Pakistan’s economy is captive to a structure of inefficient practices that brings all our earnest efforts at economic revival to a naught, despite repeated efforts to improve. The country has a skewed structure of political economy, geared to serve needs of the rich with annual cost of concessions running into a whopping 17.4 billion dollars. In simple terms, we do not earn more than we spend. We live in the moment, on doles and debt, without long-term structural reforms.
The recapitulation of a few figures may wake us up from the horror unfolding around us. For the first time in the country’s history, there was a zero release for the development figure in the last quarter of the financial year.
In year 2018, the development and defence budgets were almost co-equal at 1 trillion rupees each. Now we have only 550 billion rupees for the development budget in the current financial year. With tax revenues worth 9 trillion rupees, we apportion 4.1 trillion rupees to the provinces, leaving 4.5 trillion rupees only for the federal government, which spends 4 trillion rupees alone on debt servicing. With 550 billion rupees required to run the government and 1.2 trillion rupees required as advances to provinces and loss making entities, the defence and development both are dependent on loans. Perennial deficit means perennial loan dependence. To finance development budget of around 700-800 billion rupees and subsidies to the tune of 700 billion rupees, we have no recourse but to contract more loans.
Why are we not earning more and spending less? The reason lies in our lopsided growth model that saddles us with more imports than exports. We have not been able to develop an export led growth model like other competitive Asian economies, like Malaysia, Vietnam and Bangladesh. Therefore, we need to identify reasons of our low national income.
Before coming to income generation flaws let us have a look at our tax revenue state. Our tax to GDP ratio keeps hovering around 10 percent of GDP with the highest being 12.5 percent in 2018, whereas our tax to GDP expenditure ratio is 22 percent. The comparable ratio of other South Asian economies is 16-18 percent with the Indian figures at 18.7 percent, and Bangladesh at 15.38 percent.
With 550 billion rupees required to run the government and 1.2 trillion rupees required as advances to provinces and loss making entities, the defence and development both are dependent on loans.
Further, our country has a low direct tax to GDP ratio of 3.1 percent and a large indirect tax to GDP ratio of 5.7 percent which also needs correction. We have a narrow tax base with only 3.1 million income tax filers while according to tax researchers, like Dr Ikram ul Haq, this number should go up to 43 million.
Instead of overtaxing the existing tax payers we need to encourage more people to come in the tax net by simplifying tax assessment system, reduction of multiple tax slabs, lowering of tax rate and broadening the tax base. The burdensome and regressive sales tax of 17 percent needs to be replaced by a more tax-friendly and equitable tax rate of 7-8 percent. The lowering of the rate, and broadening of the base would bring more people in the tax net, increasing the revenues and promoting documentation of the economy. The tax bureaucracy needs to be people-friendly with simple filing procedures to encourage more taxpayers to join the tax system.
There is also a need to federalise the tax collection policy instead of over centralisation in post-18th amendment environment. To facilitate taxpayers, there should be one national tax court overseen by the Supreme Court, instead of multiple court jurisdictions.
Now coming over to our growth model, one could argue that we do not earn enough through exports to offset expenditures incurred through imports. We have more imports due to our consumption driven growth model which thrives on 96.2 percent consumption out of which 85 percent alone is household consumption. As a result, our growth figures are misleading. Whenever our growth exceeds five percent, our economy overheats, resulting in large current account deficit. To pay for more imports, we need foreign exchange in dollar denomination that is not forthcoming due to our poor industrial productivity and concomitant low value added exports.
What are those structural constraints that hamstring our economic potential? The first bottleneck is our poor investment to GDP ratio of 15 percent compared to 25 percent of our competitors. We are addicted to borrowing instead of investing. We need to net more foreign direct investment instead of borrowing. Compared to our paltry 1.5 billion dollar, the FDI figures for comparable countries like Vietnam and Myanmar are 30 billion dollars and 4-6 billion dollars respectively. Our weak dispute resolution system, complicated legal procedures, and over bureaucratised business rules are not business-friendly. The CPEC was a great opportunity but instead of capitalising on that our tardy planning discouraged Chinese investors. The real economic dividend of the CPEC was the establishment of nine Special Economic Zones but out of nine not a single one is fully operational, with five not started as yet. In this digital age, where investment moves at digital speed, this failure is unpardonable.
What is the reason for a country that had the highest per capita GDP in 1980s in South Asia to lag behind all other countries at present on the same score? It was our inconsistent economic policies begotten out of perennial political instability that did us in. Our failure to shift towards value-added exports due to poor industrial capacity is a consequence of a political economy tilted in favour of a rentier elite that thrives on concessions at the cost of people. Unless we change this structure of inequity through fundamental reforms we would remain chained to the stone like Prometheus. We need to wrest our economic policy planning from external actors and diversify our sources of borrowing.
A fundamental shift away from our geo-political fixation in favour of geo-economic dividends through consistent policies under a stable political environment is the key to unchaining our economic Prometheus.
We need to look towards Sovereign Wealth Funds, where countries like Qatar and Saudi Arabia have 356 billion dollars and 506 billion dollars parked, waiting to be invested. Instead of reaching for deposits, we need to convince the Gulf countries to invest in our oil and gas sector, in entities like OGDC and PSO. We need a paradigm shift in our investment attitude by developing business propositions based on economic value rather than leveraging our geo-political strengths for economic gains. We need to attract profitable investments in businesses and industries that yield exportable surpluses for us than multinational food chains that cater to our consumption needs alone.
Our present political and bureaucratic structures are simply incapable of promoting the desired exportable surpluses due to incapacity and lack of imagination. The business development institutions need to be freed from the bureaucratic stranglehold, and handed over to private sector that knows how to do business. Similarly, the Planning Commission needs to be served more by private sector and technocratic expertise and not generalist bureaucrats. In place of a plethora of bureaucratic regulatory bodies, we should have investment promotion bodies modeled on the Dubai Financial International Center, where investors are facilitated and international law of investment, like the British Common Law, applies. Countries on the upswing, like Qatar and Kazakhstan, have applied similar models to attract investment.
Another bottleneck to industrialisation is our banking system, which does not have long-term industrial finance capability. We should have commercial banks geared to long-term industrial development needs. On economic diplomacy front, we should start looking the East in place of the West. To attract investment and promote business, we need effective economic diplomacy. Our best and the brightest diplomats should be posted to these Asian destinations to achieve the desired results. We also need to understand that none of the above objectives could be achieved unless we invest in our human resource to equip it with skills of future, like artificial intelligence and robotics. We need to invest more in education and skill enhancement of our human resource pool to debottleneck our economy.
To sum up, we need to unchain our economy by promoting industrialisation, attracting investments, and resorting to export-led growth. We need to create an enabling environment and supportive institutions through reforms geared at de-bureaucratisation of the economy. A fundamental shift away from our geo-political fixation in favour of geo-economic dividends through consistent policies under a stable political environment is the key to unchaining our economic Prometheus.