PTI’s poor understanding of macroeconomic indicators

LAHORE: Most of the economic ills faced by the country have been inherited by the current regime from the past 70 years of bad governance, but it is also a fact the current rulers have intensified the ills instead of addressing them.

This regime has neglected the importance of macroeconomic indicators that are the basis on which the world analyses an economy. Tax to GDP ratio is important because it tells the foreign and local investors about the resource generation capacity of an economy.

Currency, stability is very vital for foreign investors because they repatriate their profits in US dollars. If the rupee goes down, then they will be sending back fewer dollars for the same amount of profit earned in rupee. They are hesitant to invest in a country with a volatile currency. Rapid and frequent increase in interest rates affects the viability of many projects that were planned on much lower interest rates and inflation. This is the reason that governments the world over make all efforts to stabilise macroeconomic indicators.

The present government desires to increase the revenues by enlarging the tax base of the country, yet it could not muster the courage to tax all incomes equally. In fact, the only fully compliant taxpayers in the country are the salaried class, because their tax is deducted from their monthly salaries by the employers at source.

The manufacturing sector conceals production to steal taxes. The traders do not keep books and majority of them pay no taxes. The few that somehow have fallen in the tax net pay nominal taxes, which, in most cases is less than the tax paid by the salaried class having very low living standards than the traders. The importers cheat the exchequer through under-invoicing, diluting the import duty and other government levies by 100-300 percent.

The agriculturists do not pay any tax at all. The majority of farmers live more comfortably than the high salaried employees.

Majority of the luxury cars plying on roads in the country are owned by members of the farming community. They accumulate wealth without paying any taxes and the sector has become a haven for parking black money.

All the leading industrialists in the country now also own agricultural land that facilitates them in accumulating assets without payment of taxes.

This government has allowed inflation to creep up that is putting additional pressure on rupee. The rule of thumb is that the difference between the inflation levels between two countries is the level of devaluation the country with higher inflation would suffer.

Pakistan’s rupee was devalued against all major currencies and India on this basis. Other factors that determine the strength or weakness of a currency include its GDP growth forecast for a fiscal year by the government and any subsequent downward or upward revision in the growth rate.

The GDP growth rate has gone down appreciably during last five months of PTI rule. GDP is considered the broadest measure of a country’s economy, and it represents the total market value of all goods and services produced in a country during a fiscal year.

Speculators also become active when there is economic uncertainty which is very much there. The government is forced to defend the rupee not only against economic fundamentals, but also against speculators.

Growth is crucial for job creation and that comes with new industrial investments. Investments are made by entrepreneurs after determining the rate of return on that investment in the long run. The interest rates are very important in this regard. The interest rates have increased three times in this government’s five months tenure, making new investments expensive.

Going forward, the businesses see further increase in interest rates. This is the reason that bank borrowing by the private sector has declined sharply in recent months.

It is understandable too, since credits with unbearable mark-up create problems for firms, as they cannot finance production and thus start cutting costs. This exacerbates the fall in demand due to uncertainty and depression in the economy.

The economy eventually goes in to deflation after hyper inflation and high mark-up. It puts pressure on other producers and a fierce price competition starts, but some of them cannot generate enough revenue to repay their liabilities and go bankrupt. This causes deterioration of the balance sheets of the bank, which then becomes overcautious in sanctioning new credits.