Economic Melt Down and its Solutions
06 October, 2010
By Zaid Khan
The current regime has made an irrecoverable loss to Pakistan Economy like their predecessors. We are in real financial crisis due to very poor financial management. Government has failed to deliver and that is why overwhelming majority public sentiment is going against them, rather more in favour of judiciary, media and establishment especially due to consistent positive role they have played over last few years. Local debts has soared to 9 trillion rupees from 4.8 trillion rupees in 2008 and foreign debts soared to 56 billion US$ from 40 billion US$ in year 2008. We are struggling with energy deficiency, trade deficit, undocumented economy, massive tax avoidance especially in agriculture, and heavy debt corporations. Most of the tax collection comes with indirect taxation which increases gap between rich and poor. The country cannot continue in this way and we have to address these issues immediately and in responsible way. Otherwise, either country will default or we will be paying a large share of our income in paying debts in the budget like this year we are paying 873 billion in debts instalment in total budget of 3259, which comes to 27%, which due to floods and WOT can go upto 1 Trillion rupees. Already, government has reduced its GDP growth rate 5.5% to 2.5%, whereas India and China has forecasted 8.5% and 10% respectively. Let us discuss them one by one and see possible solutions for them.
Low Tax Collection - We are one of the lowest taxes paying nation in the world. Our tax collection is above 9 percent whereas India which is our neighbouring country has 15 percent tax collection. It is generally believed that we can further expand this tax upto 15 percent by expanding tax percentage to 1.2 annually in next five years. Massive corruption controlling in FBR, and government organizations can generate us 500 – 750 Billion Rupees. Agriculture makes 19% contribution in our GDP yet its tax contribution is very low due to mind set of feudal class which unfortunately ruling this country from last sixty 63 years.
Heavy Circular Debt Corporations. We have four gigantic government corporations, where we spent huge money of tax payers to keep them running. For this year we have allocated 250 billions to bail them out. Among them, only PEPCO is paid 180 billion this year. Others include Railway, Steel Mill, and PIA. Massive corruption, mismanagement, incompetent, and overriding merit on higher level and recruiting staff on political grounds are the route causes of these corporations running in losses over the many years. During recent financial melt down in US and UK many of banks and automotive industry has been bailed out in 2008 but some of them has already paid back and some will be paying back in next years. Contrary to that, we have been bailing out these corporations over the years but they are never able to payback. In fact their debts and losses has increases substantially over the years.
Energy Crisis – Economy of Pakistan has suffered a lot due to energy shortage. Musharaf regime failed to foresee the needs for development of country on long term basis. Present Government is so busy in defending and proving her innocent from corruption and NRO that it has lost the focus completely. Instead, the solution they bring in shape of Rental Power Project has added to our problem with sky rocketing electricity prices with hyper inflation. We cannot avoid construction of Bhasha and Kalabagh dams along side some small dams. Government has not allocated any funds for these projects and world financial institutions have refused to support the project. The one solution can be government bonds which now a days are very good solutions. Many governments have issued these bonds like US, Ireland, Spain etc. We already issued these bonds successfully in Musharaf regime, which I think would be a good way to have balance your sheet. Government can take advantage of that and can float 5-10 years or even longer period bond for raising funds but this should be the sole purpose of bonds not for paying our debts.
War on Terror has also adversely affected our budget. We have been close ally for USA and NATO but the loss we have suffered due to this loss is around 68 billion US$. We did not get enough compensation in this regard. As a result government has to cut development budget and take more loans. We should present our case in US and EU either to waive off major loans or defer it until this war is over or reduced to certain limit. We can continue this war in our own interest and taking into account ground realities and budget restraints, but not on their terms and condition. The simple formula would be to fight against those who challenge government writ and are unwilling to come on talk table without compromising our economically and national integrity. Giving path for NATO supplies and using our bases also not well charged. So, this is the time where we should rethink our strategy and renegotiate things if we have made commitment earlier. If WOT goes over and above our allocated budget, we should convince US and allies to support and provide extra budget rather than burdening our nation. Due to this WOT the both foreign and local investment has stopped which is also cause of less job opportunities, more inflation and slowing GDP rate. The foreign investment was around 8 billion US$ which has now shrank to 2 billion US$. Present floods has just pushed us back many decades by destroying a major portion of infrastructure, wiping out crops and loss of livestock and more importantly properties of affected people.
Trade Deficit and Foreign Reserves - Our imports are forecasted a 32 Billion US$ whereas exports are 20 Billion US$. There are sectors where we can make significant improvements. Textile sector is struggling due to energy crisis, so we should have priority to meet their energy crisis. Also, due to target killing and unrest in Karachi, many of our trade targets cannot be meet. Over the years, oversees Pakistanis has really helped economy to be stable and to create a balance for budget. Government can minimize and waive off the charge for money transfers and can encourage Pakistani local banks or to collaborate with international banks to send money online, which will really boost reserves. I believe, we can significantly increase these figures. Already we have seen a major increase due to little facilitation by banks but there is always room for improvement. R&D in agriculture can also be very handful where we can significantly increase our production of crops and can reduce trade deficit.
The World Financial Institutions – We are borrowing a large amount of money from IMF, World Bank, Asian Bank on their terms and condition as we don’t have any program to increase our revenue. Everyone wants guarantee for their money and because neither government has plan to decrease deficit or increase income nor there is any sense of responsibility to address these issues. The only way of increasing revenue is through utility bills, which is quite dangerous for long term. As a result, they force us to accept their program and we have no choice but to accept their terms and conditions. For example, we should reduce non-development expenditure like reducing President and PM Secretariat, reducing number of Ministers and Advisers and their perks. All foreign tours be made via ordinary business class and PM and their cabinet to be resided in embassy. No special protocol inside and outside the country. There is very important aspect of perks is that we should monetise all the perks in all government departments so that no one should misuse the facilities. If the government leads from the front, this can be implemented in other institutions like Police, Judiciary and Armed Forces.
I have seen many Ministers, Economic experts, and talk shows anchor talking about the problems, but no one has ever come with the solution. In my opinion, we always have solutions for any problem unless we are willing to handle the problem.
For corporations, firstly, we should remove the top management and strong anti-corrupt mechanism and should make them independent. Secondly, we should invite 10 students (five each from abroad and local) from universities doing either Master’s or PhD to do the research on these corporations and come up with robust solutions. If, this solution does not look viable, and there is no chance, that these corporations can be reverted into profitable organization, it would be better to privatize them instead of bailing them every year from tax payer money. However, government should not give them free hand in their pricing mechanism, so they cannot charge consumer for hyper super profit.
All public office holders must declare their assets and what taxes they have paid on them. Government should announce a commission for reporting unpaid tax to any individual. Auditing firms should also be monitored very carefully not to be lobbied by big organizations and political influence to avoid taxes. There are also many sectors which are still not part of economy like Doctors, Big Retailers, Property Tax and Agriculture tax etc which potentially can generate 100-200 billion rupees initially. All land registration process should be computerised through NADRA. In fact, we should have a database of the each individual which should be linked with NADRA, so we should use it for our planning and scrutiny purpose in future.
Where we can save money and reduce our budget debt.
- Privatization of government corporations can save us 250 billion rupees.
- Agriculture tax can generate 100 billion
- Improvement and increase in tax base up to 12% of Federal Board of Revenue can generate 500-600 billion rupees.
- Austerity measures in non-development expenditures can save us 10 billion rupees. This should be started from President and PM Secretariat.
We have best of financial experts and reputable economic managers. The only thing we lack is the spirit, if the government decides that it has to do it, I hope things will start to move in right direction and in few months time we will see their better results. May Almighty give us wisdom to make this country a real welfare state, a dream seen by Allam Iqbal and Quaid-e-Azam Muhammad Ali Jinah and fulfilled by us!
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