Christian Debt Recovery

Us Debt To Gdp Ratio 2011

January 21st, 2009 |

Author: Gavin

Pakistan’s economic outlook!

In my opinion, Pakistan since independence have been facing 4 key issues which are :

Agriculture or Industry? No economic choice have been made between them.
Perpetual low tax to GDP ratio.
Poor economic growths and low developments.
Peristent and high levels of Public debt.

we will look each one of them in little details and finally the measures taken by Governments in this regard.

Agriculture or Industry?

Pakistan in initial years after independence set up various planning bodies (e.g development board 1948, planning board 1953 which was transformed into planning commission in 1958), all these bodies have not been able to make any economic choice for pakistan whether to move ahead with agriculture or industry.Despite 8 five year plans (1955-98), no satisfactory breakthrough has been made in any one of them.

Agriculture:

Pakistan is basically an agrarian economy, at the time of independence the contribution of agriculture to GDP was around 53% but now its share have been declined to about 21.8% only,(GDP is 202.83 bn $,2010) but is still an important sector of economy, about 70% population of Pakistan lives in rural areas depending on agriculture as their source of livelihood, it employs more than 45% labour force of country. In pakistan agriculture is divided into 4 main heads,

Crops
Livestock and poultry (largest head with 55% share)
FIsheries
Forestry

Only Livestock is performing well with ground of around 4%,but even then what are the factors that caused this sector to remain weak and out of focus, some of which are.

Underutilization of natural resources( total area of pakistan 79.61 million hectare but only 23.2 m.h is under cultivation)
poor growths ( 4.6% in 1990′s and 4.8% in 2000′s) , the sector posed growth of about 0.6% only in 2010.
Lack of mechanization (low use of hi tech seeds and fertilizers, etc)
inadequate credit facilities and water loggings

Industry:

Industries on the other hand, have also become one of the most important sector of the economy, in 1948-49, this sector accounts for about only 7.7% of GDP, but some focus has been given to this sector and now it has become the 2nd largest sector with the contribution of 23.6% in GDP, (servicing being the largest sector with 54.5% share),this sector provides employment to more than 20% labour force of the country. and has been posing growth rates of more than 6% throughout, some key industries of Pakistan are.

Textile industry( largest sector, 46% of manufacturing)
chemical industry
steel industry
sugar industry
SME’s and cottage industries and so on

but despite of all that why this sector has also not developed upto standards, some key problems are.

Declining investments ( there has been wide fluctuations, the investments are declined from 22.6% of GDP in 2006-07 to only in 13.4% in 2010)
lack of adequate infrastructural facilities
debtor public sector enterprises PSE’s (having circular debt of RS 387.6 billion)
Power outages and so on

Now, with about 22% share of agriculture and 23.6% share of industries, we are in middle of the road, what to think of and where to go?

2. Perpetual Low Tax to GDP ratio :

This is the most important factor with respect to self sufficiency. Tax to GDP ratio in pakistan has been as such 13.8% in 80′s, 13.4% in 90′s and only 10.6% in 2000′s. this clearly tell us about the tax system in pakistan. One of the main reason of this low ratio is that as said earlier more than 70% population is in agriculture and despite of that this sector is tax exempted. moreover the main tax payers class comprises of salaried persons and small business owners, even among them, some are still exempted through provisions/incentives.Last year saw a huge decline in tax ratio which was only 8.6%, though flood was the main driver of that decline.

Thus economy faces financial deficit and it has been the case with pakistan, last year deficit was 1007 billion Rupees, which was about 5.6% of GDP and it is expected at 4% next year.

Moreover FBR(federal board of revenue) most of the times fall short of it’s target for tax collection, last year the target was Rs1667 bn, but revised down to Rs1588bn.

3. Poor Economic growths:

Growth is also the main factor in development of any country. Unfortunately growth rates in Pakistan has been very fragile. specially in past few years and averaged about 4.8% in 2000′s. with 1.1% in 2008, 3.8% in 2009 and 2.4% in 2010. Agriculture having low levels of growth, though industries and servicing posing moderate growth rates.

Private sector as we know play the major part in growth, but this sector has been very conservative since 1948-49 but specially past 4 5 years have seen a major decline in credit demands of private sector, Private sector credit declined by 10% last year.

and thus low growths hampered development efforts made so far.

4. High levels of public debt:

The high and ever rising level of public debt has been a major economic issue since 1947. the public debt of pakistan has reached a figure of Rs.10020 billion. public debt consists of

External debt (loans, grants etc) is about 59.5 billion $ or 28.8% of GDP
Domestic debt (SBP borrowings, other) about Rs.5462 billion. or 30.2% of GDP.

such huge debts are the result of various factors including deficit financing, inflationary adjustments and recently one new issue has come up of Untargeted subsidies, Govt has been providing such subsidies and financial support to loss making PSE’s. last year govt provided Rs.380 billion in subsidies to various entreprises.

Further over 60% of the total debt is comprised of domestic debt, which is more costly to government than external debts.

MEASURES ADOPTED TO SOLVE THE ISSUES

We discussed some major issues encircling pakistan economy. now we discuss the steps taken by Governments and other bodies to address these issues.

For Agriculture:

Through the implementation of 8 five year plans, major work has been done to shift the momentum of this sector up. and recently there has been tremendous efforts to push up the sector. the major work has been done in the following areas.

Mechanization:, for this National fertilizer development center (NFDC) has launched various schemes including Benazir tractor scheme, moreover 0% tariff on the imported machinery is also a fine effort to boost mechanization in agriculture.

Credit: there are 5 major banks , 2 specialized banks (Zarai tariqiati bank ltd ZTBL, and punjab cooperative banks ltd PCCBL) and 13 other scheduled banks disturbing credits to the farmers for their needs. Govt provided subsidy of 32 billion Rs to farmers last year. ACAC provided rs168.7 billion and ACGS grant loans at the rate of 8 % to farmers.

Cropping: for improvements in this sector Govt launched various schemes , crop maximization project, crop loan insurance scheme etc, by FSC&RD, 66 new companies have been allowed to operate. and 3 mega canals are under construction and other water courses are adopted to overcome water logging problems.

For Industry:

As discussed earlier, in order to boost up the confidence of private sector to invest in industries,

Credit:Govt established various institutes like PIDC (1952), PICIC, IFC, and so on.moreover for the development of SME’s , SMEDA has been working under federal supervision. SMEDA has currently started 28 mega projects that will help over come the problems.

Power Issues: in order to get rid off power outrages, govt has been supporting Electricity generating industries (WAPDA, PEPCO, KESC,etc). Govt this provided grant of Rs120 billion to PEPCO to improve its efficiency. Rental power plants are also under constructions.

Taxation: Govt has pronounced 0% duty for export oriented industries. and continued since last 3 years.

Access to international market: Govt has been trying and some what succeeded in expanding the market of domestic industries to international level. access to European union of 17 textile items without duty has been a major achievement in this regard.

Poor Growth rates;

In pakistan, the real growth rate is 2.4% in 2010. which is unacceptable as compared to india and china which are possessing growth in between 10-12%. more over the central bank SBP had discount rate of 14% which continued for an year but to improve the growth, it reduced the policy rate to 13.5% that will help boost up the demand of private sector. plus this year the amount of PSDP has increased to Rs.730 billion which help boost development works. moreover inflation is about 14%, to overcome this, growth rates must be increased proportionately with it.

Public Debt:

to address this issue, Government has ensured that it will restrict its borrowings from the central bank, and therefore it will help reduce inflation in country and thus high interest payments which are estimated to be Rs791 billion this year. moreover excellent performance in external account have helped in macro economic stability, current account showed a surplus of 748 million $ and therfore balance of payment recorded a surplus of 2.5 bn $.moreover 28% growth in exports and remmitances move to double digits 11 bn $. further foreign reserves has also reached peak of 18 bn $ this year. such performance would result in curtailing public debt. and shift to foreign financing would be a better option for government as it is relatively cheap to govt then to internal financing.

Low tax to GDP ratio:

to address this issue and to broaden the tax base (direct or indirect) ,Govt has taken various steps including implementation of RGST throughout and generalizing of all sales taxes to 15%, these will likely to increase the tax to GDP ratio from 8.6% to an estimated rate 0f 10.6% in 2011. besides this other charges were also levied including flood surcharge tax, petroleum levy, etc will help to earn higher revenues in the future. besides all this, major program for tax reforms has been under development and if it is implemented, further if FBR achieved it’s target for this year tax collection of Rs 1952 bn, then it would be an added advantage.

CONCLUSION:

In my opinion this is the current situation and structure of pakistan economy, if such problems are seriously considered and the measures adopted are sincerely implemented then, conditions could be much better,

THANKYOU

About the Author

Hasan Tariq