Despite its resilience and strong fundamentals, Pakistan economy is now facing multiple challenges.
In addition to strategic location, the country’s other strong fundamentals are: a market of over 160 million people, an emerging middle class and an enviable record of economic reforms and policies. Still in place, these fundamentals contributed to economic stability and a remarkable sustained growth exceeding 7 per cent over the last four years.
What now eludes the country is political stability since March 2007, which increased further after PPP Chairperson Benazir Bhutto was assassinated in December. While one would wish that the political stability takes root early, some quarters are expressing apprehensions about the events likely to follow the general elections 2008, given the track record of the country where election results are looked with suspicion and the legitimacy of every new government is challenged. The post-election scenario has raised security concerns. The authorities need to take appropriate remedial steps to allay the fears of the diplomatic community and the civil society by obliterating even any remote chance of possible friction.
On their part, the politicians on both sides of the political spectrum should be consciously aware as to where some of their actions, policies and public posturing may be leading to. Certainly, this calls for a closing of ranks and finding a way out of the current impasse. The earlier this is done, the better it would be for the nation and the country.
However, much hinges on the forthcoming elections. Therefore, it is the paramount need of the time to conduct the elections in a free, fair and transparent manner. Further, the outcome of the polls must be accepted by all stakeholders like mature citizens and politicians. Sometimes, in the developed countries also, voices are raised against malpractices in the polls. One may cite here the case of the last presidential elections in the USA and the allegations of unfair vote count. But, ultimately the Republicans accepted the results in the greater interest of their country. Political instability neither bodes well for the citizens nor for the country.
Economic Woes
As far as the economy is concerned, the country’s exports have stagnated for the last couple of years, while the imports are constantly rising. The trade deficit, last year, stood at $13.5 billion, whereas it is likely to be much higher this year. The budget deficit, which was originally projected at 4 per cent of the GDP (equivalent to Rs400 billion), might rise to over 5.2 per cent due to increase in the international oil prices and subsidies being provided by the government on POL products, electricity and wheat flour, the cumulative effect of which is likely to swell to Rs280 billion or 2.8 per cent of GDP.
Meanwhile, an upsurge in food prices, power outages and the inflationary impact of rising oil prices in the international markets have had a direct impact on the purchasing power of the common man. A deteriorating law and order situation due to rise in acts of terrorism has further compounded the situation.
To keep its balance sheet in tact, the government shall have either to increase the volume of its revenues or cut down on development expenditure or both. The government is considering taking both the steps to keep the budget deficit within 4 per cent of the GDP. According to knowledgeable sources, the government might also slash the development expenditure, which stands at Rs335 billion, by Rs75-100 billion. The situation is quite critical as the FBR is already finding it difficult to maintain its target of revenue collection, which was projected at Rs1,025 billion for the current fiscal year, but has already been slashed down by some Rs150 billion.
Further, the FBR could collect only Rs4 billion revenue in December 2007 against Rs24 billion during the corresponding period last year due to riots in the wake of Benazir Bhutto’s murder. The revenue shortfall on corporate returns till January 31, 2008 was Rs22.7 billion, as the tax authorities could collect only Rs2.3 billion against Rs24 billion during the corresponding period in the last fiscal year.
Meanwhile, the national exchequer continues to suffer heavy losses, which are reported to be over Rs300 billion annually due to political considerations. Further, there is little progress towards expanding the tax base, in particular bringing the agriculture and service sectors within the taxation net, and eliminating non-standard exemptions enjoyed by the country’s elite classes.
Pakistan’s tax revenue-to-GDP ratio at 11 per cent of the GDP in 2006-07 is still relatively low compared to regional states. This aspect further limits the resources available for infrastructure development and poverty alleviation.
Many services and agriculture sector is still out of tax net despite making substantial contribution to the overall GDP growth. Though the authorities concede this fact, they are hesitant to move towards the desired objectives because of political considerations.
In recent years, FBR has improved tax administration significantly, which would contribute to further increasing its efficiency and strengthening tax audits. However, notwithstanding this progress substantive measures are needed to broaden the tax base.
During a recent meeting with the IMF, the authorities reportedly recognized that expanding taxation net to the agricultural and service sectors and eliminating non-standard exemptions could enhance revenue collection, but underscored the need to proceed gradually in this area, taking political considerations into account.
The cost of tax exemptions witnessed a steep hike during fiscal year 2006-07 as it soared to Rs184.9 billion. According to knowledgeable sources, the quantum of tax exemptions has further gone up during the current year.
The revenue losses on account of capital gains were estimated at Rs112.45 billion. The cost of exemptions in income tax was Rs121.45 billion in 2006-07 against Rs4.65 billion in 2005-06, projecting an increase of 2,521.1 per cent.
Given the situation, there is dire need to bring political stability in the country on the one hand and on the other to broaden the narrowed tax base and to eliminate all kinds of exemptions being enjoyed by the influential circles, such as parliamentarians, judges and bureaucracy of various hues and colours. Broadening of tax base will not only ensure fair distribution of the tax burden among various sectors of the economy, but will also enable the government to reduce the marginal tax rates, which will help to stimulate further investments.
