pakistan economy dssc - nov '17

THE GROWING SOCIO-ECONOMIC CRISIS.

MOHAN GURUSWAMY

Pakistan: On the Road to Perdition.

11/26/17Mohan Guruswamy

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Indian sub-continent GDP’s (PPP).


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11/26/17Mohan Guruswamy 3

Indian sub-continent GDP growth rates.

Regional Growth Trends.


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Snapshot of Pakistan.


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Population 208 million

GDP $284 million

GDP growth 5.28%

GDP per capita $1182

Life expectancy 65 years

Literacy (male) 68%

Literacy (female) 40%

Infant mortality rate (IMR) 73 per 1000

Foreign reserves $19.73 billion


India and Pakistan. Economic Comparison.


Gross National Saving

India.

30.2% of GDP (2016 est.)31.3% of GDP (2015 est.)32.8% of GDP (2014 est.)

Pakistan.

14.3% of GDP (2016 est.)14.5% of GDP (2015 est.)13.4% of GDP (2014 est.)note: data are for fiscal years


India and Pakistan budget priorities.

India and Pakistan growth trends since 1980.


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The China Pakistan Economic Corridor CPEC.

What is CPEC?


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The first-phase projects will receive $45.69bn in concessionary and commercial loans, for which financial facilitation to the Chinese companies is being arranged by the Silk Road Fund.

These include $33.79bn for energy projects, $5.9bn for roads, $3.69bn for railway network, $1.6bn for Lahore Mass Transit, $66m for Gwadar Port and a fibre optic project worth $4m.

Shylockian terms.


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All the Chinese loans will be insured by the China Export and Credit Insurance Corporation (Sinosure) against non-payment risks, and the security of the loans is guaranteed by the state.

Sinosure is charging a fee of 7pc for debt servicing, which will be added to the capital cost of a project. For instance, the capital cost of a 660MW project at Port Qasim is $767.9m. But it goes up to $956.1m by adding Sinosure’s fee of $63.9m, its financing fee and charges of $21m, and interest during construction of $72.8m; a 27.2pc return on equity is guaranteed.

Ironically, interest during construction is allowed at the rate of 33.33pc for the first year; 33.33pc for the second; 13.33pc for the third; and 20pc for the fourth year. The scenario presents a bleak picture, as the availability of affordable energy will likely remain a pipedream.

The CPEC Project. Lifesaver or deadweight?


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To be built over the next several years, the 3,218 kilometres route will connect Kashgar in China’s western Xinjiang region to the port of Gwadarin Baluchistan.

Currently, nearly 80 per cent of China’s oil is transported by ship from the Strait of Malacca to Shanghai, a distance of more than 16,000 km, with the journey taking between two to three months.

But once Gwadar begins operating, the distance would be reduced to less than 5,000 km. But does this reduce costs?

CPEC Power to the People.


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If all goes well and on schedule, of the 21 agreements on energy– including gas, coal and solar energy– 14 will be able to provide up to 10,400 megawatts (MW) of energy by March 2018, to make up for the 2015 energy shortfall of 4,500MW.

According to China Daily, these projects should provide up to 16,400MW of energy altogether.

Who gains most from CPEC.


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Many Pakistani economists have questioned the CPEC project’s lack of transparency and accountability.

The agreement, in its present form, is shrouded in secrecy and the lack of information has severely impeded a proper cost-benefit analysis of the project.

There are suspicions that the agreement may be heavily skewed in favor of China. This apprehension comes from the way the projects are being handled — for example, all materials (except cement, which is sourced from Pakistan), equipment, and manpower are being brought from China, with little or no participation by the local communities.

Suspicions on what CPEC really is?


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Several Pakistani economists feel that the Chinese strategy is to bring rich dividends back to its own country.

The Chinese approach of not partnering with local companies will not help Pakistan create job opportunities for millions of its youth.

There is also apprehension about the viability of the projects, as Pakistan has become an epicenter of terrorist activities. Recently, two Chinese nationals were killed, with Islamic State claiming responsibility.

As some of the projects are located in strife-torn areas, it is only a matter of time before these projects could be targeted by disgruntled elements.

Doubts about CPEC viability.


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In an article in Dawn, Khurram Hussain tallies up the costs. He writes that “the debt service outflows will be about $1 billion and the return on equity will be $646 million if it is kept at 17 percent. Add to that $1.9 percent as repayment of principal. That means an annual net outflow of $3.546 billion per year once the corridor becomes fully operational.”

Prominent local economists have also expressed serious concerns over Pakistan’s ability to service the debt. Hafiz Pasha, a former finance minister, and Ashfaq Hassan, a former adviser to the Finance Ministry, have estimated that CPEC loans will add $14 billion to Pakistan’s total public debt, raising it to $90 billion by the fiscal year ending June 2019.

The Taxfree Regime.


18Chairman Federal Board of Revenue, Ali Arshad Hakeem says that only 0.9 per cent of the population of the country pays income tax.

He said that 82 per cent of all sales tax and federal excise duty is paid by the top 100 companies.

Hakeem said that about 7.7 per cent of the country workforce-approximately 4.5 million-earned enough money to pay income tax. Only 0.3% of Pakistanis pay income tax.

He said that revenues from the individual income tax have declined from 1.5 per cent of GDP in 2000-2001 to less than one per cent of GDP in 2010-11.

He said that only 6,152 people filed personal income tax higher than Rs 5 million in 2011.

Tax/GDP ratios of Top 10 & Pakistan’s.


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USA 28.2

China 17.0

Japan 27.4

India 17.7

Germany 40.6

UK 39.0

Russia 36.9

France 46.1

Brazil 36.8

Italy 42.6

Pakistan 10.6


Pakistan’s Tax/GDP ratio problem.Pakistan’s overall tax-to-GDP ratio has remained stagnant at around approximately 10-11% and has shown a decline in recent years.

Pakistan has a lower tax-to-GDP ratio than other Asian countries like Sri Lanka (13 percent), India (16 percent), Indonesia (15 percent), Malaysia (14 percent), Thailand (17 percent), Philippines (14 percent), and South Korea (16 percent).

The country has committed, according to the macroeconomic framework agreed upon with the IMF (as a part of the Standby Agreement in 2008) to increase the tax-to-GDP ratio to 14.2 percent by 2013-14, which implied a jump of almost four percentage points in the ratio. Which didnt happen.

A survey, carried out by a reputed Lahore-based academic institution a few years back, as a part of tax reformation drive, concluded that mainly because of rampant corruption, in combination with a host of other factors, the country suffers a loss of 64 percent in income tax, 48 percent in customs, and 45 percent in sales tax . Translated into hard cash, it means that for each hundred rupees of genuine income tax payments of a typical Pakistani business, the government collects only Rs 36. The rest of the money is shared among the three parties - assessors (taxmen), the assesses (taxpayers) and the middlemen (tax practitioners).

Cost of walking out in the green channel.


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Dr Aqdas Ali Kazmi* in his paper ‘Tax Policy and Resource Mobilization in Pakistan’ estimates 70 percent part of economy consists of 36 percent pure black economy, 18 percent exempted economy, 9 percent illegal economy, 4.5 percent unrecorded economy, and 2.5 percent informal or unreported economy.

*Dr. Aqdas Ali Kazmi former Joint Chief Economist (Macro), Planning & Development Division, Government of Pakistan, Islamabad.

Black and bleak economy.


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Untaxed “shadow” economy share in GDP. (%)


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India & Pakistan Gross Savings /GDP. (%)

According to a US State Department report, the Gini Coefficient for Pakistan is 68.0.

According to the same report, the 'Gini Index' for Japan is 14.9, for Sweden is 21.0, for Switzerland is 21.1, for Germany is 22.3, for the United Kingdom is 23.0, for Canada is 23.1, for France is 32.7, for Iran is 41.0, for the United States is 46.6, for Argentina is 52.2, for Mexico is 54.6, for South Africa is 57.8 and for Namibia is 70.7.

According to an United Nations report, from 1987 to 1999, the Gini Coefficient for Pakistan was in the range of 0.33 to 0.43, but it increased to 0.68 in 2006.

Comparative Income Inequality. Gini out of the bottle.


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Troubles ahead with troubled youth.


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India & Pakistan - Population ages 15-64 (% of total)


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The Clear and Present Danger.


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Population Living in Urban Areas of 750,000+, 2005 (%) 18 Population Living in Urban Areas of 750,000+, 2005 31,795,000

Youth Ages 10-24, 2006 54,200,000Youth Ages 10-24, 2025 64,800,000

Birth Rate (annual number of births per 1,000 total population) 30Death Rate (annual number of deaths per 1,000 total population) 7

Rate of Natural Incr. (birth rate minus death rate, expressed as a %) 2.3

Population Mid-2025 (projected) 246,286,000Population Mid-2050 (projected) 335,195,000

Population Change 2009-2050 (projected %) 85%


Demographic highlights of Pakistan.


Countries with the largest increases and decline of populations in this century, millions.


The 20 largest countries in 2050, millions.

Collateral Damage. Growing criminal economy.

According to an official of the UN Office on Drugs and Crime ( UNODC), Afghanistan produces 355 metric tons of heroin every year, about 90 percent of the whole world's production. And 42 percent of the heroin production of Afghanistan passes through different routes from Pakistan.

Talking to Xinhua, National Research Development Program Officer at the UNODC, Sher Ali Arbab, said that 150 metric tons of heroin come to Pakistan every year, out of which 80 metric tons are consumed in Pakistan, and 70 metric tons are smuggled outside. He said it is impossible to seal the 2,500km-long porous border that Pakistan shares with Afghanistan, to curb drug trafficking and other smuggling.


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Giving a comparison of heroin prices, a top Pakistan customs official said that a kilo of heroin cost $2,000 in Afghanistan, $4,000 in Pakistan, $376,000 in Australia, $325,000 in Canada, $255,000 in Japan; $131,000 in the US, $100,000 in Europe, $96,000 in Russia and $52,000 in the Kingdom of Saudi Arabia.

If an Afghan farmer produced opium he would earn roughly six times more than what he would earn if he had sown a wheat crop. Opium production will never come down in Afghanistan, which means that most of the heroin will pass through Pakistan.

Out of a total of $80 billion heroin trade, the farmers got only $1 billion while the rest went to different pockets in the contraband supply chain.

The irony is that over $80 billion was spent on the treatment of around 21 million addicts across the world.

Chasing the Dragon.


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Everyday 700 people die from drug addiction in Pakistan, an ongoing death toll much greater than terrorism, which kills 39 people a day.

Afghan opium production, already the highest in the world, has recently risen to record levels and accounts for 85 percent of the world’s opium. An UNDOC report states 45% of the opium passes through Pakistan for processing into heroin, consumption and export. There are 6.7 million heroin addicts in Pakistan

The narcotics sector now has a turnover of $70 billion and half of it is in Pakistan now. And perhaps worse, the Afghan and Pakistan Taliban’s have become a “drug mafia,” using opium and heroin production to finance their terrorist operations. They are reported to be getting $2 billion each annually.

India/Pakistan Military Expenditure % Budget.


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India & Pakistan Military Expenditure/ GDP (%).


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The Indus basin.

Climate change is likely to limit the flow of the Indus River.

Unlike the Ganges and Brahmaputra River systems, which rely more heavily on rainfall, the Indus River system is fed primarily by glacial meltwater.

Meltwater provides approximately 70 to 80 percent of all the water in the Indus River. Global warming thus has a disproportionate impact on the amount of water entering the Indus and its tributaries.

The precise effects of climate change on the Indus River system are highly dependent on how climate change is modeled.

However, widely referenced estimates indicate a troublinglong-term trend for the flow of the Indus River.

Immediate consequences for the Indus.


Pakistan’s water resources.

Pakistan owns world’s largest irrigation system. Total length of canals in Pakistan is 56073 km, while the total length of watercourses is 1.6 million km. About, 106 MAF is diverted to canals, of which about 15% is lost in main and branch canals, 8% water is lost in distributor minors, 30% water is lost in water courses and 30% in the field. The efficiency of irrigation system just over 41%.

Pakistan’s surface flow in the Indus basin system is 145 MAF annually.

The water mined from underground aquifers, which is around 40 MAF annually, is not really a renewable resource. Pakistan is sprinting from a water scarce country to becoming a water stressed country and within a water famine country.

Since majority of land holdings are of less than five acres, the income patterns of households owning them, become highly vulnerable to the vagaries of weather and economic shocks.


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● Reduced water availability is altering the crop rotation and cropping patterns leading to reduction in cereal production, as well as in cotton and sugarcane. In southern Pakistan yields of major cereals are predicted to decline by 15-20%. ● Livestock production predicted to decline by 20-30%, creating crises in milk, meat and poultry supplies and pushing prices beyond reach of most. ● Inland fisheries predicted to be reduced due to decreased water availability and changing river flows.● Plant diseases, weeds and insect attacks will increase considerably, resulting in major crop losses.● Fruits, vegetables and horticultural products are high-value exports for Pakistan. Pakistan earns 70% of its foreign exchange from agriculture alone..

.Issues arising from Climate Change –Pakistan.


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Drowned in gloom!


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What do ordinary Pakistanis think about their future?


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Nuclear weapons neither ensure security, nor do they consolidate political power; rather they are a threat to both security and political power. The events that took place in the 1990s showed that the possession of such weapons could not even safeguard a regime like the former Soviet Union. And today we see certain countries, which are exposed to waves of deadly insecurity despite possessing atomic bombs. ... Ayatollah Khamenei.

pakistan economy dssc - nov '17

Economy & Finance