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Pakistan’s economic problems — II

National

August 2, 2016

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There are at least three standards to judge the economic performance of a government and its budget. Most easy and simple is the standard that we should observe whether the fixed targets of the previous budget have been achieved or not and in which aspects government has not succeeded. If you consider with this point of view, you will know that government has 20 targets of this kind in the previous budget. The government has a claim that 9 out of 20 have been achieved. While in 11 targets, the government is unsuccessful, especially in agriculture, which has a contribution of 21% to national production and 45% to the labour force of the country.

The objectives set for exports and foreign investment could not be achieved. Although growth rate of the economy has increased, it lacks in achieving the aims. It means that the expected growth was 5.5% but only 4.7% has been achieved. The independent experts claim that real growth rate is much less than that, namely 3.1% equal to the growth rate of the previous year.

However, the efforts of the government in the fields of budget deficit, inflation and foreign resources have comparatively been fruitful. Even then, there are many questions that make the results doubtful. For example, circular debts of Rs300 billion have not been included in the budget deficit.

Similarly, the refunds of Rs2.5 billion of private sector in exports have been restricted in  spite of transparency. The most successful sector is the services sector. Banking, cars, automobile, cell-phone and relevant IT sectors are important in it. Increase in official expenditures, salaries and pensions are an important reason in the success of services sector. They become a source of progress in economy and increase in production in accounting terms. But practically, they do not affect the process and capacity of production.

The banking sector has progressed greatly. But 90pc of the loans have been taken by the federal government, provincial governments and government institutions, though investment through private sector is hardly 10pc. It is something dangerous. The profit of banks has increased immensely. We can note a huge addition in the salaries, bonus and other benefits of the bank officials. But common account-holders are deprived of their rights. As a result, the rich is becoming richer and the poor is becoming poorer.

Banks are earning interest by giving loans to the government. Common account-holders in banks are not receiving their shares according to the inflation rate. In fact, they have to bear the load in the reduction of their genuine wealth. What is the role of banks in giving favours to their favourites? You can have an idea if you go through a report, published by a local English-language newspaper on Feb 29, 2016.

The salary and other benefits of the president of the National Bank have been increased by 51pc in the year 2015, though the shares of the bank have lost their market value up to 22pc. The president of the bank received Rs71 million as his salary. It was nearly an addition of Rs20.2 million in the previous year’s (2014’s) salary.

Similarly, the president and CEO of the United Bank were paid more than Rs12 million. The president of Habib Bank has an increment of 41.3pc, as he received Rs7.5 million as his salary. It should be noted here that the bank has earned a profit of Rs35 billion, which is 14pc more than the previous year’s. The growth rate of the economy, according to the claims of the government, was 4.7pc. Same is the case of the president of MCB. He was given more than Rs80 million as his pay, 14.9pc more than the previous pay. The shares of the bank lost their market value up to 29pc.

The Allied Bank, which is the 5th largest bank of the country, is not different on this count. Its president got a salary of more than Rs40 million, 7pc more than the previous year’s. The government must be credited for everything that has been done positively for the growth of the economy. But at the same time the other side of the picture shouldn’t be ignored. So that the real condition of the economy can be presented before the nation and a strategy for improvement can be worked out.

If we consider the performance of this year in the perspective of the previous two years, we have to believe a little the claim of the finance minister that there is a minor progress towards the target fixed for the strong economy. However, the expenditures of the budget, especially the expenditures of administration, could not be controlled effectively. The non-development expenditures have increased in the budget as usual. We see a reduction in the development expenditures. The allocations of the development budget have been completed up to the level of 60% only.

Mostly the amount of the budget was spent on debts, payment of interest on debts and the return of debts. These loans are almost double of the defence budget of Pakistan, and a burden on economy. A tradition of taking a loan to pay some other loan has been established. Unluckily, a big share of all these loans has been used to balance the administrative expenditures, to pay the loans and interest on the loans. The use of these loans for development purposes has been rare. This method of taking loans is dangerous politically as well as economically. It can be a source to balance the budget deficit but have no role for the progress of the country. That’s why in modern economics, these loans are called odious loans. Regrettably, we have changed the development loans into unpleasant and disagreeable loans. These loans have no positive effects. But the negative effects are increasing day by day. The country is being led to point of no return. We are insisting on the usage of the poison and regarding it a medicine.

The finance minister has guaranteed that SROs and exemption from tax will be abolished. But after the completion of three years apparently some restrictions have been imposed only and in spite of that exemptions are continued. Rs394.5 billion has been wasted in this connection previous year. Agriculture has left for destruction under the heavy load of taxes. But at the same time automobile has been given a waiver of Rs22.5 billion.

New circular debts are high like a mountain and their exact figure is still unknown. But according to different announcements they are nearly Rs250 billion to Rs300 billion. This figure still remains after the payment of Rs500 billion, which Nawaz government paid shortly after coming into power without any rules and regulations in order to give us a relief from loadshedding. Although it does not affect the production of electricity and loadshedding, the objective of tax collection in the budget has been achieved approximately. It is admirable, but the question remains what is the price of it.

The aim was to bring those into tax net who do not pay the tax. It did not happen. The amount that is being collected through revenue is only a half of the amount that should be collected by the implementation of these laws. According to trustable sources including World Bank, 80pc of collection is being wasted because of tax stealing annually. It is nearly Rs3000 billion.

There are four million people and institutions in the country that should be in the tax net directly. Practically, the people and the institutions that are paying tax are no more than one million, almost one fourth of the required number. Nine tax amnesty schemes have been executed to bring these people and institutions to tax net but all in vain. The FBR has totally failed in offering its responsibility. No effective effort could be made to improve its review and performance. Everything depends on new taxes, addition in taxes and on changing the direct taxes into indirect taxes through withholding taxes. It is wrong according to the rules and causing social injustice in the country. This mistake is being revised again and again and is regarded a magic wand through which the target of tax collection can be fulfilled. You can illustrate it in this way that revenue generation without tax reforms. Tax base is only 8.5pc to 9pc of the national wealth. Although it had been 13pc to 14pc of the national wealth 20 years ago, the incumbent government claimed that it will rise up to 12pc to 14pc within three or five years. But claims remained claims as usual.

A reason for failure in tax generation is that the government has not paid the refund of importers which was its responsibility. Though it repeated its promises. In this way, almost Rs250 billion, which is not the right of the government. In this sense the budget lacks transparency.

 

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