forward issues, problems, and solutions related to logistic network in the country.
According to them, poor transportation system both railways and road cut four per cent of Pakistan's GDP, which is not a significant figure.
Dilapidated roads, old freight carriers, and outdated and inefficient railway transportation result in serious financial losses to all the stakeholders involved from farm producers in case of agriculture produces to companies and consumers in the end.
Since the government is not interested to take policy response to strengthen communication infrastructure (e.g. highways) between the provinces and cities and with the neighbouring countries, investors show reluctance in venturing out capital intensive projects to transform the existing business models relying on the old systems to carry on the local operations.
Speakers haling from renowned companies such as Getz Pharma, Uni Lever, Tetra Pack, etc. demanded of the government to revamp and build road, railways, shipping infrastructure to help the choked logistics industry. There is also a need to develop the technological soundness of freighters. There should be greater emphasize on development of information and communication technology-related skills and competencies in the logistics industry as the population of emerging economies grows and so does the global trade, said a paper titled transportation and logistics 2030 released by PricewaterhouseCoopers.