The current economic problems of Pakistan and solutions By Yousuf Zahid
[email protected] September 2011
Problems ‘In the beginning…’
These are the first three words from f rom the Holy Bible. In the beginning, there was just land. Plain barren land with weak infrastructure of roads, railways and airports; limited or negligible number of production facilities; inadequate or makeshift water supply and sewage network; insignificant communication system and vastly limited power generation. This is how Pakistan was 64 years ago. Agriculture was the dominant sector back then and still is even today but over the last six decades numerous socio-economic problems have consistently surfaced and that has nipped the advancement of the industrial and services sectors and has affected the aggregate economy as a whole. A simple list is presented that interprets Pakistan’s problems in 2011 viz-a-viz various domains: Economic Problems
Inflation:
Unbelievably ridiculous rise in prices of all food commodities, consumer items, gold, fuel, durable and non-durable goods has triggered a public displeasure and anger that is more than often depicted through the media. The all-powerful and less than 10% wealthy in Pakistan with access to easy-money remain unaffected. The people who are affected continue to pay the taxes. Understandably, the prevailing macroeconomic tools fail to function and to re-engineer the economy.
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Unemployment:
Hiked up power and gas tariffs, high cost of local and imported raw material and reduced buying power of consumers has affected the manufacturers and service providers. In order to survive they have to tone down their operations, reduce the output, curtail expenses and of course lay-off employees.
Fiscal Problems
Internal debt:
Even with a tight monetary policy, the government continues to borrow in order to meet its expenditures, private banks are discouraged and local and foreign investors face the crowding-out effect. The debt continues to rise, how else the government will be able to function especially in the event of an extremely low revenue base.
External debt:
The Musharraf-era saw a decrease in the external debt. Due to political and price stability even in times of global turmoil, Pakistan stood up in the performance ranking and had been appreciated by the World Bank. A bail-out by IMF sounds inviting but the conditions applied can really detrack the economy. And it happened exactly the way it was predicted. The recent IMF funding had the condition of eliminating the subsidies on power and increasing the revenue base. Though the IMF loan had the socalled vision of improving the standard-of-living of the people, the economists knew that removal of subsidies would bring in dire consequences. Subsidies are something that the nation has started to enjoy even though that the original intention for it had been very different many years ago. From the US Secretary of State to IMF, everyone strongly suggested that Pakistan should improve its tax base but the Minister of Finance countered the notion and invented RSGT during talks with IMF. But did that work?
Declining exports:
One thing leads to another. Exports are going down. One prime reason being the cost of goods that producers unintentionally fail to control. And then due to recession there has been a reduction in production by approximately 50%.
Oil imports:
Pakistan has oil, period. The official proven reserves are false. But that’s a
story better left for an effective and efficient leadership to re-write one day. In short, oil is required which leads to the hard-hitting oil-based inflation. One factor that can be controlled and even reduced is the requirement of fuel by the military. Time for justifications is over.
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Regressive taxation: Barely 5-7% of the population in Pakistan pays it tax. These are the employed people. Those who should pay either don’t or pay what serves
as a matter of ridicule in the media. Recent news had claimed a leakage of approximately Rs. 500 billion in taxes. A huge sector of small scale service providers, merchants, etc. continues to be out of the tax net. How could Pakistan possibly improve its revenue then? Agriculture tax:
Why shouldn’t it be taxed? For starters, the feudal are in the assemblies.
Secondly, the will and logic to pay their taxes does not exist. Social Problems
Population:
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Pakistan’s population is expected to be 3 largest in the world by 2050 at the current growth rate. That’s in another 40 years from now. Enough
said. Poverty:
With claims of poverty declining before 2007, various sources still put the figures at approximately 40% (70 million people), which is the number of people living below $1.25 a day. How this huge population will be able to have access to food, shelter and clothing. Education and healthcare would then remain a dream.
Illiteracy:
Pakistan is perhaps the only nation in the world that has changed its official definition of literacy several times. Though no one would accept and research would not prove but why would the ruling elite allow its people to be literate? How will they then be able to ‘rule’? Why don’t the double standards in education be eliminated? Why the curriculum isn’t
revised and aspects taught which can bring out the uprighteous human in each student? The old adage is being followed in spirit; divide and conquer .
Healthcare:
Infant mortality and median age in Pakistan continue to be high and low respectively in comparison with other countries of either the same GDP or those of the same group that acquired independence around 1947. Either obnoxiously expensive or simply not present, quality of healthcare in Pakistan is a stigma if moral ethics are considered.
Welfare programs:
Misused zakat funds, stagnant stagnant pensions pensions and a farce Benazir Benazir Income Income Support Program besides a few others constitute an irony of a nation that calls itself a welfare state. What face-saving exists is due to private charity and entities like the Edhi Foundation.
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Internal Factors
Then there are factors that have serious repercussions on the economy. Factors which presently flourish due to Pakistan’s own doing, namely:
Terrorism and civil war Military spending Political instability Corruption Weak leadership
Other Factors
Dissaving:
As a nation Pakistan lacks the habit of saving. The Chairman of Unilever Pakistan had once remarked: ‘Pakistanis can’t seem to have enough.’ The
demand for goods and services is astronomical even in times of inflation. As compared to India where simplicity is the truth unlike what the media shows, in Pakistan false pretensions continue to grip the nation and in all socio-economic classes. PSDPs:
Every year, whatever’s allocated for the Public Sector Development
Program is further reduced in order to meet general expenditures of the government. Without dynamic and high-budget PSDPs, the standard-ofliving will continue to be stagnant and employment opportunities reduced. The PSDP progress continues to be slow as of the moment. Each and every problem is interlinked. It has been a domino effect all the time due to wrong decisions taken at the wrong time both intentionally and unintentionally. Land is by far the first tangible capital that is available to a nation followed by natural resources, human labor, education and technology. Pakistan has had a history of either underutilizing, misusing or ignoring its resources altogether. The country has committed a criminal offense by not investing in capital goods the way it should have been done and especially ignoring the education sector and PSDPs. In the 1990s, Pakistan knew that power shortages will be imminent but on time action was not taken. Pakistan knew that after entering WTO, the textile industry will suffer due to obsolete manufacturing systems, lack of wastewater treatment plants, complete absence of quota and fierce competition from China, Bangladesh and India; pre-emptive action was not taken and the industry of Faisalabad – once known as the Manchester of Pakistan, has lost the glory of yesteryears.
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Surprisingly, Pakistan has shown economic resilience in the face of extreme situations. Over the years, despite facing one dilemma after another, the economy has continued to grow and buying power still exists. What Pakistan had to face and still performed well?
The Asian financial crisis The economic sanction after the nuclear detonations Early 21st century global recession The four-year drought Military tensions with India Post 9/11 military action in Afghanistan The earthquake of 2005 The floods of 2010 The global financial crisis
So how is Pakistan able to stand with apparent dignity in such times of adversity where as it has been labeled as a failed-state and one with a highly unstable economy? Does it mean that the bureaucracy is doing its job? Does it mean that the short-term plans of the government in the wake of an emergency are highly effective? Does it mean that the government and the public have a desire to keep the wheel turning; that is th e ‘will’ is there? As of recent the recent rains in Punjab and Sindh have devastated the crops. Will Pakistan still prevail and not succumb to another food shortage? The economist predict that nothing substantial will come out of the government policies during 2011 or even after the next general elections. The IMF aid will probably be suspended soon. Which means that the government will borrow more; and more lenders will be approached; debt will increase; deficit will boost up; the national exchequer burdened further; more inflation; more unemployment. Is there no end to it? Recommendations
As done in successful private organizations; first make a long-term plan spread over say 5 years, then develop a strategy to ensure that the ultimate goals will be achieved, then develop shortterm tactics which will oversee the achievement of annual goals. It’s quite simple in
organizations because the owners and employees have a stake at risk, secondly, the people themselves have the knowledge and talent that push it all to deliver the goods. With no stakes in the government and with limited talent including a mindset that doesn’t translate into ‘I am a public servant and I am to serve’, this very easy solution will seem like chasing for gold at the
end of the rainbow.
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One, a sincere and dedicated leadership is the pre-requisite that has the ability to face extreme difficulties and has the vision to take the nation towards economic prosperity through consistent efforts. Consistent efforts translate into a continuation of policies which has never been the case in Pakistan whenever a new government came into power. The leaders speak of ‘roti, kapra, makan’ but never admit how and when will they make it all
tangible for the masses. So, with the right or transformed leadership in place, here’s what needs to be done:
Political and FDI 1. End the war against terror. It was never Pakistan’s war. Once a political solution is acquired and security is back to normal then it will pave the way for FDI which can rapidly improve infrastructure, employment, inflation and over all aggregate growth of the economy. Land Reforms 2. Levy agriculture tax as the first step in bringing land reforms. FBR 3. In the early 1990s, Reckitt Benckiser was known as Reckitt & Colman in Pakistan. The organization was corrupt and a joy ride for all. In one swift move, all except a handful of the employees were terminated and fresh ‘blood’ and ‘oxygen’ was induced. The result was an astronomical success of the company till to date. Same principles are to be followed and a swift action is demanded in institutes such as FBR which must work independently. Tax collection will no more be a dilemma once the evaders know that there’s no where to hide.
Power Generation 4. Remove impediments to encourage private sector to enter into power generation. 5. Accelerate the Thar Coal project. 6. Off-shore and in-land oil and gas exploration, dams, hydel and thermal power plants if planned with authentic feasibilities will attract substantial international funding. Above all, feasibilities ready for implementation already exist.
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Motivating Local Manufacturer 7. Ban the import of all luxury goods. Be it colognes, BMW, high-end cell phones, HD television, etc. Do what India did. It will over a period of 5 years enable local production to come into existence and with parallel development of the infrastructure. This step will also encourage production of similar local products. 8. Levy heavy duties on import of goods which are also locally manufactured in Pakistan to support local industries e.g. chinaware, plastic-ware, shoes, garments, etc. Why import everything from China? Spending and Saving Enhancement 9. Reduce corporate taxes and income tax to enhance producing and buying power. 10. Reduce GST till 15% to lower prices of goods and services. Revenue Enhancement 11. Triple the tax on tobacco. A packet of cigarettes costs $5 and above in the US. Same principle is applied there. 12. Regularize and monitor industries such the automobile sector to end their cartel-like operations. Vehicle prices will be controlled by the government. Transfer Payments 13. Increase per family quota from Rs. 1,000 to at least Rs. 5,000 in the Benazir Income Support Program. Only then the essence of transfer payment will come into action. BISP supports families living below the poverty line. Only a substantial amount will be able to make a difference and introduce a standard-of-living in their lives. Discount Rates 14. Decrease them to foster local investment, especially in the public sector which will bring in employment opportunities. It’s a question of taking the absolutely right and positive steps. Such steps will give way to a logical speculation in the stock market and turn about the nation’s mood towards optimism. It’s crucial because a pessimist work force won’t be able to deliver results. Same principle as in organizations when staff delivers 101% if it ‘owns’ the company because they are being taken
care of by the management.
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Conclusion
There are countless other steps; similar ones and more radical in nature but the result be the same. Output will increase, sales will improve, credit will be demanded, prices will decrease, profits will rise, and government revenue and investments will increase. A tight or easy monetary policy just for the sake of the very concept sometimes wouldn’t work in extreme situations. But these are the very tools that the US used during the Reagan Administration; most effectively and efficiently to steer the national economy towards eventual prosperity in the Clinton-era. An agro based economy like Pakistan should no longer ignore the agricultural sector. It has to be developed at par with world standards. Micro financing has to be given more than a chance in order to bring out the buddingentrepreneur still looking for the opportunity. Non-development government expenditures must and have to be eliminated. Period. If a small shabby locality in Karachi can see its roads carpeted, sidewalks painted, wall chalking removed, trees implanted, trash removed and electricity restored with in 24 hours before the Prime Minister’s arrival then the same will and dedication could be used to make Pakistan into
a success story. As in India, Pakistan could also introduce legislative measures against corruption or will prices quoted to government buyers continue to have a load of 40% in the form of bribe? About time that NAB was made independent in absolute terms. The economy will then be re-started and it will be evident. All sources of information will be provided provided on request. request.
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