Pakistan's Economic Growth - some missing elements

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2. 2
A key challenge still remains: how can the
government demonstrate that this is not
entirely debt-backed or borrowed-growth?
This is a key question as many economists
have argued that one-off and debt-driven
investment in public infrastructure cannot
sustain growth over longer periods. This
will also not result in sustained poverty
reduction and related progress towards
sustainable development goals.
This view is attested by the recent data on
Pakistan’s economic performance and
subsequent analytical opinion pieces which
suggest that lack of structural reforms have
prevented Pakistan’s economy to achieve
higher levels of savings and private
investment. While the savings ratio declined
to 13.1 per cent in FY17 compared to 14.3
per cent in FY16, the private investment as
percentage of gross domestic product was
below 10 per cent. Just as a regional
comparison, we may like to note that the
savings ratio in India stands above 25 per
cent.
There are also signs of populist economic
expansion which the incumbent government
may resort to, given that they are entering
into an election cycle. As one could observe
that while the government is unable to
process refunds of exporters and pay for the
circular debt in electricity and gas sectors,
the volume of agriculture credit is being
enhanced by PKR 1,001 billion. This is a 43
per cent increase over the previous year. In
fact, the size of agriculture credit is same as
the overall public sector development
programme (PSDP).
Lack of structural reforms have
prevented Pakistan’s economy to achieve
higher levels of savings and private
investment. While the savings ratio
declined to 13.1 per cent in FY17
compared to 14.3 per cent in FY16, the
private investment as percentage of gross
domestic product was below 10 per cent.
The government intends to roll out two
million small loans of up to PKR 50,000 per
farmer through the Zarai Taraqiati Bank and
National Bank of Pakistan. Past evaluations
of agriculture credit do reveal that such
expansion in lending may not be sufficient
for sustained growth unless agriculture
markets are made competitive, fair and
transparent. We do, however, realise that
expanding agriculture credit wins votes!
Lack of structural reforms have prevented
Pakistan’s economy to achieve higher levels
of savings and private investment. While the
savings ratio declined to 13.1 per cent in
FY17 compared to 14.3 per cent in FY16,
the private investment as percentage of
gross domestic product was below 10 per
cent.
On the PSDP, the government is clearly
aiming to create more debt if it has to fund
PKR 1 trillion projects in 2017-18, besides
also funding the throw-forward i.e. projects
already approved in the past and awaiting
cash flow. The budget documents are
certainly silent on what would be the term
structure of this borrowing to fund the
PSDP, grants, subsidies and losses of public
sector enterprises.
While all this is happening, changes are also
being made to the definition of public debt
and accounting for fiscal deficit. Of course,
this is being done with the aim to suppress
the true value of variance between low
government revenues and large government
expenditures.
The taxation structure also remains complex
and compliance is difficult, in turn hurting
competitiveness of Pakistani businesses.
The total number of taxes, levies and
surcharges faced by individuals, small and
medium enterprises (SMEs), and large
corporations has increased after the
devolution. On average, a SME annually
faces over four dozen different levies at
federal, provincial and local level. There are
different filing and payment arrangements
for each of these taxes and taxpayers end up
receiving notices and audit calls from
multiple federal and provincial tax
authorities across the country.
Perhaps a good exercise could have been to
learn if not follow, from our neighbour, the
recent example of moving towards ‘one

3. 3
India one tax’ goods and services tax (GST).
GST in India now is a single tax on the
supply of goods and services across the
country, and across the supply chain of
manufacturer to the consumer. The credits
of input taxes which are paid at each stage
remain available in the next (value addition)
stage, making GST a levy only on value
addition at each stage. The end-consumer
pays only the GST charged by the last
seller.
Having a single tax framework throughout
the country implies easy compliance,
uniformity of tax rates and structures,
removal of hidden costs of doing business
and overall improvement in
competitiveness. We do, however, know
that multiplicity of taxes actually lead to
lower revenues with the FBR missing its
annual target in the previous year.
A key element in the cost of doing business
is electricity and gas. What we know from
the preliminary data available on newly
added generation capacity and LNG
supplies, that additional supply does not
mean lower prices for Pakistani consumers.
The guaranteed tariffs for almost all new
power generation plants are bound to keep
Pakistan’s energy prices one of the highest
in the region. While energy generation side
is being addressed to some extent, very little
progress has been seen to address the
transmission and distribution issues. The
problems related to technical losses and
energy theft still continue to exist.
As debt servicing expenses increase and
foreign exchange reserves remain under
pressure, a key failure of the incumbent
government was its inability to turnaround
the export performance. While exports were
not helped by the current structure of
exchange rate, distortions in taxation, high
cost of utilities including energy, lack of
availability of timely and affordable credit,
weak trade facilitation reforms (among
other issues), some very basic mistakes
were made by the state which did not help
the already falling export receipts.
Most notably, the reduction in transit and
bilateral trade with neighbours i.e.
Afghanistan, India and Iran made Pakistan
an unreliable trading partner in the region.
We now know that Afghanistan — once
Pakistan’s key market for exports — has
started imports from other economies in the
region. This year Pakistan could see its
exports to Afghanistan fall below USD 1
billion. Another grave mistake was also not
to consciously tap the potential of services
sector growth (and resulting potential
services exports). Most under-negotiation
and past free trade agreements of Pakistan
have ignored the trade in services.
Finally, it remains a matter of concern that
Pakistan’s growth is still not seen as pro-
poor. Ideally it is the SMEs that should
grow and absorb the unemployed and new
workforce entering the labour market.
However, we have observed during the past
year that despite record low interest rates
borrowing by SMEs is still not at a level
seen during 2005-07. The government has
also not done any evaluation of why are
Pakistani SMEs not able to sustain and
graduate into larger entities over the longer
run.
Similarly, in order to address the woes of
those unfortunate amongst us, the delivery
of social safety nets in Pakistan is still
fragmented across federal and provincial
institutions. A key question will be how the
existing institutions can better provide
healthcare and employment insurance to
those below the poverty line.
http://tns.thenews.com.pk/borrowed‐growth/#.WW2LRhWGPIV