By Bader Al Hussain
Pakistan’s economy is being confronted by chronic current account and fiscal deficits for decades, the result of which is an increase in internal and external debt in order to mitigate the gap between the deficits.Fiscal deficit is often financed by internal borrowing, international financial institutions like World Bank, and this deficit financing in return increases inflation and depreciates the rupee. Consequently the central bank, or in our case, The State Bank of Pakistan raises the nominal interest rates resulting in crowding out of private sector.
Whereas Balance of Payment deficit is being financed by loans from International multilateral financial institutions such as IMF (International Monetary Fund) and from foreign countries particularly from USA. In addition to that, depreciation of national currency increases the strain on Pakistan national budget. For example, currently Pakistan’s foreign debt stands at $59.5 dollars and an appreciation of dollar by one rupee would have incurred an additional burden of 60 billion rupees on national debt, which increases the amount allocated for debt servicing in the national budget. As a matter of fact, the rupee has been depreciated by Rs 26 against dollar from 2007 to 2011.
The accumulated net impact of the imbalance in macroeconomic indicator is stagflation whereby the overall growth rate in GDP is stagnant and there is raising trend in inflation, furthermore increasing poverty and unemployment rate.
The systemic problem to the long-ranging miseries of the Pakistani economy is a low tax-to-GDP ratio, which is the lowest in the region below than 10 percent because of which government accrues huge deficits. Hence, tax net should broaden. It is an economic principle that private savings plus public savings i.e. (government expenditures less revenues) equals net exports. So, in order to have balance of payment surplus a country needs to have surplus budget which can only come through increase in revenues as Pakistan, due to some quite understandable reasons, cannot cut back or curtail raising expenditures.
Hence, in order to increase revenues, tax net need to be broadened and more untaxed sectors of an economy should be subject to taxation. For instance, there is no tax levied on the real state sector, therefore Pakistanis residing inside their country or abroad invest in it because of its lucrativeness, which according to some economist is dead investment. Government ought not to encourage such investments rather it should tax it because of numerous reasons. Predominate rationale includes that as such investments give rise to speculation thereby resulting in soaring property prices, which is detrimental industrial development. Moreover, such sectors do not produce any goods for the economy henceforth does not contribute sufficiently to the overall GDP and economic development. Likewise, other sector of an economy which includes agriculture and services needed to be exploited. Simultaneously, the quandary of tax evasion by the corporate and business sector of Pakistan should also be taken into account.
Side by side, the government needs to address predicament of “loss making public enterprises” that are draining about Rs 300-350 billion from national kitty annually. The solutions entail transparently privatizing such loss making entities and operate them under public-private partnership whereby administration is controlled by private sector and thorough monitoring is to be done by the government.
As far as private sector of Pakistanis concerned, policies should be formulated in order to encourage, facilitate and regulate investment particularly in agriculture and manufacturing sector. Additionally, government has to encourage indigeanous-ization of products imported from abroad particularly automobile parts. A large chunk of Pakistani imports is composed of crude oil in order to fuel power plants, vehicles etc.; efforts should be materialized in tapping alternative source of energy such as solar, wind and hydel power plants and for powering vehicles research and development has to be intensified in the fields such as biodiesel.
To conclude, it is possible for Pakistan to come out of the economic crises on its own without getting help from anywhere else in the world but there is need of strong and staunch political will to rectify the flawed policies made in favor of the political elite and landlords of Pakistan. The solution lies within Pakistan not outside it.
The writer is currently a student at NBS
