This paper provides a non-political and realistic analysis of the state of affairs of Pakistan economy in the pre-budget scenario for the year 2007-2008. Discussion in the following paragraphs include the theoretical perspectives, with their present indicators, an analysis of the indicators and the solution on the policy side.
It also identifies realistic perspectives their present Indicators and analysis. There has been a description of the fundamental economic disagreements which hamper the national consensus on economic issue. The relationship of manufacturing sector growth with import substitution and consequential effect on employment, inflation and poverty alleviation has also been briefly discussed.
This analysis requires an agreement by the nation as a whole on a Common Minimum Program being Charter on Fundamental Economic Issues termed as Mesaq-e-Maeshat. The draft of Common Minimum Economic Program has been laid down for a national debate by the nation.
THE REPORTED ECONOMIC INDICATORS FOR PAKISTAN, WITH A COMPARATIVE STUDY OF INDIA AND CHINA, RELEVANT FOR OUR ANALYSIS ARE:
-- Increase in GDP 6.6 % (India 8.6, China 11.1)
-- Increase in Industrial Production 6.8 % (India 11, China 17.6)
-- Increase in consumer prices 7.7 % (India 7.6, China [-2])
-- Unemployment - Not Available (India 7.6, China 4)
-- Trade Balance [-13.4] bn US dollar (India [-56] , China 204)
-- Current Account balance [-6.4] bn US$ (India 10, China 160.8)
-- Currency to US $60 (India 42, China 7.7)
-- Budget Deficit as percentage of GDP [-4.6] (India [-4.3], China [1.6]]
-- Interest Rates
-- 3 months 9.92 (India 7.33, China 2.9)
-- 10 years Government Bonds 6.59 in US$.
An analysis of these indicators reveal that everything on economic side is not fine. Pakistan's economy and its size cannot sustain a constant trade deficit of 13.4 bn US$. The interest rate of around 10 per cent seriously affect the investment strategies.
Only countries like Brazil, Russia, Turkey and Venezuela have such high interest rates. For the rest of the world it around 2 to 5 percent. This situation requires immediate corrective measures.
Increase in consumer prices is a natural outcome in this situation. Monetary and fiscal policy can only provide a temporary relief. With these indicators inflation is bound to increase that will affect the common man.
Comparison with China and India is relevant for the reason that China is our present and future major trade partner and India and China are competitors in the fields being our forte.
Notwithstanding the same, on an international comparison the position is not that bad. We are among the only few countries in the world having +6.5 GDP growth rate.
This proves that we are performing reasonably well for the time being. However, now there is no time and space left as a nation to make mistakes and wait for a messiah. There has to be stabilisation and national consensus on economic issues. This is the subject of this discussion. There has to be two pronged strategy for the same. This includes short and medium and short term measures along with a long term strategy with a national agenda.
ON THE MEDIUM AND SHORT TERM WITH IMMEDIATE POLICY MEASURES ARE:
IMPORT SUBSTITUTION: As an immediate step trade deficit needs to be curtailed. US $13.4 billion cannot be overspent each year where the reserves are around US $12 billion only. There has been no serious effort to improve this situation. There is a need to place 'Import substitution' as a priority in addition to export promotion.
Pakistan is now importing those products where we had clear edge in the past. Tariff adjustments, fiscal corrections, and 'support' to local industry, being a replacement to trading, should represent the national priority.
Support to local industry now represents a totally different paradigm. It does not mean any benefit in the form of disparity in the rate of interest, subsidies, tax exemptions etc. In the present days, it represents provision of good infrastructure-roads, railways, ports, network etc, availability of human resources, facilitation in regulatory environment, non-discrimination in regulations, consistency in policies etc.
We should have no hesitation in accepting that our cost of production is high as our efficiency level does not match with other societies, individually and nationally.
FISCAL EXPANSION: Time has now come for real expansion in fiscal network. The incidence of tax on manufacturing and trading which has been 'equalled' need to be re-aligned to provide a space and incentive for entering into manufacturing activities.
In order to achieve that level, presumptive tax (income tax and sales tax) etc on manufacturing be immediately withdrawn. Workers' Profits Participation Fund (WPPF) and Workers' Welfare Fund (WWF) being a 7 percent tax on manufacturing, not on trading, needs to be abolished.
Real expansion in tax base necessarily requires integration of data-bases of taxation records with banking and real estate records. Furthermore all sources of income be brought within the tax net whether they remain exempt from tax or otherwise. Exports, capital gains, real estate etc to be brought into documentation though for policy reason the same may be exempted for a certain time. Real and meaningful progress in this field requires integration of Federal, Provincial and Local bodies economic and tax data base.
MONETARY POLICY: Certain monetary policy steps, though not theoretically ideal, to tackle the issue of inflation in non-conventional manner are required. With least 'Trickle Down Effect' inflation in the range of +7.5 cannot be afforded by the nation at large.
Immediate steps require effort for reducing the 'Banking Spread' and management of overall lending of the banking sectors. Monetary policy has to gear the resources towards manufacturing sector and avoiding allocation of resources for real estate, capital market and trading sectors.
MANAGEMENT OF PUBLIC SECTOR DEVELOPMENT PROGRAMME: Out of the total resources available a specific sum has to be assigned to (a) Education and (b) Health. Such funds should be utilised in a proper manner and there has to be Government-Community Partnership for the same. For the utilisation of funds available with the governments total reliance on government agencies would not fulfil the national objectives.
DIVERSIFICATION OF ECONOMIC PRIORITIES: Pakistan's main economic asset is the human capital and potential for growth in the service sector. Economic priorities have in the past been potentially geared towards export of tangibles items and that related to traditional items. This approach needs to be changed.
GROWTH IN THE MANUFACTURING SECTOR AND EMPLOYMENT AND POVERTY ALLEVIATION: An analysis of policies since 1990's [after the promotion of free market economy] reveals that there had been similarities for fiscal other incidence for manufacturing and trading sectors.
This is not a correct policy, specially in societies like us. The issue of employment, poverty alleviation and sustainable growth require a preferential, not parental support, to the manufacturing sector.
In Pakistan privatisation is treated as investment. In the present times there is a need to emphasise on the sustainability of small and medium size businesses engaged in the manufacturing sector. We cannot survive with big plazas and shopping malls in Lahore and Karachi if medium and small scale industry in Sukkur and Gujranwala does not survive.
REALISTIC PERSPECTIVE OF PAKISTAN ECONOMY: Common man is not interested, and reasonably so, in the theoretical perspectives discussed above.
FOR THEM THE STATE OF AFFAIRS IN PAKISTAN IS REFLECTED IN THE FOLLOWING INDICATORS:
-- Primary requirements
-- Present Condition
(a) Literacy level and availability of primary education Extremely low;
(b) Availability of basic medical health Extremely Bad
(c) Availability of clean drinking water Not available to above 80% of population
(d) Availability of sanitation Not available to above 50%
(e) Infant mortality Around 40%
(f) Population growth Over 2.5%
SECONDARY REQUIREMENTS:
(a) Employment Guised & Disguised unemployment over 50%
(b) Security personnel require more security than a common man
STABILITY REQUIREMENTS:
(a) Equitable judicial system Over 5 million cases pending
(b) Stable political system None
(c) Equitable distribution system.
DISPARITY OF WEALTH DISTRIBUTION IS INCREASING An analysis of these indicators reveal that Pakistan's indicators on all these fields are not encouraging. This raises the issue of relationship of first indicators (theoretical economics) with the fulfilment of the society's needs at large.
(To be concluded)