After 47 years of independence, Pakistan is yet to stabilize its
economy. We have achieved what any nation in the surface of this earth
would hate to acquire, an unemployment rate of 6.38 percent, an inflation
rate of 11.35 percent, a literacy rate of 35 to 36 percent only, a budget
deficit of 45.5 billion rupees and worst of all a population growth rate of
2.9 percent with all these anomalies one wonders why don’t we create a
fourth world since we are unadjustable, even, in the third world countries.
But then an economist can point out that economic development is as
difficult a process as climbing a high and steep mountain. A BRIEF HISTORICAL PERSPECTIVE.
On the eve of independence, Pakistan inherited a weak economy and
a torn economic structure due to the mass migration of people and
communal hatred which is still prevailing between the two countries i.e.
India and Pakistan.
A notable feature of the history of Pakistan is that economy has been
the most neglected sphere, an all out struggle of power had been a
dominant characteristic till the advent of the 7th decade of this century
whence an alternate economic system was applied which ultimately proved
more disastrous coupled with the political instability and establishment of
dictatorship.
After military took over, they kept the nationalized industries as it is
but started encouraging private investment. This effort again backfired
since the result was strengthening the character of landed aristocracy and
so called business boom resulting in the concentrations of wealth within
very few hands, most of them picked up by the then government in order
to prolong its rule in the country.
But the government was successful to the extent of prolonging its
rule, after playing havoc with the politics of the country and sending
people beyond poverty line, though per capita income showed an
Amprovement.
Totalitarianism is gradually disappearing from this Globe. Pakistan
followed the same discourse, finally we stepped up on the road of
Democracy. Privatizations process was initiated in the late eighty’s the
process is still going on, many of the industries have been handed back to
the private sector and there are many more to go. Recently government
has also announced to privatize the energy sector though not as a whole
but a part of it is to be privatized.
In the sector of transportation, though industries like Pakistan
International Airlines (P.I.A) has not been privatized but Government has
issued license to few people who were interested in a private airline. Even
though red tapism exists in departments like Railway, which has always
proved itself to be a burden on the Economy with all the utility’ it provides
to the general public, but there are positive signs that the time is not far
when it will become imperative for the government to privatize it. INDUSTRIALIZATION.
Pakistan has very rapidly industrialized, though it is yet to enter the
domain of industrialized nation. Pakistan has successfully established may
industries for example steel, automobile and textile. etc. Though the
automobile industry is at a very early stage but there are visible signs that
in future they will prove very fruitful and Pakistan would be saving a lot
of Foreign exchange due to the sale of locally manufactured automobiles.
AGRICULTURE.
Even after all these years we are still an agro-based country. Raw
cotton, cotton yarn, and rice are still our principal cash crops, More than
half of the foreign exchange is earned through the export of cotton and
rice.
Though Pakistan has one of the most longest and modern system of
canal irrigation system in the country, yet still for the many of the last
years, agriculture especially cotton and rice have been a victim of floods
and pests, due to which we are losing valuable foreign exchange and
subsequently visible decline in the revenue receipts
POLITICAL CONDITIONS AND THEIR IMPACT.
Politics plays a vital role in the developmental process of a country,
with an established concept of barrierless economy (Towards free market
economy). Political stability tends to enhance the economic prestige of a
country by attracting foreign investors, which is considered to be a major
element in the economic uplift of the country.
Pakistan has been very unfortunate in this respect. Throughout our
history, political turmoil has always been a marked characteristic of our
economy. Frequent seize of power by the military (a typical characteristic
of a third world countries) prolonged rule of the military dictators and
their stern but limited economic initiatives have always discouraged the
local and foreign investors to invest their capital in Pakistan. Finally in
1988 when democracy arrived with all its vigors and spirit, it found out
that people were quite unprepared and politically immature for such an
immediate release from the iron claws of dictatorship. Now instead of
suppressed politics an intense political rivalry has taken place, frequent
dissolution of assemblies has created a lot of anarchy in the Economic
development. Annual budget is more bent towards defeating their political
rivals which results in further inequality among the people. Common man
is still suffering at the hands of landed aristocracy, the ruler class,
signifying the famous aristocratic doctrine that “some are born to rule and INTERNATIONAL AFFAIRS.
Due to the consistent Indian threat, Pakistan is spending a lot more
on defence than a normal country would require in a peaceful co-existence
with its neighbour. These defence expenditures are great menace to the
Economy of Pakistan. Since 1989 Pakistan has increased its defence
budget from Rs. 89 billion to 101 billion in 1994, which is a great drain
on the resources of our country.
A CURRENT STATE OF ECONOMY.
The current state reflects a weak economy. Yet with several
rectifying measures to reform the economy. The govt has introduced
broad-based economic activity; to achieve (1) macro-economic stability
and reduction in inflation (2) consistent increase in the GDP (3)
development of social sectors, human resource development, increase in
productivity and elimination of unemployment (4) growth of energy and
physical infrastructure (5) establishment of free and open economy.
These activities have been envisaged in the annual budget for 1994-
95 by the Federal Government. Though these measures are reform laden
but they add-up to the miseries of a common man.
But before going into the details of remedial measure, let us first
observe what change have been brought in the economic policy with
respect to the previous years.
The government increased the total outlay of the Budget which
amount to Rs. 385 billion, out of which the revenue receipts amounts to
Rs. 339.50 billion whereas the Budget deficit amounts to Rs. 45.5 billion.
1. Among the two sources of Revenue taxation, Govt has embarked on
Indirect taxation methodology instead of Direct taxation for the year
1994-95. Previously Govt. realized Rs. 30 billion by imposing 30%
taxes on the manufactured goods, which usually had to be paid by
the consumer. But now government has embarked on a different
strategy and had levied a General Sales Taxes (VAT) on the
production level at the rate of 15 percent. Under this method
consumer is going to pay only 3 to 5 percent more. Moreover govt
has included 277 additional commodities, both imported and locally
manufactured, in the GST network, with this addition of 15% tax at the production level Govt. is expecting to realize some Rs 55-60
billion in the next fiscal year.
2. Among the import and export sector, there has been a slight tariff
but which would result in the drain of Rs. 13 to Rs. 14 billion from
the national exchequer.
3. External debts amounted 23 billion in the year 1992-1993.
4. There is also, massive, measure in the budget expenditure due to
Indian nuclear programme.
Government has also increased the long awaited salaries of the
public officials. Which is going to place a burden of 10 billion rupees on
the national exchequer but the Govt. is hopeful that this would be nullified
because of the two weekly holidays which would realize Rs. 5 billion and
rest of amount is also going to be generated through other sources.
These all measures led to an economic growth of around 4 percent,
which is not very encouraging as compared to 6 or 7 percent on the
average in the last decade, apart from the year 92-93 when the economic
growth rate was 2.3 percent.
CAUSES OF THE DECLINE OF GROWTH RATE.
In 1992-1993 growth rate started declining, there were two main
reasons for the decline :-
1. Fall in the agriculture output due to crop failure and floods.
2. Resultant decrease in Industrial output.
There had been a 100 percent decrease in the agriculture output
from 12 million bales of cotton to 6.5 million bales of cotton.
This all placed a drastic effect on the exports of the country, exports
fell, due to which there appeared a decrease in the foreign exchange
reserves, which contributed to the reduction in Gross Domestic Product
(GDP), placing an over all result on the reduction of National income and
worsening of Balance of payments.
This situation had a staggering effect on the economic development,
industrial output fell and the Budget deficit rose to 129 billion rupees as
compared to the Budget deficit of Rs. 56 billion in the year 1989-90. Another dilemma that appeared in the year 1992-93 was an increase
revenue
percent
in the current expenditure, which shot up to 66% whereas the
increase was only 46%. The current expenditure amounted to 90
of the revenue receipt there by leaving only 10 percent for the social
sectors like education, health, population planning and old age pensions
etc. Thus there appeared a very gloomy picture, with no macro-economic
stability.
WHAT IS MACRO ECONOMIC STABILITY AND HOW IT
CAN BE ACHIEVED?
Acquisition of long term stability in the (1) Inflation rate, i.e.
reduction, (2) reduction in the interest rate and increase in investment is
called macro-economic stability.
These variables which create instability in the economy are the
product of “Deficit financing”. By deficit financing we mean to fill the gap
between the expenditure and revenue receipt of the Economy. There are
two basic tools which are utilized in term of Deficit financing.
1. Monetary tools.
2. Fiscal tools.
MONETARY TOOLS.
As is obvious from the word monetary, this tool has every thing to
do with money. Whence there is a shortage of or a gap between the
expenditure and revenue, an increase in the amount of currency, is sought
by the Federal Government. This increase does fill the gap but it creates
inflation in the country.
FISCAL TOOLS.
Fiscal tools are generally called government borrowings, either
through external sources or internal sources. This leads to increase in the
interest rate (whence government is taking loan. There will be very little
amount left for the private investors thus decrease in supply would lead to
increase in demand and resultant increase in interest rate) Crowding out.
i.e. discording behaviour of the investors not to invest due to high rate of
interest.
Thus deficit financing results in the above mentioned stalemates and
if these three variable are stabilized, a country will achieve macro-
economic stability. This deficit financing process does not end here. The increase in
inflation results in the increase in price. This goes a long way to check the
exports of a country (because of the increase in prices less will be
exported). And this decrease in exports would bite foreign exchange
reserves, i.e. less exports would obviously create a difference in the
balance of payments and an imbalancing of the trade.
Thus it is understandable that deficit financing is a harmful
phenomena, it places lasting impediments on the growth of an Economy.
REMEDIES.
After this pathetic picture, the only remedy which seems plausible
even to a lay man is to generate more revenue or cut the expenditure in
order to fill the gap. Generally our current expenditure comprise of :-
1. Defence
2. Administrative expenses
3. Debt servicing.
All these expenditures are mounting day by day. For the year 1994-
95 the defence expenditure has been risen to 101 billion. In the year 1993-
94, Pakistan paid Rs. 130 billion for debt servicing, together the amount to
almost 90% of the revenue receipts.
The possible way out of this is imposition of taxes or more
investment in order to generate more wealth and an increased national
income but also equally distributed. This exactly is the position where
Pakistan stands.
Due to these condition of common man and in addition to political
motives, Government can hardly increase the tax rate, but against all odds
Government is increasing the same.
Investment is not done as it ought to be, because of the mounting
interest rate and the result of course, is Economic deadlock.
STEPS TAKEN TO BREAK THIS DEADLOCK.
In order to achieve this macro-economic stability, with elimination
of unemployment and decrease in inflation rate, the current Govt. has
taken following steps:- In the current fiscal year, money supply is going to be decreased by
1/3rd. The eventual effect of the policy would be two fold:-
1. decrease in inflation.
2. stability and decrease in the prices of the commodities,
On the other hand Government has reduced borrowings from the
internal sources to 1/6th of the previous year, in order to bring a halt in
the mounting interest rate.
WIDENING OF THE TAX NET.
It is generally believed that tax evacuation is a usual thing in
Pakistan, and Government do not collect what it actually is entitled for?
Secondly, according to recent statistics, there are only 8,23000
people registered as tax payer out of the population of 120 million. It is
hypothesize that between 33% to 50% tax payers are not registered with
the govt. i.e. to say that “official size of the tax payers is 33 percent less
than the unofficial size of the tax payers”.
Government has embarked on this project of detecting the non-tax
payer, who otherwise are liability to pay the tax, and it is loping to realize
some 17 billion rupees through this documentation process in the current
fiscal year. Though this amount is only 5 to 10 percent of this 33 percent.
Documentation of unofficial economy would result in better revenue
receipts.
Secondly, government has imposed GST on 277 more commodities
accumulating to 736 altogether, not only imposed it has been increased by
15 percent to fill up the gap between expenditure and revenue receipts.
Further Government has relaxed the import tariffs, so that foreign
investment can be boasted.
Fourthly, a long awaited agricultural tax has also been imposed on
the big land owners previously who were enjoying tax free status.
Conclusion:-
The current state of affairs depicts that reform laden activities have
been initiated, but perhaps the government is too optimistic of its success.
It is quite obvious that to document the economy within a year, after
detecting all the tax evaders is not an easy task, considering the fact tha! Dom the last 47 years we have been unable to do the same. What it seems
only a storm in a tea cup.
But the positive aspect of this documentation is that if all the
Unofficial economy is located it could lead up to reduction in the taxes and
plus no new taxes. Since the real problem is to generate revenue but under
the present circumstances it was inevitable to increase the taxes.
Secondly, Government is encouraging foreign investment in the
country, the recent visit of the President of Pakistan to United States and
France has shown positive signs but the investor is still hesitant to invest
due to the power tussle in Islamabad. What we really require on the
problem of foreign investment is a continuity in politics between
oppositions and the Government which presently seems a distant thing.
The government is determined to cut the budget deficit from 6.9
percent of GDP and intends to increase the economic growth rate to 6
percent per annum.
Though naturally the sound positive aspect is to boost the economy
of Pakistan but the development process is not self accelerated, it depends
on population of the country. It also depends on the literacy of the
country. We are down trodden in both of these aspects.
It is also advisable that relations with India should also be
normalised. Our maximum revenue is being spent on the defence of the
country, just because of the Indian threat, recently we have increased our
budget expenditure due to the deployment and manufacturing, of “Pirthvi”
missile by India. Not only that it would increase the missile warfare but in
addition it would have bad impact on the economy of the country.