Economy of Pakistan under new Management

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Assad Umar has now been replaced with Dr Abdul Hafeez Sheikh who has remained Finance Minister for the Zardari government and in Musharraf time between 2010 and 2013 and 2000 and 2002. His performance was like other finance Ministers of Pakistan and some time he was removed due to certain reasons.

It has remained a dilemma with every Finance Minister of Pakistan whether coming from any multilateral or not that they are well aware of economics and finance but does not know the ground realties of Pakistan and miseries of its people. That’s why they have failed every time to evolve a road map for the revival of Pakistan economy.

Before next budget to be announced in May, the government is planning to introduce another amnesty scheme to provide non-filers of tax returns an opportunity to whiten their undeclared assets at home and abroad and get into the tax net. Government interest payments are anticipated at around Rs2 trillion for the current year against the budget estimates of Rs1.62tr, while defense expenditures would also go up due to the recent tension with India .The increase would be based on Rs1.1tr of current year and the armed forces development fund would increase on the basis of current year’s Rs576 billion. The revenue target is being also revised over the massive shortfall of around Rs290bn in nine months. The serious drag is going to come in the next two months as petroleum prices are on rise and already they have gone to $ 65-75 per barrel after remaining below $ 50 per barrel. This would impact current account deficit significantly making government to raise fuel, gas and electricity prices in the coming months.

Looking at these facts, Pakistan was and is required to pursue reforms to improve its entrepreneurial environment and facilitate private-sector development. The financial sector was needed to undergo modernization and restructuring. However, overall progress lags significantly behind other countries in the region. The tax system is complex and inefficient, although reforms to cut tax rates broaden the tax base, and increase transparency have been taken half heartedly but not on equitable basis. Reliance on indirect tax remains the main feature of tax collection.

The state’s excessive involvement in the economy and restrictions on foreign investment are serious drags on economic dynamism. Ongoing political instability and the threat of terrorist violence have made the business operating environment more challenging in recent years.

In 2019, Pakistan finds itself facing a dire macroeconomic crisis. It is spending more on imports than it receives on exports, with its current account deficit having risen from $2.7 billion in 2015 to $18.2 billion in 2018. The major driver of this rising current account deficit is an expanding trade deficit, which is mostly due to the rising imports under new China-Pakistan Economic Corridor (CPEC) projects and low exports in general and now due to rising oil prices. The previous governments focused more on import-led growth strategy to finance large scale projects under CPEC.

Current economic data
  Feb 2018 Feb 2019
Currency in Circulation Rs billions 4,053 4,744
CPI inflation in % 3.8 8.2
US$ against PKR 121 143
Foreign Remittances $ millions 12,833 14,350
Total FX Reserve $ millions 18,317 14,964
Trade deficit$ millions -19,839 -19282
Current account deficit $ millions -11,421 -8,844
KSE 100 index 43,239 39,054
  Dec 2017 (FY 2018) Dec 2018 (FY 2019)
Total External debt million $ 92,120 1,899
Revenue billion Rs 2,385 2,327
Expenditure billion Rs 3,181 3,357
Fiscal Deficit billion Rs -796 -1,030
     

Despite the massive depreciation in the rupee, Pakistani exports have remained almost the same. Meanwhile, the government’s external debt has also increased from $64.1 billion in June 2018 to $65.8 billion in January 2019. The inflation rate is now touching 9.4 percent, which is a record level high over the last five years mostly due to rupee depreciation and rising energy prices. In addition, increased defense spending and its ongoing fight against extremism only further burden the economy. Along with a depreciating rupee that has made imports costlier, low foreign investment due to Pakistan’s security and political challenges has also severely hit its foreign exchange reserves.

Despite rising deficits, Pakistan’s tax revenue was only 13 percent of its GDP in 2018. During the current fiscal year, the country has seen a decline in its revenues while expenditures have increased, resulting in a half-year fiscal deficit of 2.7 percent of GDP, the highest since 2010-11. According to the State Bank of Pakistan, the sharp decline in revenue can be attributed to a fall in development spending, reductions in income and corporate taxes, and taxes on petroleum products, as announced by the earlier government.

With its domestic industry in ruins, Pakistan has not been able to rely on consistent foreign investment for more than stopgap measures. It did recently receive $2 billion from the United Arab Emirates (UAE) through the Abu Dhabi Fund for Development (ADFD), which provides concessionary development loans. This inflow has increased Pakistan’s foreign reserves from $14.956 billion at the start of March 2019 to $17.398 billion

To make a significant impact on the current account deficit, Pakistan needs to ensure an investment-friendly environment that attracts more foreign direct investment (FDI), instead of relying so heavily on foreign aid.

Pakistan also needs to focus on building its domestic industry to expand its export portfolio and enhance its competitiveness in the international markets.

Currently, Pakistan is not taxing its agriculture, 50% of Services, Whole sale and Retail sector, and large businesses are often given big tax breaks. Hence, Pakistan needs to broaden its tax base – by taxing the agricultural produce of landlords with big land holdings and stop giving tax amnesties to big businesses – instead of overburdening current taxpayers, improve fiscal transparency, and strengthen tax collection coordination at the national and provincial levels to ensure that revenue targets are met. These steps would go a long way to addressing the myriad financial and deficit issues stemming from the country’s weak governance.

The coming months are going to be tough for the current government and new Manager of Financial sector as the rupee is expected to depreciate further, causing inflation to rise. Pakistan’s economic crisis cannot be resolved overnight. Support from the IMF and friendly countries like Saudi Arabia, China, and the UAE can only provide some breathing room in the short term to its shattered economy. Promoting manufacturing by creating a more investment-friendly environment, broadening its tax base, and encouraging innovation and modernization in export-led industries are just some of the most urgent measures the government can take to address the growing fiscal and current account deficit.  Pakistan must take advantage of this moment of hard-won reprieve by building a truly stable and sustainable economy before it once again finds itself digging its own economic grave – and that of its people.

 

 

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