- Fixing an economy in shambles
Managing an economy like Pakistan’s is the most arduous task due to both internal and external factors, the more so when a government inherits it in complete shambles. There is no denying the fact that the incumbent government inherited an economy with whopping public debt and had no choice other than to seek assistance from the friendly countries and approach the IMF for a bailout package. Going to the IMF is not as reproachable as the opposition parties and detractors of the government have been trying to portray. Beginning from 1958 all the governments have sought assistance from the IMF to rectify their balance of payments situations and avoid default on previous loans. What really matters is the productive utilization of the loans taken and introduction of the reforms that lead to broadening of the tax base and elimination of the informal economy.
The governments require indigenously raised resources to finance projects related to socio-economic development and public well-being. This necessitates broadening the tax base and enhancing the tax-to-GDP ratio, which shows the tax revenue collected by the government as a percentage of the GDP. The ideal situation is when the tax-to-GDP ratio ranges between 25 percent to 50 percent. A cursory glance at the tax-to-GDP ratio of the countries across the globe reveals that the states which are considered to be developed and welfare states, owe their status to a higher tax-to-GDP ratio. For example, Scandinavian countries, Denmark, Finland, Sweden and Norway, have tax-to-GDP ratios of 51, 54, 50 and 54 percent respectively. The average tax-to-GDP ratio of EU countries is 35 percent. African countries like Zimbabwe and South Africa boast tax-to-GDP ratios of 27 and 27 percent respectively. India collects 16.1 percent in taxes out of its total GDP, whereas Nepal stands above the whole region with 27 percent. Latin American countries also have tax-to-GDP ratios ranging from 25 to 34 percent, with Brazil having the highest ratio. Pakistan has a dismally low tax-to-GDP ratio of 11 percent. Even Kenya, the least developed country of East Africa, has a tax-to-GDP ratio of 18 percent. The specific reasons for this low tax-to-GDP ratio in Pakistan, apart from the lack of political will exhibited by successive governments, are the narrow tax base, largescale tax evasion or a nonexistent tax culture, weak and corrupt tax administration and the existence of large informal economy.
While the government was more focused on stemming the rot in the economy it did not lose sight of poverty alleviation and improving employment position in the country. In this regard the Ehsas programme, Kamyab Jawan and Naya Pakistan Housing Scheme were launched. Economists believe that the Housing scheme will have spillover effect on 40 allied industries with prospects of creation of thousands of jobs. To address the supply side constraints and taming inflation, the government is also providing series of subsidies to the industrial and agricultural sectors, including on gas and electricity. The economy is surely moving in the right direction
The remedy undoubtedly lies in refining the tax structure which means not only expanding the base and bringing more and more people into the tax net, but also eliminating avenues of tax evasion through documentation of the economy as well improving the tax administration. Pakistan ranks among the countries having a very low tax-to-GDP ratio. The consequence of this low tax-to-GDP ratio has been that the governments mostly relied on loans from external and internal resources to finance their developmental and other needs, coupled with phenomenal increase in the non-development expenditure which has pushed the country into a debt-trap and a burgeoning budget deficit, with all the debilitating implications.
The unfortunate reality of Pakistan is that successive governments, both military and civilian, have given false hopes to the people divorced from the ground realities, without taking steps with a futuristic approach to address the existing maladies as well as putting in place policies designed to unleash the process of sustained economic growth. They all succumbed to political expediencies and hence all their economic decisions were politically motivated with the result that the country never experienced a real change and has drifted to the ebb of an economic precipice.
Introducing reforms in the economy was indeed a very arduous task for the government and a challenge to its political will to do the right things without caring for the political cost. It is a reality that raising the prices of gas, oil, electricity imposition of additional taxes as well as removal and lowering of subsidies is hurting poorer sections of the society which are groaning under the burden of the hydra-headed inflation set in motion by these steps. However, the problem was that the government had no other option available. It was a now-or-never situation. So better do it now than allowing the country to drift further into the economic sandpit. Tax Amnesty, Assets Declaration Scheme and the implementation of Benami law were positive measures towards documenting the economy and an essential ingredient of broadening the tax base.
In the backdrop of the developing situation it is hard to take issue with the strategy adopted by the government to remedy the situation. The opponents of the government might try to exploit the situation by whipping up public sentiments against the government, but the reality is that they also do not have any alternate plan or idea to stem the rot. The PTI government has shown the political will to take the bull by the horns. Though it would be a hard path for the government to traverse, ultimately it would lead to the rectification of most of the aberrations afflicting the economy and setting the course for sustained economic development, enabling the government to provide desired relief to the masses and spending on their well-being. Fixing economic aberrations requires time. There is no magic wand available to achieve the desired results in a jiffy. People will have to support the government in this task of rebuilding the economy for a prosperous future.
When the Prime Minister repeatedly says that people must have patience because better times are ahead. One tends to give credence to his claims on the basis of what has been achieved so far. The reports from different sources are really encouraging. The current account deficit declined by 75 percent during July-December 2019, the fiscal deficit was contained at 1.6 percent of GDP, tax revenues increased by 16.2 percent, exports increased by 4.5 percent, Foreign direct investment increased by 68.3 percent and the rupee improved against the dollar by five percent. Pakistan was ranked among the 10 best business climate providers. Moody’s shifted the credit outlook of Pakistan from negative to B3 stable. All the foregoing are positive portents.
While the government was more focused on stemming the rot in the economy it did not lose sight of poverty alleviation and improving employment position in the country. In this regard the Ehsas programme, Kamyab Jawan and Naya Pakistan Housing Scheme were launched. Economists believe that the Housing scheme will have spillover effect on 40 allied industries with prospects of creation of thousands of jobs. To address the supply side constraints and taming inflation, the government is also providing series of subsidies to the industrial and agricultural sectors, including on gas and electricity. The economy is surely moving in the right direction.