Voices in Brussels, as anticipated, echoed the case of much needed economic reforms in Pakistan before they expect others to help them out. There would be no gain without some pain, asserted the friends. However, at home, all the focus is on cat and mouse game between the Executive and the judiciary.
Media and analysts are speculating and evaluating the odds of lifting the executive order of reinstatement of judges. While Islamabad is busy in this hide and seek, officials in Khakis sitting in Rawalpindi are apparently spectators at this moment.
This tussle is going on ever since the judges are restored and may continue unless the Khakis show some interest that apparently have their plate full with controlling effective foreign policy including Afghanistan, India and war-on-terror partners and busy in tackling extremists within the country and controlling east and west borders.
Nonetheless, the focus of the Executive should be to take the economy out of abyss, but it has taken the back seat at a time when the country is at the verge of default. The political economic will is hindering the consensus to be formed on the reformed GST.
Another deadline of October 15th is not met due to policy inaction. In such circumstances creditability of government to increase tax revenues, sealed the public sector entities leakages and to implement, in spirit, the power sector reforms is touching the lowest ebb.
The question of having equitable taxation system seems like a far dream. As aptly said by German foreign minister at recent FoDP moot that an adjustment in the equilibrium between rich and poor in Pakistan is fundamental.
Abdullah Yousaf, former chairman of FBR, in a recent article was critical about inequitable tax structure in Pakistan. According to him, in FY10, the services sector, at 53 percent of GDP, contributed 26 percent of total taxes, while agriculture, which accounted for 22 percent of GDP, contributed only one percent in total tax receipts. The lion's share, ie, 63 percent of taxes, collected from manufacturing sector, at 25 percent of GDP.
While we have less than 2 percent of population or 5.1 percent of labour force is paying taxes. Moreover, taxes are largely skewed towards indirect taxes which inherently increase the incidence towards low income households.
Even the implementation of reformed GST, an indirect form of taxation, will not greatly help in achieving an equitable tax structure. Nonetheless, it may bring an array of services into tax net and facilitate documenting the economy. According to conservative estimates of SBP, 30 percent of Pakistan's economy is undocumented.
The documentation will help in bringing back the tax evaders into tax net. But this is easier said than done.
Even the steps taken to remove the power sector subsidies are essentially increasing the power tariffs, rather than reducing the thefts. Given the poor governance structure, thefts are likely to increase with rise in tariffs. The devil of circular debt is mounting again.
But the status quo is likely to be prevailed on political and economic fronts. In case of the former, its impact on country is unclear but for latter it is detrimental for the future generations.
MONEY AGGREGATES:
A gradual decline in currency in circulation continued for the third consecutive week. With a fall of Rs 12 billion last week, average decline for the past three weeks stood at Rs 18 billion to restrict the year to date increase at Rs 101 billion versus Rs 114 billion in the corresponding period last year.
There is a sharp appreciation in demand and time deposits amounting to Rs 51 billion, taking the hike in deposits to Rs 129 billion for the past six weeks. This depicts the excess liquidity in the system at the time of subdued demand in advances. SBP is trying to keep the rates in permissible limit by moping up excess liquidity from the system.
The government reduced its borrowing burden from SBP by Rs 71 billion to come anywhere close to quarterly borrowing target of IMF. But, it seemingly missed by a good Rs 149 billion for the first quarter of this fiscal year. With a slight decline in government borrowing toll of scheduled banks, over-all borrowing fell by Rs 79 billion for the week ending October 1st.
Private sector for the first time in FY11 increased by as much as Rs 26 billion in a week to make to date fall at Rs 52 billion.
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KEY MONETARY AGGREGATES AS ON OCT 1
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Rs (mn)
1-Oct 24-Sep Change
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Currency in Circulation 101,831 113,587 (11,756)
Total Demand & Time Deposits (68,715) (119,858) 51,143
Broad Money (M2) 34,951 (4,578) 39,529
NFA 35,444 5,891 29,553
NDA (493) (10,467) 9,974
Net Government Borrowing 106,828 186,003 (79,175)
Borrowing for budgetary support 133,219 213,176 (79,957)
from SBP 148,939 220,274 (71,335)
from scheduled banks (15,720) (7,098) (8,622)
Commodity operation (25,794) (26,310) 516
Credit to non-govt sector (67,772) (82,189) 14,417
to private sector (51,905) (78,123) 26,218
to PSEs (16,230) (4,320) (11,910)
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Source: SBP
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