prebudgetseminar0708economicsofpakistansmsz

8/22/2019 PreBudgetSeminar0708EconomicsofPakistanSMSZ

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Economics of Pakistan-

A realistic non-political analysis

& Common Minimum EconomicProgram

Syed Shabbar ZaidiPartner A F Ferguson & CoKARACHI-APRIL 24, 2007


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Table of contents

Theoretical Perspective Present indicators Analysis of Indicators Solutions-Policy side

Sentimental and Realistic Perspective Present Indicators Analysis of Indicators

Relationships in two perspectives-Problems in cohesion

Fundamental Economic Disagreements

Manufacturing Sector Growth-Import Substitution-Employment-Inflation


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Table of contents (1)

Common Minimum Program (Mesaq-e-Maeshat)-Agreement onFundamental Economic Issues.

Utilization of Development Expenditure.

Draft of Common Minimum Economic Program ( Mesag-e-Maesat).

Solution and Conclusion.


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Theoretical Perspective-The Indicators

The reported economic indicators for the Pakistan are:

Increase in GDP 6.6 % (India 8.6, China 11.1)

Increase in Industrial Production 6.8 % (India 11, China 17.6) Increase in consumer prices 7.7 % (India 7.6, China [ -2 ])

Unemployment - Not Available (India7.6, China 4)

Trade Balance [-13.4] bn US $ ( India [-56] , China 204)

Current Account balance [-6.4] bn US$ (India10, China 160.8)

Currency to US $ 60 (India 42, China 7.7) Budget Deficit as percentage of GDP [-4.6] (India [-4.3], China [1.6]]

Interest Rates

3 months 9.92 (India 7.33, China 2.9)

10 years Govt Bonds (Discounted) 6.59 (India 4.13 , China 3.42)


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Theoretical Perspective -Analysis of

Indicators (1)

These indicators reveal that everything on economic side is notalright.

Pakistans economy and its size can not sustain a constant tradedeficit of 13.4 bn US$.

The interest rate of around 10 per cent seriously effect theinvestment strategies. Only the countries like Brazil, Russia, Turkeyand Venezuela have such high interest rates. Rest of the world isaround 5 percent.


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Theoretical Perspective- Analysis of

Indicators (2) Increase in consumer prices is a natural phenomenon in this

situation. Monetary and fiscal policy can only provide a temporaryrelief. With these indicators inflation is bound to increase.

Comparison with China and India is relevant. China is our presentand future major trade partner and India and China are competitorsin the fields being our forte.

Notwithstanding the same, on an international comparison theposition is not that bad. We are the only few countries having +6.5

GDP growth. The conclusion is that we are performing reasonably well, however,

now there is no time and space left as a nation to make mistakesand wait for a messiah. There has to be stabilization and nationalconsensus.


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Solutions-Policy Side

Import Substitution

Trade Deficit needs to be curtailed. US $ 13.4 billion can not beoverspent each year where the reserves are around US$ 12 billion only.

There has been no serious effort to improve this situation. There is aneed to place Import substitution as a priority in addition to exportpromotion. We are now importing those products where we had clearedge in the past. Tariff adjustments, fiscal corrections, and support tolocal industry as a replacement to trading need to be examined.

Support to local industry has gained a totally different paradigm in the

present days. It does not mean disparity in the rate of interest,subsidies, tax exemptions etc. Now it represents provision of goodinfrastructure-roads, railways, ports, network etc, availability of humanresources, facilitation in regulatory environment, non-discrimination inregulations, consistency in policies etc. Our cost of production is high asour efficiency level does not match with other societies individually andnationally.


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Solutions-Policy Side (1)

Fiscal expansion

Time has now arrived for real expansion in fiscal network. The incidenceof tax on manufacturing and trading which has been equaled need to be

re-aligned. Presumptive tax (income tax and sales tax) etc onmanufacturing to be immediately withdrawn. WPPF and WWF being a 7percent tax on manufacturing to be abolished.

This requires real expansion in tax base that necessarily requireintegration of data-bases of taxation records with banking and realestate records.

All sources of income to be within the tax net be exempt or otherwise.Exports, capital gains, real estate etc to be brought into documentationthough for policy reason the same may be exempted for certain time.

Integration of Federal, Provincial and local economic and tax data.


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Monetary Policy

Certain Monetary policy steps, though not theoretically ideal, to tacklethe issue of inflation in non-conventional manner are required. With

least trickle down effect inflation in the range of +7.5 can not beafforded. This requires reducing the bankingspread and managementof overall lending of the banking sectors. Monetary policy has to gearthe resources towards manufacturing sector and avoiding allocation ofresources for real estate and capital market sectors.

Management of Public Sector Development Program

Out of the total resources available a specific sum has to be assigned to(a) Education and (b) Health. Such funds should be utilized in a propermanner and there has to be Government-Community Partnership for thesame. For the utilization of money total reliance on governmentagencies is not proper. We have to go above the theory ofPC 1.


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Diversification of Economic Priorities

Pakistans economic asset is the human capital and potential for growth

in the service sector. Economic priorities have potentially been gearedtowards export of tangibles and that related to traditional items.


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Manufacturing Growth-Import Substitution-Employment -Inflation

An analysis of policies since 1990s [after the promotion of free marketeconomy] reveals that there had been similarities for fiscal and otherincidence for manufacturing and trading sectors. This is not correct speciallyin societies like us. The issue of employment, poverty alleviation andsustainable growth require a preferential, not parental support to themanufacturing sector.

In Pakistan privatization is treated as investment. In the present times thereis a need to emphasize on the sustainability of small and medium sizebusinesses engaged in the manufacturing sector. We can not survive with

big plazas and shopping malls in Lahore and Karachi if medium and smallscale industry in Sukkur and Gujrranwala do not survive.

Manufacturing Sector

Infrastructure support Fiscal supportMonetary Policy

support


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Realistic Perspective-Present Indicators

Indicators of Economic Development and the state of affairs in Pakistan is indicatedbelow:

Primary requirements Present Condition

Literacy level and availability of primaryeducation - Extremely low

Availability of basic medical health - Extremely Bad Availability of clean drinking water - Not available to above 80%

of population Availability of sanitation - Not available to above

50% Infant mortality - Around 40% Population growth - Over 2.5%


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Realistic Perspective-Present Indicators (1)

Secondary requirements

Employment - Guised & Disguisedemployment over 50%

Security - Security personnel requiremore security than acommon man

Stability Requirements

Equitable judicial system - Over 5 million casespending

Stable political system - None Equitable distribution system - Disparity of wealth distri-

bution is increasing


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Realistic Perspective-Analysis ofIndicators (2)

Pakistans indicators on all these fields are not encouraging.

This raises the issue of relationship of first indicators(theoretical economics) with the fulfillment of the societysneeds at large.


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Relationshipbetween two perspectives-

Problems in cohesion

Theoretical economic indicators have direct relationship with the realperspective. However, the situation is always blurred in countries

like us where there has been constant mismatch. There are validreasons for the same. In other words, the reality on grounds isdifferent from the board room of the planning commission. Thefailure and the gap in not limited to Pakistan. It is partly true for allthe countries where there has been an application of monitoredpolicies lead by the donor agencies with serious drawbacks inGovernance and Fundamental disagreement on certain economicpolicy issues.


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Relationshipbetween two perspectives-

Problems in cohesion (1) The problems in cohesions can be summarized as under:

Lack of trust-between people and government, provinces andfederation;

Size and capability of the government, over centralization (lack ofeconomic autonomy); Lack of awareness of domestic issues and policy framework; Perceived fear for change; Lack of social accountability and escapes; Improper allocation of national priorities; and

sensational and politically motivated media;

All these factors have created a society where economic disparity andpoverty alleviation, which is the root cause of all the problems, becomes asecondary issue and the vicious circle of wastage of economic potential andincrease in distribution of wealth is strengthened.


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Fundamental Economic Disagreements

Water Distribution-Kalabagh Dam.

National Finance Commission Award.

Devolution of Economic Autonomy to Provinces, Districts and localbodies.

Possibility of Free market economy in Pakistan Re-emergence ofsocialistic tendencies.

Privatisation or governmental control of businesses.


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Fundamental Economic Disagreements (1)

The economic disagreements within the country on the issuesidentified is primarily relating to an economic matter that is

being side-tracked into politic and national stabiltiy.

Unless all these matters are amicably and reasonablyresolved, long term economic stabilitiy is not achievable.


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Earning and spending

From 2005 onwards it is the first time in Pakistan wherethe funds are available for development work, howeverthe socio-economic indicators are not improving. This iscalled the No Trickle Down Effect. There is an argumentthat a gestation period is required for the same. Thequestion to be raised by us whether we have thecapacity, capability and procedures whereby spending ofthis money could lead to improvement in our economicindicators. The general impression in this regard is

negative. In short, whether or not Rs. 340 bn availablefor development program is being used or could be usedin the correct manner.


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Common MinimumProgram (Mesaq-e-

Maeshat)-Agreement on FundamentalEconomic Issues In India there has been a coalition government for the last two

terms. Inspite of fundamental economic policy differences between

the political, parties there is no change in economic policies. Societyhas agreed on a Common Minimum Program there.

In Pakistan, there is a need that as a nation we have to agree on abasic economic model. There is no space, need , possibility ofcontinued unproductive excursions on such matter by amateurs.

Common man is only interested in achieving the desiredimprovement in the indicators laid down earlier.


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DraftCommon Minimum Economic Program

Legislation

Finance Bill to be approved by Senate in addition to National Assembly.

National Finance Commission Award

Allocation to provinces to be increased to 75 percent from present 50percent.

Allocation within provinces to be on stratified ratio not being solely onpopulation base.

Award to be approved by National Assembly and Senate.

Privatization

PSO, PIA, OGDCL,Pak Steel and other government business ventureswith at least 49 percent public ownership.


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DraftCommon Minimum Economic Program(1)

Corporatisation

WAPDA, Railways, National Highway Authority, National Directorate ofNational Savings to be corporatised.

Decentralization of WAPDA and its division into generation anddistribution and distribution to regions.

Devolution

Ministries of Health, Education, Industries to be fully devolved toprovinces or local bodies.


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Fiscal Policies

Corporate Income Tax for all manufacturing and service sectors to be25 percent for at least 10 years.

VAT on services and goods at the rate of 10 percent for at least 10

years. All income to be disclosed. However agriculture income, exports of

goods as well as services , long term capital gains to be zero-rated foranother 10 years.

Excise Duty to be abolished. WPPF and WWF to be abolished.

Trading income to be taxed at the rate of 30 percent. Custom tariff to be reduced to 5 categories.

Education & Health

All major hospitals in the cities and colleges to be handed over toautonomous boards with direct identified support from the

governments.


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Monetary policy

Credit availability preference to manufacturing and service sector. Inflation management for basic commodity prices.

No credit for speculative sectors-stock markets. Development of debt capital markets. Abolition of unproductive government saving schemes.

Distribution of Resources

Mandatory allocation of 10 percent of Revenues (Federal andProvincial) each for Education & Health.

Expenditure on armed forces to be capped to 20 percent ofresources.


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Governance

Devolution of agriculture marketing and irrigation departments.

Energy Sector

Promotion of Iran-Pakistan-India pipelines. Abolition of all indirect taxes on petroleum products.

Accounts & Audit

All public sector accounting system to be brought to double entrysystem within five years.


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DraftCommon Minimum Economic Program

(5) Policies in Post 1999 government are conducive to the proposed

program. However, a strong political will is required for other steps.There is no clear road map for that.

An analysis of politico-economic developments in post 1990situation reveals that there is almost unanimity in the acceptability ofthe goals set in the aforesaid common minimum program. The issueis implementation and acceptability. Due to political exigenciesattentions are diverted to issues which are not relevant and debatesare generated to divert the focus from the fundamental issue ofachieving the primary economic goals identified above.

Adoption of Common Minimum Economic Program will not bring thechange overnight. It would provide stability and results will emergein two to three years.


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Solution and Conclusion

As a nation we have to agree on the Common Minimum EconomicProgram. This would provide stability at least on the economic side.Political and social stability is bound to follow.

It is the duty of the civil society to motivate for approval andadoption of Minimum Common Economic Program.

There is no short cut solution.

Thank You

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