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Economic blasphemy

VCheng

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from: Pakistan's troubled finances: Economic blasphemy | The Economist

Economic blasphemy
In saving itself, Pakistan’s government has jeopardised the economy
Pakistan's troubled finances


Jan 13th 2011 | from PRINT EDITION

ON JANUARY 3rd Pakistan’s central bank began printing rupee notes carrying the signature of Shahid Kardar, who was appointed governor of the State Bank of Pakistan in September. Unfortunately inflation has robbed money of over 15% of its value in the past year, and no let-up is in sight for the new notes. It is the most visible sign of an economy slouching towards another financial crisis.

At the start of the year the government raised petrol prices, prompting the Muttahida Qaumi Movement (MQM) to quit the coalition government led by the Pakistan People’s Party (PPP). It left the PPP “with a choice between saving the government and saving the economy,” as Maleeha Lodhi, Pakistan’s former ambassador to the United States and Britain, put it in the News, a Pakistani daily.

On January 6th the PPP made its choice, reversing the price rise. The decision has rescued the government but also robbed the exchequer of 5 billion rupees ($58m) a month. By the end of the fiscal year in June, the government’s deficit could reach 6.5% of GDP, according to Sayem Ali of Standard Chartered bank, or even 8% if oil prices continue to rise, according to Mohsin Khan of the Peterson Institute, in Washington, DC.

Pakistan’s budget has a lot to bear. The World Bank reckons that recovering from the summer’s devastating floods, which damaged over 1.6m homes, will cost up to $10.8 billion. To date, aid has been modest. Donors have pledged just $2.1 billion, or $11 per person, compared with $363 per person promised to Haiti after its earthquake —a slightly unfair comparison perhaps.

Yet Pakistan’s fiscal troubles are antediluvian. It is one of the most lightly taxed countries in the world. Fewer than a quarter of the country’s firms declare any taxable revenues, and only 11 out of every 1,000 of its citizens pay tax on their incomes, according to the World Bank. As a result, tax revenues amount to a mere 10% of Pakistan’s GDP.

The government had hoped to raise that ratio by broadening its sales tax, which is riddled with exemptions. Yet it lacked the heart to defy lobbies which slip through the threadbare tax net. They include exporters who escape tax on their domestic sales, as well as retailers and wholesalers who elude tax altogether. The proposed reforms also proved unpopular with the broader public, who resent paying anything to a government that gives them so little in return.

The government’s failure has jeopardised its agreement with the IMF, which is withholding the remaining $3.5 billion of the bail-out funds it offered back in 2008. At that time, the rupee was tumbling and Pakistan’s foreign-exchange reserves barely covered three weeks’ worth of imports. If the country is not yet in similar trouble, it can thank Pakistani folk abroad, whose remittances surged by 16.8% in the second half of 2010, compared with a year earlier (see chart). This is one reason why the rupee has not sunk further, and why the central bank’s reserves still cover six months’ worth of imports.

Yet foreign investment has slowed to a trickle, and higher commodity prices will add to the country’s import bill. Meanwhile, Pakistan’s foreign debt must be serviced. The finance minister is in a pickle. If Pakistanis lose heart, too, they may quit the currency, scrambling for dollars instead. Should that happen, Pakistan’s reserves will quickly vanish. And here is the big difference between 2008 and today: Pakistan has already had its IMF rescue.

from PRINT EDITION | Asia
 
there is one way to Pakistan recovery..promote tolerance, peace, shut down all the political trolls and politico-religious parties..create economic zones..and invite foreign investment, open sovereign investment funds where governments and high net-work establishments will be invited to contribute for profit. The problem i can explain from my real life experience is that remitting money to Pakistan is not helping me with anything. There simply aren't any investment opportunities other than real estate of mega enterprises..both of which require money an average working class can never save through out his life. Couple that with generally disturbed and lawless situation now a day and you have an absolute recipe of failure. Gone are the cold war days and "war against infidels" where arabis gave us blank cheques to foot our bills..we have to stand up on our own. Almost every manufacturing effort in Pakistan is curtailed by a higher up politician, bureaucrat, sardar etc etc who is importing the same in bulk from abroad and risk losing his business to local manufacturing.
 
there is one way to Pakistan recovery..promote tolerance, peace, shut down all the political trolls and politico-religious parties..create economic zones..and invite foreign investment, open sovereign investment funds where governments and high net-work establishments will be invited to contribute for profit. ............

What you say is a tall order, given that the who and how of these steps is next to impossible given the present setup.
 

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