Pakistan economy collapsing

ISLAMABAD - Pakistan is not only wrestling with a problem of law and order, but struggling to get its collapsing economy back on rails.

The country’s commercial capital, Karachi, which accounts for nearly 45 percent of Pakistan’s Gross Domestic Product (GDP) (180 million dollars per day) and tax related revenue of a billion rupees per day, is facing a host of systemic problems.

Poor financial and economic management has been compounded by flood-related devastation. This has adversely affected the country’s agricultural growth, and damaged its infrastructure (which is already groaning under years of mismanagement).

Given this abysmal scenario, it is extremely doubtful that the Pakistan economy will improve on its 2010-11 growth rate of two percent in fiscal 2011-12.

With the growth rate expected to be low, rampant inflation is likely to prevent the income of the common man from increasing.

A report on Pakistan suggests that 40 percent of Pakistan’s 175-million-strong population (approximately 70 million) will continue to live in absolute poverty.

According to the report, the International Monetary Fund (IMF) recommended Reforms General Sales Tax (RGST) of 15 percent would only increase inflationary pressure and prices. Tax levies such as the Flood Relief Surcharge and the increased Special Excise Duty on imports and domestic produce will add to the inflationary pressure.

It is being predicted that the Government of Pakistan will have to resort to taking bank loans to reduce the gap between revenue and expenditure.

Another issue that cannot be ignored is the fact that an already distressed Pakistan economy is caught in the vicious cycle of having to borrow externally to pay off existing foreign debt.

In the first quarter of 2010-11, debt servicing amounted to 1.169 million US dollars as per State Bank of Pakistan figures. Since then, the size of debt servicing has increased by about 49 percent as compared to the same period last year.

In 2008, Pakistan’s foreign exchange reserves touched rock bottom because of the oil price increase. Consequently, the Government of Pakistan had to borrow 11.3 billion US dollars from the IMF, but with the usual stringent conditions.

The state of the Pakistan economy can be judged by the fact that high prices continue to erode foreign exchange reserves and the government’s inability to repay loans.

Pakistan had to pay 5.641 billion US dollars as debt servicing in fiscal 2009-10, which accounts for more than 33 percent of the country’s total foreign exchange reserves.

The total foreign debt and liabilities of Pakistan reached 58.512 billion US dollars, up from 47 billion US dollars two years ago.

Pakistan’s balance of trade shortfall was over 11.4 billion US dollars last year, despite receiving 8.9 billion US dollars as remittances from overseas Pakistanis.

According to the Washington-based Carnegie Endowment for Peace “Fewer than three million of Pakistan’s 175 million citizens pay any income taxes, and the country’s tax-to-GDP ratio is only nine percent.”

This is one of the lowest tax-to-GDP ratios in the world. In comparison, Sri Lankans pay 15 per cent of their GDP in taxes, Indians pay 17 per cent, Turks pay 24 per cent, Americans pay 28 per cent and Swedes pay as much as 50 per cent.”

The main reason for this low ratio is tax evasion by the country’s elite.

Federal officials, including ministers (even the Prime Minister, Yousuf Raza Gilani), only pay taxes on their government salaries and not on their personal assets.

This has provoked Washington to take a tough stance.

Secretary of State Clinton told the US Global Leadership Coalition Conference in London, that, “Countries that will not tax their elites, but expect us to come in and help them serve their people are just not going to get the kind of help from us that they have been getting. Pakistan cannot have a tax rate of nine percent of [gross domestic product] when landowners and all of the other elites do not pay anything, or pay so little it’s laughable…”

Therein hangs the sorry tale of a downward spiraling economy of a country that has an upward spiraling graph of violence. (ANI)