Pakistan''s GDP growth is expected to decelerate in fiscal year 2015 as a result of simmering political tensions and the recovery would remain slow on account of persistent energy shortages and a troubled security situation, says the World Bank. The World Bank report "Global Economic Prospects (GEP)" launched Tuesday says political tensions in Pakistan in the second half of 2014 and a difficult security situation are projected to continue to weigh on the activity.
Growth in Pakistan accelerated to 5.4 percent in fiscal year 2013-14 from 4.4 percent the previous year, reflecting a lull in political turmoil and increased macroeconomic stability under an IMF support programme. However, a spike in political unrest in the second half of 2014 has taken a toll on confidence and activity. Improved growth prospects for South Asia are predicated on the implementation of structural reforms to ease supply side constraints, which are substantial, and put government finances on a sustainable footing. Disappointments could weaken confidence, depress investment, trigger a reappraisal of growth prospects and reversal of investor sentiment, and, in Pakistan, derail financing under the IMF-supported programme.
According to the report, concessional inflows, and migrant remittances in Pakistan helped shore up the currency, rebuild reserves, and reduce external financing pressures. With inflation falling to an 11-year low in Pakistan, the central bank lowered its benchmark rate in November. In Pakistan, preferential market access by the EU could boost export performance unless continued energy supply shortages hamper exporting companies.
Weakening global oil prices, fading pass-through from currency depreciations in 2013 (India, Pakistan and Sri Lanka) and the lagged effect of monetary tightening in 2013 (India and Pakistan) made for lower headline inflation in the region. In India and Pakistan, part of the decline in inflation also stems from favourable base effects, which drove the moderation in food price pressures in the second half of the year despite poor monsoons in India and Pakistan and drought in Sri Lanka.
The report further states that onerous labour regulations, cumbersome bureaucracies, underinvestment in human capital, and large infrastructure deficits have undermined the region''s competitiveness, making it hard for low-cost labour-intensive manufacturing to thrive and to compete against the more flexible economies of East Asia. Added to this, a cyclical weakness in recent years has meant that industrial output has expanded slowly in the post-crisis period, posing challenges of coping with a rapidly growing labour force. As a consequence, manufacturing''s share of economic output in India has stagnated over the past decade while in Pakistan it has trended down to near the bottom of the range for major developing or emerging market economies.
The report further states that with power generation unlikely to keep pace with growing demand in the region, shortages are expected to persist in the near term, including in Bangladesh, India, Nepal, and Pakistan. In both India and Pakistan, substantial transmission and distribution losses, insufficiently high user prices, and subsidies to special interest groups have resulted in repeated bailouts for the energy sector. In India, these represented a fiscal cost of 1 percent of GDP in 2001 and again in 2011 and in Pakistan, 1.4 percent of GDP in 2013.
The fiscal cost of food and fuel subsidies is also heavy. Energy subsidies alone amount to between 6-10 percent of revenues in India and Bangladesh, and 30 percent in Pakistan. Tax-to-GDP ratios have declined since the early 2000s in Pakistan and Sri Lanka, and stagnated in India. Only 3 percent of the population in India pays the personal income tax, with the figure dropping to about 1 percent in Bangladesh, Nepal, and Pakistan. Added to this, a plethora of exemptions exists. These have narrowed the tax base, with research indicating a sharp fall in average effective tax rates, and an even larger decline in marginal effective tax rates over the last decade. They have also made tax systems more complex and may have contributed to the emergence of vested interests to resist further reforms.
The report further states that extremely low taxation of the agriculture and service sectors in Pakistan has raised the tax burden on industry although industry accounts for only a quarter of GDP; tax revenues from industry are about 60 times more than for agriculture and 5 times more than for services.
By and large, income tax rate structures are relatively simple in South Asia, with the exception of Pakistan and Sri Lanka where both personal and corporate income taxes have complex/multiple rate structures. In India the number of taxpayers who declare their incomes to be more than Rs 10 million is 42,800 while in Pakistan only 3.1 million people possess tax numbers.
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