Pakistan’s much-studied economy is one of great contrasts. Until recently it could not manufacture a crankshaft. It has one antiquated and inefficient steel plant, and no chemical or plastics industry to speak of, but it fabricates nuclear weapons and missiles.
Pakistan lacks any significant manufacturing capacity, is low on the list of states that can add value to goods—with the sole exception of its textile industry—and agriculture, its most important sector, is far behind exactly comparable regions in India.
Pakistan’s defense expenditure in 2003 stood at 54.5 percent of the budget, while developmental expenditures were around 35.5 percent.
Furthermore, there is a large unofficial economy, estimated to be 50 to 100 percent of the size of the regular economy; this makes it hard for the government to collect taxes and places a greater strain on civil servants and others who receive regular, documented salaries.
Oil imports make up one-quarter of Pakistan’s total import bill, although this is softened by a subvention from Saudi Arabia.
Consumer price inflation is expected to slip past 5 percent, which compares unfavorably to an all-Asian figure of less than 3 percent.
Investments in Pakistan have grown in the past few years, especially from Europe and the Gulf, and the total may exceed $1 billion, with half of it directed to the financial business and oil sectors.
Privatization is moving ahead, with the prospective sale of the state oil company (the Habib) and Allied banks, two major gas companies, the Karachi Electric Supply Company, and Pakistan Steel, but not military and defense-related companies.
Problems in Pakistan Economy:
Besides a very high defense burden, an unbalanced land policy remains at the core of Pakistan’s social structure and influences its economic policy. There have been three major attempts at land reform in the past, with a fourth now under way. The first, in 1959, focused on the abolition of revenue-free estates (the Jagirs), gave security to tenants, and imposed an ownership ceiling of 500 acres for irrigated land and 20,000 acres for unirrigated land. A second reform in 1972 reduced the size of holdings by 70 percent, and a third reform in 1977 lowered the ceiling on ownership to two-thirds of the 1972 levels.
Besides land policy, another obstacle has been Pakistan’s poor export performance. Efforts to increase exports have not taken off, with minor exceptions in the sporting goods, surgical instruments (manufactured in a factory started by American missionaries), and textiles sectors.
Unlike India, whose growth has partly been driven by exports of software and the products of it auto-parts industry (the largest in the world). Furthermore, with the widespread lack of education at all levels, it is unlikely that Pakistan will on its own become a powerhouse services provider in the global economy in the short to the medium term. Social policies, which tend to exclude women from public and economic life and which have downgraded education for many years, also restrict the range of economic opportunities open to Pakistan, and make a large percentage of the population unqualified to participate in a modern economy. Political conditions that restrict cooperation with India are also detrimental to Pakistan’s economic growth.
A third structural flaw lies in the area of actual tax collection, which is believed to be almost half of what is held to be due. Much of the economy remains outside the government’s reach, which gives the unofficial economy vigor but seriously hampers the government’s ability to deliver services.
Whereas Pakistan’s official per capita income is about $500, the unofficial economy is believed to be three times larger. Including the unofficial economy—though how that can be done is itself problematic—could take the figure of per capita income as high as $1,700.
Many felt little obligation to pay taxes to a government that provided few services, especially when the government itself failed to tax the rural elite—part of its own support base. Moreover, any attempt by the government to raise taxes “resulted in protests, demonstration and strikes. In the absence of effective government, the urban middle class sought its own solutions through private rather than collective action. They created private educational facilities, private health care institutions and private protection forces.
How Tax is being evaded:
Money brought in through the foreign currency accounts have found legal protection under laws passed in 1992, and tested in the courts in 1996.
- Periodic amnesties
- No questions on foreign currency bonds
- Agriculture income tax
Property transactions in cash where the value of the land is massively understated
Shaping Economy: Suggestions
Following are some suggestions for improving economy of Pakistan:
- Undertake major tax reforms starting with budget 2011-2012.
- Introduction of RGST
- Withdrawing all exemptions on goods
- Eliminating all distortions that have crept into the current system
- Wealth tax must be introduced
- Effort made to curb all tax evasion
- Provincial tax on services will be broadened.
- Provinces should develop there tax systems to generate more resources
- Taking advantages from some provisions in 7TH national finance commission award
- Improving working of large lossmaking enterprises
- Eliminating the problem of circular debt
- Constraining the supply of electric power from existing capacity
- Careful review of public sector development programme
- Placing emphasis on completion of high priority projects
- The SBP should have autonomy to orders its policies with the objective of containing inflation and not meeting the fiscal deficits of the federal government.
- The SBP should backoff from the printing press and let the government finance its operations by increasing tax revenues and by going to market to raise additional money
- The SBP should also let the market determine the exchange ratio.
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