SLOWING ECONOMY NEEDS STIMULANTS

AROOJ ASGHAR
(feedback@pgeconomist.com)

Jan 9 - 15, 20
12

The year 2011 proved to be another dormant one for the Pakistan's economy while 2012 carries baggage of 2011.

Pakistan's economy is currently passing through one of the worst phases of its life. Deep-rooted structural problems in the economy, continuous increase in the rate of inflation, shortage of electricity and gas consequently forcing closure of industries, and increase in the international oil prices have badly affected the economic conditions. On the collapse of a number of European economies and the global financial crisis, many developed and developing countries have plunged into deep recession.

Pakistan has found itself in a slightly different position since its economy is not very much interlinked with the international economic system.

Pakistan is a strange country in almost all aspects, a country whose GDP went as high as eight per cent and then dropped to below two per cent in the following four years.

Historically, its annual growth remains uneven; the higher was 8.526 per cent in 1980 and 8.958 per cent in 2005 whereas lowest was 1.703 per cent in 1997 and 1.722 per cent in 2009 at constant prices.

In 2000s, the economy grew five to six per cent a year but for the last three years, it has been creeping below four per cent. This clearly shows inconsistent pattern, lack of policy depth, and continuous change of priorities.

Economic growth is supposed to deliver prosperity. Higher incomes should mean better choices, richer lives, and improved quality of life. That, at least, is the conventional wisdom. But, things haven't always turned out that way.

As a general rule, in order to encourage economic development and investments in any country, leadership has to put following things in place: an environment of security of property; political stability; social harmony; and respected legal code that protects the rights of its people and business community.

Furthermore, the state has to offer infrastructure such as roads, ports, airports, railways, electricity, water, and telecommunications, and supply of well-educated and skilled labor force. It is too simple to blame only policymakers for Pakistan's stagnant economy.

In order to understand current economic situation, it is important to keep four points into consideration. Firstly, what is happening at the moment represents the breakup of the interlocking set of arrangements by which the country's economy has been governed for the last ten odd years. These arrangements represented a temporary 'solution' to some very serious issues.

Secondly, there has been too much dependence on imported energy resources whereas less reliance on indigenous resources.

Thirdly, a blunder is made by converting national economy into a trading economy from agri-cum-manufacturing economy. Fourthly, there is a pileup of debts both foreign and local.

GDP of a country goes down in case of slowdown of its economy.

* Pakistan's weakening economic activities have impacted revenue generating ability of government.

* Structure of budgetary expenditures provides little flexibility; high security-related expenditures and debt servicing absorb almost 65 per cent of the government revenue.

* Excessive subsidies to various national corporations like PIA, Pakistan Railways, Steel Mill etc. are needed.

* Persistent electricity and gas crises cause closure of business and unemployment.

* There is a decreasing trend in foreign direct investments.

The slowdown impacts stock market and tumbling index relays negative signal about the economy.

As of today, Pakistan has one of the lowest tax-to-GDP ratios in the world. As per the ministry of finance, the tax-to-GDP ratio was 9.4 per cent in FY11 as against 9.1 percent in FY10.

The government set target to double the tax-to-GDP ratio in FY12, which apparently seems difficult, mainly because of energy crisis and insufficient foreign investment.

Factories are facing difficulty in meeting their orders both internationally and locally due to shortage of electricity and gas. Textile, leather, carpets and football industries are losing export earnings.

With the increase in the cost of doing business, not only small industry units are closing but a large number of workers have also been laid off. The loss of jobs and decrease in earning of workers is pushing up poverty incidence.

Local business community has started establishing their businesses in Bangladesh, Malaysia, and Africa, which is an alarming trend. There is no harm in establishing business outside the country provided profits are brought back to home country. In most of the cases, investments would be kept out and cash profits not be brought back.

From 2003 to 2008, rupee was almost frozen at Rs60 per dollar then there was a rise of Rs20 and in last few months rupee has deprecated at an enormous speed of almost five per cent thus surpassing Rs90 level.

Increase in international oil prices has put up a lot of pressure on the rupee. With the increase in dollar rate, cost of doing business has also increased thus making it difficult for businesses to remain afloat.

High interest rate is also a cause of slowdown of the economy because it squeezes much needed investments. Despite that the stock market declined, the state bank continued to increase interest rates. It didn't start lowering rates until late 2011. Local businesses are facing difficulties in meeting their debt services and are more inclined towards bank defaults. This inclination will not only close the factories and trading houses but will also inhibit the performance of banks, which is even more serious and dangerous for the overall economy.

The economic survey of Pakistan 2010-11 said, "The domestic environment is still affected by the intensification of war on terror and volatile security situation while external environment is affected by uncertainties surrounding external inflows and oil prices. Notwithstanding substantial improvement in the current account balance, the external sector vulnerabilities need a review especially in the backdrop of spike in international crude oil prices which bounced back from as low as $33 per barrel in January 2009 to beyond $120 in May 2011. Pakistan economy still faces pressures from higher inflation driven mainly by spike in food prices, acute power shortages, modest growth in tax revenues amidst rising security related expenditure thereby, putting pressure on fiscal deficit, lower than anticipated inflows, and growing absolute financing requirements. Abatement of inflationary pressure remained oblivious and prices depicted stubbornness. Pakistan's economy weathered an unprecedented set of challenges during 2010-11, however, the resolve to take challenges head on is even greater."

The government has to take corrective measures to bring back the economy on track. Deputy Chairman Planning Commission, Dr. Nadeem-ul-Haq once said, "Pakistan's real GDP needs to grow at an annual average rate of seven per cent to provide jobs to the increasing population of our youth".

The following measures are advisable:

* Complete elimination of non-productive subsidies and permanently abandoning unrealistic public schemes like susti roti scheme.

* Ruthless, professional, uncompromising overhaul of public sector enterprises like PIA, Railways and Steel Mill.

* More powers to federal board of revenue and expansion of tax net.

* Encouragement to local business community to invest in Pakistan by providing subsidies to only those manufacturing concerns who have good track records.

* Complete ban on import of those products, which are or can be manufactured in Pakistan like mobile sets and measures be taken to stop smuggling.

* Steps be taken to reduce import bill and import of unhealthy food items like pan and tea.