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Comment: Higher GDP growth, tax collection key to poverty alleviation

By Javad M Goraya
December 30, 2018

Prime Minister Imran Khan seems upbeat about Pakistan’s economic turnaround with packages from Saudi Arabia, the UAE and China but more so from the untapped investment and human resource potential of the country.

He expressed these sentiments in a background session with senior economy centric journalists at the PM Office also attended by Finance Minister Asad Umar, Commerce and Industries Minister Razzak Dawood and Information Minister Fawad Chaudhry.

The prime minister shared that his government was working towards an IMF package which did not increase hardship of the downtrodden. To a question about impact of 12 IMF packages on Pakistan since 1980 and that it may slow down growth, the prime minister referred the question to Finance Minister Asad Umar.

The journalist shared data that over a 40-year period (1970-2010), Singapore grew on average 10% and Malaysia 7% without any IMF package due to low interest rates and taxes and focus on manufacturing, services and FDI.

Asad Umar replied that the recent market happenings were not linked to IMF package and under a ballooning current account deficit, the government’s first priority is to arrange due payments and ultimate focus will be on growth. The World Bank estimates that Pakistan must grow at 8% annually to overcome its economic challenges in face of annual 2.3% population growth whereas current year GDP growth forecast is less than 4%.

Prime Minister Imran Khan stated that fiscal balance and higher growth is imperative to get rid of the debt trap previous governments led Pakistan into. Premier Imran Khan talked about his desire to alleviate poverty and shared that a major Poverty Alleviation program is on the anvil. However, till adequate resources are available, such a program may not achieve its targets nor prime minister’s desire to get out of debt trap. It’s globally proven that income inequality and poverty can be controlled under a just and effective taxation system and a high growth model.

This is where the challenge lies. Pakistan faces a severe resource crisis to meet its fiscal and social obligations. Successive governments have failed to increase the tax to GDP ratio which is at an embarrassing 11% at present. Many African countries tax to GDP ratio is now above 20%, Mozambique being one which improved from 10% in mid 90s to this level. OECD countries tax to GDP ratio was 34% last year and in Americas, this is around 30%. Pakistan has never crossed 14% tax to GDP ratio in last 50 years.

It was reassuring to learn from Asad Umar that the upcoming mini budget is geared towards increasing investments and growth and he will announce a three-year roadmap to revive economy. Asad assured that he had enough cushion to settle an IMF package that does not include any retarding impact on economy.

Asad Umar said he will commit to a higher tax to GDP ratio under the 3 year Economic Revival Plan he plans to announce shortly. Pakistan has around 47 federal level taxes compared to India’s 13 and there are as many provincial taxes in Pakistan as well. Instead of nabbing the evaders, the FBR is more inclined to collecting taxes upfront through nearly 68 withholding taxes.

The corporate and personal income tax rates need rationalization and let’s hope the 3-year economic revival package by finance minister attends to these points. Pakistan’s investment to GDP ratio at 15% is one of the lowest in region and as per World Bank it should be at least 25%.

Prime Minister Imran Khan talked about the tremendous human resource and investment potential in Pakistan and the response he is receiving from within Pakistan and abroad. To harness this potential, again the federal government needs to commit to at least meeting the global average of 5% spending on Education out of its GDP. Pakistan unfortunately has never crossed 3% spend out of its GDP on education in last 50 years. Malaysia has been spending 7-8% of its GDP on education and so do majority of developing and developed countries.

Another segment which finance minister may include in his economic revival package is more job opportunities for women. Pakistani women’s contribution to workforce is only 22% against global average of 40% and a huge number is not contributing to national economy. Asad Umar focus on self-reliant and self-generating business plans by PIA, steel mills and power companies to get government funds is welcome and it’s one of govt’s biggest challenges to revive these entities.

Commerce and Industries Minister Razzak Dawood talked about the upcoming Industrial Policy that will stimulate growth and rationalize tariffs. He added that there is a strong response to government export package and momentum is picking up. Mr Razzak said that the new industrial policy will be pro exports and will lead to import substitution. The government is up against weakness of rupee, higher interest rates, a status quo tax machinery and low collection, low saving and investment ratios, higher utility rates which are all challenges to GDP growth.

The prime minister’s focus on economy is very welcome, however, his finance team will have to share a roadmap to bring down all the above inputs which are crucial to any business and national economy and all eyes are now on the finance minister’s upcoming three-year economic revival plan.