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Concerted efforts needed to raise GDP in Pakistan

Published on 4th Feb, Edition 06, 2013

 

Pakistan GDP growth rate rose to 3.7 percent in 2012 from the previous year. Throughout the history from 1952 to 2012, GDP growth rate averaged 5.0 Percent reaching an all time high of 10.2 Percent in June of 1954 and a record low of -1.8 percent in June of 1952.

Pakistan has a developing semi-industrialized economy that depend mostly on manufacturing, agriculture and remittances. In spite of the fact that since 2005 the economy has been springing up at an average 5 percent a year, it has not been able to keep up with fast population growth.

GDP growth rate of Pakistan is lowest in South Asia at 3.7 percent, if we compare GDP growth rate with other countries in South Asia, the growth rates of Bangladesh is 5.9 percent and Sri Lanka 7.5 percent.

Foreign Direct Investment in Pakistan the major source of economic growth of the economy has slackened. Tax to GDP ratio at 9 percent seemed to be somewhat of a permanent feature and the lowest in the region. The deficit has jumped to 7.6 percent.

Worker remittances remain a major source of foreign exchange earning in South Asia-equivalent to 20 percent of GDP, as of 2010, in Nepal, 9.6 percent in Bangladesh, 7 percent in Sri Lanka and 5 percent in Pakistan.

No tax on agriculture sector, leakages in the collection machinery; subsidies on electricity, fuel, and agricultural commodities is increasing to the government’s fiscal burden.

The current level of overstaffing in PSEs, corruption and wastage and politicized unions in the PSEs is putting hurdle to the growth in the economy of Pakistan

According to the latest World Bank report Pakistan GDP would remain widely stable at 3.8 percent as compared with 3.7 percent growth recorded in fiscal year 2011-12. Pakistan’s GDP growth is forecasted to strengthen to 4.0 and 4.2 percent in 2013-14 and 2014-15 respectively.

The World Bank report stated that a fragile investment climate, infrastructure gaps, and large fiscal deficits continue to place hurdles to a sustained improvement in investment activity and economic performance.

Electricity and gas shortages in the industrial and agricultural sectors, macroeconomic challenges including fiscal deficits and high inflation, and security uncertainties, have hindered productive business activities.

Investment as a share of GDP fell by nearly a third between the 2007-08 and 2011-12 fiscal years when particularly compared with the more than 6.0 percent average annual GDP growth recorded between 2003 and 2007.

Concerted efforts to address electricity shortages, a major constraint to growth, would also help to raise the sustainable pace of growth, it explained.

Remittances, in particular from the oil-rich Gulf Cooperation Council (GCC) countries, are predicted to remain resilient and support domestic demand in Pakistan.

A moderation in inflation allowed Pakistan’s central bank to reduce its key policy rate by a cumulative 250 basis points between August and December of 2012

In Pakistan, despite domestic security problems and electricity shortages, industrial output picked up. Industrial activity rose at a 12 percent annualized pace in the three months to November from the previous quarter, and was 6.5 percent higher in November than a year earlier.

Pakistan’s export growth picked up in the months leading to November, mostly depicting an increase in exports of garments and processed cotton products. However, electricity shortages during the second half of December adversely affected textile production and may weaken export growth in later months.

Nevertheless, annual inflation picked up again in December in Pakistan, caused partially by acceleration in the pace of food price increases.

Despite all efforts at consolidation, fiscal deficits are 6.0 percent or higher in Pakistan and Sri Lanka and above 4.0 percent in Bangladesh. Subsidies, primarily for fuel and to a little extent for food, contribute to the overall deficits-subsidies account for over 2.0 percent of GDP in India and Pakistan, and over 3.5 percent of GDP in Bangladesh, according to recent World Bank report.

Efforts to bring deficits under control will also need to involve efforts to broaden the tax base, which is extremely narrow in particular, in Pakistan where a very small percentage of affluent citizens pay income tax.

In Pakistan, the late monsoon arrival during the secondary Kharif crop only somewhat affected rice and cotton production. Despite restricted water availability earlier in the year and floods later, rice output is expected to raise modestly, according to UN Food and Agriculture Organisation (FAO) estimates.

 

Pakistan’s current account deficit had widened to 2.0 percent of GDP in the fiscal year 2011-12, but the release of coalition support funds and continued robust pace of increase in migrant remittances helped to reduce Pakistan’s current account deficit to 0.4 percent of GDP in the first five months (July-November) of fiscal year 2012-13.

Overseas remittances represent an important source of incomes and domestic demand in Nepal (22 percent of GDP), Bangladesh (11 percent), Sri Lanka (7.9 percent), and Pakistan (5.7 percent).

According to central bank of Bangladesh the GDP growth rate rose to 6.3 percent in 2012 from the preceding year. From 1994 until 2012, Bangladesh GDP Growth Rate averaged 5.58 Percent reaching an all time high of 6.7 percent in June of 2011 and a record low of 4.8 percent in June of 1994.

Bangladesh is considered as a developing economy. Yet, almost one-third of Bangladesh’s 150 million people live in utter poverty. In the last ten years, the country has recorded GDP growth rates above 5 percent due to development of microcredit and garment industry.

Although no doubt a large majority of Bangladeshis are employed in the agriculture sector, three fourth percent of exports revenues come from producing ready-made garments. The biggest obstacles to sustainable development in Bangladesh are overpopulation, poor infrastructure, corruption, political instability and a slow implementation of economic reforms.

Bangladesh has surpassed Pakistan. In 1972 people in Bangladesh lived on average ten years shorter than in Pakistan, whereas both countries had very large families, 7 children per women.

Bangladesh has in the past four decades increased the life span from 44 to 67 years; now surpass Pakistan. In the change to little families Bangladesh has declined from 7 to 2.3 children per women, whereas Pakistan still has virtually 4 children per women.

The Asian Development Bank (ADB) has predicted that Nepal’s economy will improve to 4.5 percent in the current fiscal year. High pace of growth in agriculture, tourism and remittance are the major reason that Gross Domestic Product (GDP) will go up this year, stated ADB.

ADB has also forecasted that the GDP will go down to 4 percent in the next fiscal year 2013 under the current conditions and average weather.

ADB also said the country’s economy will also depend upon the political situation, peace process and constitution drafting by May 27. The inflation would go up to moderate 8 percent this fiscal year while it would improve to 7 percent in the next fiscal year.

Likewise, trade deficit will likely widen further with import growth outpacing export growth. However, ADB expected that trade deficit will be offset by tourism income and remittance growth due to higher outflow of Nepalis for overseas job in this fiscal year.

According to central bank Sri Lanka’s rupee will stabilize further and economic expansion may rise to 8 percent next year from 7.2 percent in 2012. Inflation will remain in “single-digit” levels this year. Sri Lanka raised interest rates for the second time in 2012 to weaken credit growth and inflation.

The balance-of-payments will have a surplus of $1.2 billion in 2012. The central bank of Sri Lanka estimated 8.3 percent gross domestic product growth in 2014. The economy is recording strong expansion after the end of the 26-year civil conflict.

Grant of MFN status to India could boost Pakistan’s Gross Domestic Product (GDP) by 2 percent per annum. According to research by the Institute of Public Policy the former finance minister and Institute of Public Policy vice chairman Dr Hafiz Pasha said their organization’s research depicts that granting the Most Favored Nation (MFN) status to India, will also help cut down inflation on the back of availability of comparatively cheap Indian goods.

Trade normalisation with India can also add to national funds by over Rs 470 billion per annum in addition to benefits of Rs70 billion to consumers in the shape of cheap imported goods. Pasha added that over a period of three years the country would achieve 700 million dollars in annual gains besides creating 200,000 new jobs.

The 2010 NFC Award recommended that the federal government and provincial governments should streamline their tax collection systems to reduce leakages and increase their revenues though efforts to improve taxation in order to achieve a 15 percent tax-to-GDP ratio by 2014-15.

The FBR envisages an increase in tax to GDP ratio from existing 9.1 percent to over 10 percent in 2012-2013 by taking administrative measures of Rs176.1 billion including an amnesty scheme that legalizes un-disclosed assets.

Pakistan has all potential to increase tax to GDP ratio through making the system public-friendly and equitable. Widening of tax net is required but in a systematic and realistic way.

Improving governance, eradicating corruption and pursuing equitable tax policies are required. Collectors should collect taxes without any harassment.

The government should create a favorable environment to collect taxes from businessmen, industrialists and also encourage non-taxpayers to come into the tax net. There should be a free and fair taxation policy in order to raise revenues, broadening and simplifying the tax collection procedures.

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