Economy in deep peril, while Lilliputians at war


ISLAMABAD – At a time when the national economy is heading towards a breakdown, political parties are engrossed in petty politicking instead of sitting together to contain the looming crisis.
The fiscal deficit is estimated to increase to a record 7.5 percent of the GDP, or Rs 1.2 trillion, by the end of the current fiscal year, compared to the budgetary estimate of 4 percent of GDP or Rs 685 billion.
The International Monetary Fund has given the country another nine months in the $11.3 billion Standby Arrangement Programme, to implement the agreed reformed general sales tax (RGST), for which three deadlines have already elapsed.
No money from IMF means the country would not get the announced $1 billion assistance from the World Bank, $2 billion from the Asian Development Bank and $1.5 billion under the Kerry Lugar Bermen Law from the US. This may also jeopardise $1.5 billion assistance from Japan. The financial assistance from China and Saudi Arabia and other Gulf states alone would not be in a position to provide sustenance to Pakistan in the long run, an official source said.
The stoppage of assistance from development partners, which technically is under suspension since May this year, would put a stain on the exchange rate as well, as on the foreign exchange reserves, the source said, adding that the government would borrow from the central bank, as it did a record Rs 328 billion until mid-December.
Eminent economist Dr Hafeez Pasha warned that if immediate rectifying steps were not taken to bridge the fiscal deficit, the country would enter an era of hyper-inflation, with borrowing from the central bank reaching an all-time high of Rs 1.2 trillion.
State Bank of Pakistan Governor Shahid Kardar also attributed the government borrowing of Rs 1,600 billion during the last two financial years for the stubborn inflation in the country. The SBP amendment bill, which limits government’s borrowing to 10 percent of last fiscal year’s actual revenue proceeds, still awaits Senate’s approval before it becomes binding on the government.
An international expert on value-added tax, Dr Ehtisham Ahmed, said Pakistan was trying a unique mode, by being the only country in the world to attempt implementing the general sales tax (GST) on goods at the federal level and GST on services at the provincial level, without having the administrative machinery to do so.
He warned that if GST did not succeed, the entire devolution process would run into trouble, as would the implementation of the current NFC Award.
This would seriously risk the implosion of the existing inter-governmental fiscal system.
Economists have observed that the grave situation needs immediate attention of political parties to sort out a national strategy for macroeconomic stabilisation and put checks on the government.
Their advice was similar to the one from international development partners – as stated by US Secretary of State Hilary Clinton and British Secretary of State for International Development Andrew Mitchell – that Pakistan should generate additional resources to meet its needs as their taxpayers money could not be provided at a time of an extreme financial crisis in the West.
The IMF mission chief in Pakistan, Paul Ross, also categorically asked the government to introduce equitable tax system in the country, where everybody paid taxes to overcome the chronic low tax to GDP ratio.
The delay in the implementation of GST could be catastrophic for the country.
The borrowing from the central bank would increase inflation, decrease investment and diminish away future revenue generation possibilities.
The severe power shortages have already halted industrial activity. The growth of non-performing loans, mainly from small and medium enterprises, during the first two quarters of the current financial year have grown by 7.4 percent, reaching Rs 494 billion in the bank’s lending portfolio.
Productivity has declined with the decline in electricity supply, and so has the profitability. The budgetary revenue target for FBR is projected at Rs 1,667 billion, but was revised downwards to Rs 1,605 billion, which tax authorities now demand to be further lowered by Rs 80 billion.