Economy battered by multiple setbacks

LAHORE – Pakistan’s economy remained under tremendous pressure in 2010, as the crippling energy shortage, liquidity crunch, multiplying bad loans, low growth rate, high budget deficit and massive summer floods took a toll on the macroeconomic health of the country.
The reformed General Sales Tax (GST) remained a hot and divisive issue throughout the year as political parties, instead of evaluating its advantages and disadvantages, politicised and polarised the debate. The GST bill remains unimplemented at the end of the year and has lingered on.
The State Bank of Pakistan (SBP) increased the discount rate by 150 points thus making the environment tougher for business operations. The government kept up its practice of borrowing from the banks although private sector access to liquidity remained extremely limited.
The industrial and banking sector faced severe problems while the budget deficit, balance of payments imbalance, tax to GDP ratio, growth rate and other major factors of the economy all posted negative results.
Economists and industrialists insisted that the government had not undertaken adequate measures to revive the economy.
Their prognosis for next year is also bleak; it is expected that Pakistan will again have to turn to the International Monetary Fund (IMF) for assistance. They complained that tax evaders remained unpunished resulting in even in greater income disparity. They claimed that unequal wealth distribution amongst the various social classes was wreaking havoc in the economy.
Renowned economist Shahid Hasan Siddiqi offered his opinion that Pakistan had been poorly ruled under the leadership of the current government. He claimed that the loss to economy sustained in the war on terror stood at $23 billion during 2001 to 2008; a figure which had nearly doubled in only 33 months of current government.
“In the last 33 months, losses attributable to the war on terror touched $62 billion,” he said, adding Pakistan is incurring a loss of at least Rs 1.35 trillion annually due to this war.
At the same time, tax revenues are only Rs 1.327 trillion, a figure completely overshadowed by the massive losses, he noted. He went on to say that the growth rate of the country remained the lowest in Pakistani history.
“The growth rate remained less than 2.8 percent, while the inflation touched 15.5 percent,” Siddiqi said. He also pointed out that it had become impossible for the poor to resist the inflationary tide.
He asserted that the government had fixed the budget deficit at four percent but had been compelled to revise it upwards to 4.7 percent. “Not a single positive indicator was exhibited,” he added. Siddiqi said the government could not even pay instalment of IMF’s loan and would have to take further loans for repaying previous debts.
He said the confidence of foreign investors had been badly shaken by the misguided policies of the government and they have been put off from investing Pakistan. “Foreign Direct Investment (FDI) was $1.5 billion during the year, in comparison, it was $5.4 billion in 2008,” he elaborated. He said the tax revenue targets were unlikely to be fulfilled.
Standard Chartered Bank analyst Sayem Ali while discussing the year for the banking sector also expressed disappointment, focusing in particular on the increase in discount rates.
He informed that the SBP increased the discount rate in July, September and November to tackle inflation. He opined that it had no effect on inflation which still hovered at a dangerous level.
Ali expressed concern in particular on the liquidity crunch alongside decelerating deposit and asset growth. He said due to the high number of Non-Performing Loans (NPLs); banks were extremely cautious in lending money. He said Pakistan was ranked at the top of 10 countries, where NPLs are touching dangerous level, now having crossed Rs 500 billion, 14 percent of banks’ assets, he disclosed. Ali was also critical of government borrowing indicating there is not enough liquidity for the private sector because of state policies.
“The confidence of businessmen was hurt by policies,” he said adding besides foreign investors’ confidence; the domestic investor is least interested in investing in local market.
Lahore Chamber of Commerce and Industry (LCCI) President Shahzad Ali Malik and SVP Sheikh Muhammad Arshad expressed alarm over the government’s inability to constrain gas and electricity cuts. They were also disturbed by the GST bill. “We are not against imposition of taxes but the government should do adopt it through the correct manner,’ they added.