Immediately after take-over,General Pervez Musharraf, the then Chief Executive (C.E.), addressed the nation on television on the 17th October,1999 highlighting the problems facing the country- economic as well as political.
The most important political problem, as asserted by the General, was inter-provincial disharmony. About the economy, the problems highlighted by him were to: (i) rebuild investors' confidence with the objective of encouraging the local investors, overseas Pakistanis and foreign investors, (ii) increase domestic savings, (iii) carry out pragmatic tax reforms, (iv) turn around the state enterprises towards profitability (v) boost agriculture and revive industry (vi) adopt austerity measures.
The President had promised that he would recover not only the defaulted bank loans but would also recover the amounts of loans written off without justification. For the purpose, inter-alia, of the recovery of bank loans, National Accounting Bureau (NAB) was established.
As for the inter-provincial disharmony, which the CE promised to address, the main issues were: river water distribution, equitable distribution of federally collected taxes among the provinces and the grant of autonomy to the provinces.
The rulers have been claiming that they have made the economy vibrant and put it on the sound growth path. Their claim is that progress has commenced immediately after October,1999 take-over.
There are two school of thoughts in this respect; the first one says that there has not been any visible progress in the economic field until 9/11 whereafter the sanctions-whether nuclear or democracy related- were lifted by the USA, European Community provided some market access, Paris Club reprofiled the bilateral debts amounting to over $12 billion, USA and some middle-Eastern countries initiated anti-money-laundering measures resulting in diversion of private inflows from hundi/hawala markets to the banking channel, USA and some other countries wrote off their outstanding debts [the write off by USA alone aggregate $1.5 billion]which resulted in accrual of huge resources to the rulers from abroad which helped the economy to grow to some extent.
The object of this write up is to take an overview of both- economic and socio-political fronts- since the October 12,1999 take over.
ECONOMIC FRONT: Let us first dilate on the economy. Table "A" is appended which contains the major economic indicators as of 30th June,1999 (fiscal year which closed just before the take-over), 30th June,2002 (upto which time period, abundant external flows did not commence) and the 30th June,2007 ( the last fiscal year ended a quarter back). The information given in Table "A" tends to go in favour of the first school of thought.
TABLE "A": MACRO ECONOMIC INDICATORS:
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Fiscal year 1998-99 2001-2002 2006-07
[FY 99] [FY02] [FY07]
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Real GDP growth 4.2% 3.1% 7%
Manufacturing sector growth 4.1% 4.5% 9.4%
Large scale Manufacturing sector growth 3.6% 3.5% 8.8%
Gross total investment as% of GDP. 15.6% 16.8% 23%
Fiscal deficit. 6.1% 4.3% 4.2%
Tax-GDP ratio. 13.2% 10.9% 10.8%
Foreign exchange reserves US $billion 2.378 6.398 16 plus
National savings as% of GDP 11.7% 18.6% 18.1%
Inflation 5.7% 3.5% 7.8%
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Tax revenue [CBR collection in Rs billion]
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A. Direct taxes 112.0[36.36%] 142.6[35.30%] 320.6[38.18%]
B. Indirect taxes. 196.0[63.64%] 261.3[64.70%] 519.0[61.82%]
C. Total [A+B] 308.0 403.9 839.6
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GDP growth:
It will be seen from the above Table the real GDP growth declined from 4.2 per cent (in FY-1999) to 3.1 per cent (in FY-02). In fact the real GDP growth had fallen to the lowest in our history @ 1.8 per cent in FY-01(2000-01).
The growth in the manufacturing remained almost stagnant upto the close of FY-02. It has been (more than) doubled to 9.4 per cent in FY-07. The growth in Large Scale Manufacturing (LSM) sector reached 16.6 per cent [post 9/11] in FY-05, which came down to 10.7 per cent in FY-06 (as against the target of 12.5 per cent). In FY-07 it has further come down to 8.8 per cent ie half of the growth rate achieved in FY-05. This raises the alarm bells and puts the economic managers test to arrest the deterioration and work for enhancement.
The economic managers consider the GDP growth rate of around 7 per cent very sacrosanct. It is now widely believed that to put FY-07 GDP growth at that level, wheat production estimate was kept at an exaggerated high level and export was also permitted which is partially responsible for the current wheat crisis.
INVESTMENT: The gross total investment, as percentage of GDP, marginally increased from 15.6 per cent (FY-99) to 16.8 per cent (in FY-02). The major increase was seen in the post-9/11 era and it stood at 23 per cent by the end of FY-07.
FISCAL DEFICIT: The high fiscal deficit, as percentage of GDP, of 6.1 % (in FY-99) came down to 4.3 per cent (in FY-02). Thereafter, it remains almost at the same level. By the close of FY-07, it stood at 4.2 %.
TAXATION: The Central Board of Revenue's tax collection increased from Rs 308 billion (FY-99) to Rs 403.9 billion (in FY-02) and to Rs 839.6 billion in FY-07. As the economists generally believe, indirect taxes constitute regressive form of taxation while direct taxes are taken as progressive.
Despite the promises of the regime taking over in October,1999 to rationalise the tax system to make it equitable for all the sections of the populace, nothing concrete happened. The ratio of direct taxes to the total collection remains around 36-38 per cent while indirect taxes comprise 62-63 per cent.
The figures of direct taxes include the withholding taxes, which are generally believed to be the indirect taxes, and comprise 40-42 per cent of the direct taxes. If one properly accounts for that, the ratio of direct/ indirect taxes shall work out to 20:80.
The doubling of tax collection during FY-03 to FY-07 is on account of most regressive general sales tax being recovered by the post-1999 regime, at the rate of 15 per cent, which is believed to be the highest in the world. Once, the economic managers had imposed this tax on food items and life-saving medicines too, which was partially withdrawn on mass public agitation.
The economic managers have neither the courage nor the political will to widen the direct tax net. The rich brokers are earning billions or rupees daily-tax free- on stock exchange/ real property transactions. Similarly, the feudals earn billions of rupees annually-tax free, on fruit orchards which are auctioned annually and where it is not much difficult to estimate the income.
The sales tax is a provincial tax almost globally but in our case, the federal government has usurped it forcefully. The federal government has also not been able to evolve the formula for equitable distribution of tax collections among the provinces. The National Finance award is long overdue while the distribution is taking place on ad-hoc basis on the presidential decision.
Despite, governmental claims of substantial increase in tax revenues, the tax-GDP ratio fell 13.2 per cent (FY-99) to 10.9 per cent (FY-02) where it stagnates even today as this ratio during FY-07 was merely 10.8 per cent- a substantial fall since FY-02.
NATIONAL SAVINGS: The national savings(as a percentage of GDP) increased from 11.7 per cent (FY-99) to 18.6 per cent (FY-02) where it stagnates today. The ratio during FY-07 rather slightly fell to18.1 per cent. This is despite the fact that heavy remittances were received from abroad in the aftermath of 9/11.
The quantum of remittances is as follows: FY-01 $1.1 billion, FY-02 $2.3 billion, FY-03 $4.2 billion, FY-04 $3.8 billion, FY-05 $4.1 billion, FY-06 $4.6 billion and FY-07 $5.5 billion: Total $25.6 billion.
WHAT ARE THE REASONS FOR STAGNATION IN THE NATIONAL SAVINGS? THE FOLLOWING CAN BE THE POSSIBLE REASONS:
-- Anticipating the heavy inflows from overseas, the economic managers should have prepared plans for utilisation of these funds in the manufacturing sector. No such thing happened. Consequently, the heavy inflows found their way to the consumerism/stock exchanges/real estates while the economic managers complacently used these funds merely to tide over the balance of payments difficulties.
-- The other reason which diverted these funds to the above channels was that banks flooded with the liquidity finding no lending avenue commenced curtailing deposit/lending rates so much so that the rates on small deposits were brought down to almost zero. This situation still continues.
-- Instead of guarding the interest of the depositors, the economic managers made use of the falling interest rates to curtail the government expenditure for bringing down the fiscal deficit by reducing the Market Treasury Bills rates (TBs); at one point of time TBs interest stood even below 2 per cent p.a. The economic managers also sharply cut down the interest rates on the National Savings Scheme (NSS) instruments like Special Savings Certificates/Defence Savings Certificates etc.
-- The then State Bank of Pakistan (SBP) governor acted more as a fiscal policy administrator than the monetary policy administrator. When interest rates commenced picking up , SBP itself not only financed the entire fiscal deficit at cheaper rates but also provided funds to the government for liquidating commercial banks' debt during FY-05 and FY-06 relieving the banks of the need of mobilising deposits by offering attractive interest rates.. The situation has, however, undergone change in FY-07.
As the national savings rate in Pakistan is too low, the economic managers will have to initiate remedial measures, the signs whereof are not so far visible because the SBP, as the regulator of the financial sector, has lost its writ over the banks who are not prepared to heed to its advice to share their huge profits with the depositors by increasing the deposit rates.
INFLATION: The inflation decelerated from 5.7 per cent (in FY-99) to 3.5 per cent (in FY-02). It is again on the rise. It was at the peak in FY-05 at 9.3 per cent and decelerated to 7.9/7.8 per cent in FY-06/FY/07 respectively. During the last two fiscals, the economic managers have not been able to decelerate the inflation despite pursuing the tight monetary policy since July,2005.
The main reason for increase in the CPI is the food inflation which at times crosses double digit. The hoarders/smugglers of food items [like sugar/wheat etc] sitting in the cabinet with the access to the bank borrowings are believed to be responsible for that. The government has lost all its writ against them as it can neither deprive them of the access to bank credit nor can it stop the smuggling because in that event the support to government could be withdrawn by these elements.
So the populace should silently bear the brunt of inflation as in the event of agitation, law enforcement agencies can be let loose on them for effective beating.
FOREIGN EXCHANGE RESERVES: The foreign exchange reserves have soared to $16 billion plus. This is because of two major factors: (a) huge remittances from abroad during FY-01-07 $25.6 billion and (b) purchase of $5.2 billion by SBP from the open market during FY 2000 to FY 02.
The reserve build up does not owe its origin to our exports as we have always been in trade deficit which is increasing with the passage of time and is being financed, inter-alia, through Foreign Direct Investment (FDI) which does present the rosy scenario.
The foreign exchange build-up is not very significant when we compare it with the Indian reserves of $240 billion ie 15 times of our reserves. Our reserves cover merely 5 months' imports.
EXTERNAL DEBT-BREAKING UP THE BEGGING BOWL: There has been a lot of talk during the last 8 years about (a) breaking up of the begging bowl (b) premature repayment of the expensive debt or (c) replacement of the expensive debts with the cheaper ones. How much truth is in it? Let us examine. We append Table "B" containing details of the accumulation of external during various eras:
TABLE "B"- ACCUMULATION OF EXTERNAL DEBT [FIGURES IN U S $ MILLION]:
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Era Period Debt accumulated. Annual era
covered during the average.
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1.Ayubian/Yahya Khan July,1958 to June 1971* 3425 263
era [ 13 years]
2.Z.A.Bhutto era [6 years] July 1971 to June 1977* 2916 486
3. Total outstanding external debt at the end of 6341 -
Z.A. Bhutto era
4.Ziaul Haque era [11years] July 1977 to June 1988* 6572 597
5.Total outstanding debt at 12,913 -
the end of Zia-ul-Haque era
6. Democratic era [11 years] July 1988 to June 1999 18,372 1670
7.Outstanding external debt [30-06-1999] 31,285 -
when the present took over. **
8. Present regime [8 years] July,1999 to June 2007 7,415 926
9. Total outstanding external debt as at 38,700 -
the close of fiscal 2006-07.***
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