ECONOMY OF PAKISTAN AND CHALLENGES FACED BY PAKISTAN

ECONOMY OF PAKISTAN AND CHALLENGES FACED BY PAKISTAN 

It is indeed great honour and pleasure for me to be spending this
morning with you. I am quite cognizant of the fact that this is one of the finest institution
Pakistan has and I always keep saying that if we had institutions like C & SC replicated in our
civilian life, the country would be much better off, therefore, I commend you and I am sure that
all of you would be rising stars of Pakistan Armed Forces and would make a contribution which
is badly required for the uplift of the country. Gentlemen! I am going to talk about a subject
which practically affects every single sector of life, which is economy. It underpins every walk
of life and there is great deal of interaction between health of economy and the defence forces.



1. We Consume More and Save Less.
2.  We Import More and Export Less.
3. Government Spends More than it Earns as Revenues.
4.  Our Share in the World Trade is Shrinking.
5. We Badly Lag in Social Indicators..
6. We Face Energy and Water Shortages.
7.  Cost of  Doing Business is High.
8. Crisis of Governance and Implementation.
9. Uncertainty and Unpredictability due to Lack of Continuity.
10 Political Stability, Law and Order/Security


1.  We Consume More and Save Less. Out of every hundred rupees of our
national income, we consume 85 rupees and save only 15 rupees, which means
that the amount of money which is available to invest for economic growth and
advancement is too little. Because to grow by 6%, you need at least 24-25%
investment rate - and if you want to rely on domestic savings, your saving rate
should be 25%. India’s saving rate was about the same, but last year they
recorded 34% saving rates. China’s saving rate is 50%, so this is the contrast as
to why we are in serious difficulty because as a nation this is a problem which we
have to recognize. We have to at least double on savings rate otherwise we will
remain dependent on foreign sources.
2.  We Import More and Export Less. Till 2007-2008, 80% of our imports were
financed by our export earnings. This ratio has come down to only 50%, it may
go up to 60% but a gap of 40% of financing needs in order to keep with the
import level still exists. As a nation we prefer to use even the basic commodities
of foreign countries rather than locally manufactured goods. Unless we do not
change this attitude of preferring the imported goods we have to keep on relying
on outsiders to fill in this gap b/w our imports and exports.  Relying on outsiders’
means that there are cycles, ups, and downs i.e. when things are good, one gets
financing, and when things  are bad one starves for financing. No nation which
strives to preserve its honour must go through this particular route. The lower is
this gap between our export earnings and expenditure on imports - and that can
be achieved only by expending our exports; our reliance on external sources
would be reduced.
3.  Government Spends More than it Earns as Revenues.   Fiscal deficit is the
difference between the revenues which are collected  in a year and the total
expenditure incurred by the Government. Pakistan’s government takes away
20% of national income as its own. 80% is left in the private sector and 20% in
the hands of the government is spent on defence, debt servicing, development
on education, health, general administration etc. The revenue generated is only
15% of the GDP at best, and in the worst days it is 12 to 13%. Out of the every
rupee of income received by a Pakistani, on average, tax paid is only 9 paisas
and 91 paisas remain with the individual.  In 2007-2008, Pakistan’s fiscal deficit
was more than 7% which means its income or revenues were only 13% of GDP
whereas, expenditures were 20%. Therefore, fiscal deficits have to be financed
from somewhere, so how do you finance them; you either go again begging the
external donors, or to the State bank of Pakistan. The financing provided by the
State bank of Pakistan is  dangerous because it creates  high inflation in the
economy, which is injurious to the middle class, those earning fixed wages and
salaries, and the poor. Therefore, there is an uproar in the country if the inflation
rate goes up. In 1999, our Debt to GDP ratio was 100%, which means that the
entire national income was pledged as debt. Every single penny was pledged to
the creditors. This ratio was reduced gradually over next six to seven years and
brought down to 50%, an average for all the economies. However, the way the
things are going for the last two years, it has moved from 50% in last two yrs to
58%, and with all the borrowings it may go to 60%, while the Fiscal Responsibility
Law 2005 says, that the government should not exceed the debt GDP ratio more
than 60% and is required to  reduce it by 2.5%;  and that is not happening. The
reason the fiscal deficit is widening is low revenue collection. How can you
expect that only nine paisas out of every rupee of income generated by Pakistani
population suffices to meet the requirements of defence, infrastructure,
development, debt servicing etc. This is just not possible. In India, tax GDP ratio
is 15% and still they have fiscal deficit. So Pakistan is way below the norm for
developing countries. Many people say that defence takes away a lot of
government expenditure. Whereas, the fact is that defence expenditure is only
20% of government expenditure. It is only 4% of GDP, and is not such a large
expenditure as compared to debt servicing which is 7-8% of GDP and almost
40% of government expenditure. Therefore, government has to contain its fiscal
deficit by raising revenues. Agriculture incomes are exempt, professionals,
retailers, wholesales, transport owners and many other service providers evade
taxes by paying a small fraction of what is due. Continuing large fiscal deficits
year after year may plunge the country into debt trap again.      
4.  Our Share in the World Trade is Shrinking.  In 1990, Pakistan’s share was
0.2% of the world trade. After 20 years  it has come down to 0.12% in a very
buoyant world economy. World trade has been  growing faster as compared to
the world output. India in the same period had doubled its share from 0.7% to
1.4%, while Pakistan is going the other way and that is the reason why
exports/imports imbalance is increasing. We are not taking advantage of the
opportunities which a buoyant world economy is providing. Pakistan is stuck with
only a few commodities – textiles, leather, rice, sports, goods and the surgical
goods. We have not entered the markets for more dynamic products. All our
exports are to a few markets – the USA, EU and the Middle East. So this narrow
export base and very limited geographical spread are not allowing us to expand
our share. Unless we improve the quality of our products, go out and do the
marketing abroad, invest in research and development, the prospects do not look
promising. That is why we are lagging behind other countries which from way
back are over taking Pakistan.
5.  We Badly Lag in Social Indicators. One of the most glaring weaknesses is
that a country like Pakistan that should have had best indicators in literacy, infant
mortality, fertility rates, in access to water supply, in primary enrolment ratios has
social indicators which are more comparable to Africa rather than to the countries
of similar per capita income. Even Tajikistan, which is a very poor country, has
better literacy rate and primary enrolment  ratios than Pakistan. What does it
means? It means that if we  had literacy rate of 100% instead of 55%, then in
2009-2010 our per capita income would have been 2000$ rather than 1000$.
Instead of 30 million middle class in Pakistan we would have 60-70 million middle
class people; we would have poverty reduced to 15-20%. We have committed to
achieve the millennium development goals by 2015 i.e. we will be able to reach
80-85% literacy rate, but it is doubtful  that this will happen. Why do we have
regional inequalities?  Why Baluchistan is lagging behind other provinces? It is
because of literacy rates and primary enrolment ratios. There is a direct corelation between regional inequities  and backwardness with the level of
education.
6.  We Face Energy and Water Shortages. Another challenge we face today
is energy and water shortages, and that is not because we are not generating
enough electricity or we are not having enough water. With the losses of KESC
from the point it has generated to the point they realize the billing is 45%, so 55%
people are paying for those who are stealing the electricity. Government of
Pakistan out of its own limited resources is paying 200 billion rupees every year
as subsidies for electricity. Our industry is at a disadvantage that they get the
orders from foreign countries but they cannot execute the orders because there
are electricity outages. In addition to economic losses it also creates
inconvenience for pursuing normal life.  We have silting of our dams, but no
additional dams have been constructed since Tarbela in 1974. We have water
course losses of about 20-25%. Even after these losses, the water is inequitably
distributed. The influential land lords are able to take greater share of water from
the canals as compared to poor farmers.  Therefore, the productivity of poor
farmer is only one ton per acre as compared to 3 tons by large holders. If we
provide the water equitably to the small farmer, he would also be able to increase
the productivity from one to at least two  tons resulting into additional income,
increase in exports of food grains, cotton and fruits and vegetables which will add
to export earnings of Pakistan. With the climate change taking place with all the
glaciers in Himalayas which are going to melt, we are going to have difficulties in
future due to global warming.
7.  Cost of  Doing Business is High.     Pakistan is ranked among the bottom half
of the rankings of the countries where cost of doing business is quite high. It is
not high for any particular reason but because of our bureaucracy totally sitting
on their seats without taking actions or decisions in time. Unless there is some
pressure or incentive for them, the normal businesses particularly the small and
medium businesses have serious problems at the hands of bureaucracy. Even if
we have investors who are welcomed by the federal government, when it comes
down to provincial and local governments there are given a run around – the land
is not available, the water is not available, the gas is not available, electricity is
not available, road is not available. Lack of coordination among various
government agencies, innumerable laws and regulations that are antiquated and
outdated have proved to be serious impediments. Labour laws, inspections by
multiple agencies, the delays in the court system, infringement of intellectual
property rights and evasion of taxes by competing firms in the informal sector
have rendered some of the well established firms unprofitable, or the feasibility of
starting near ventures questionable.
8.  Crisis of Governance and Implementation Weaknesses. If we glance on
policy documents of various governments on education, agriculture, health, trade
policy etc, and look at the same policy forty years ago and the problems, there is
hardly any significant record of implementation of those policies or plans over this
period. We produce five years plans and all kinds of medium term frameworks,
but it is the poor governance and implementation that are the weak links in
getting things done. Unless we strengthen civil services and bring about a merit
based system of recruitment, promotion, performance evaluation, compensation,
disciplinary action, etc, we will not be able to see any difference in the quality of
governance. Orders are given  by the higher ups but they are not carried out;
summaries are approved, but they remain buried in the files and therefore;
whether it is education, health, water supply, revenue or law and order, you can
pin down the problem to the governance issues. Unless we fix the governance
issue, the economy is not going to take off at the speed which is required.
9.  Uncertainty and Unpredictability due to Lack of Continuity.  Every
government whether military or civilian starts with a clean slate, as if nothing
happened before them and nothing will happen after them. This is not the way
the real world works. You take the projects and programmes which were initiated
by the previous governments, evaluate  them as to what the strengths and
weaknesses were, fix those weaknesses and carry them forward. It will take only
few years to bring these inherited projects to completion and the country will
benefit from new motor ways, new ports, highways, educational institutions etc.
But the blame game of successive governments results into abrupt termination of
all such projects and programs. When these are resumed the cost has escalated
three times and it takes several additional years to complete them. In the
meanwhile the people of Pakistan suffer because of this lack of continuity. When
faced with such unpredictability about the  future, the investors are pondering
whether they should invest in this country as they are uncertain whether the new
government when comes in would stop or  alter what the previous government
was doing, or adhere to the commitments made to them. Take the example of
Higher Education Commission, which  was sending 1700 students for PhDs
abroad but the new government comes in and suspends the funding of those
programmes. This solved down the process of faculty development for our
universities at a time when we should have been sending twice as many
scholars.  
10.  Political Stability, Law and Order/Security. The overall arching theme is that
for a robust economy we should have  political stability, law and order and
security. The Armed Forces of Pakistan  deserve gratitude for what they have
done in Malakand Division to bring about stability as far as the law and order
situation is concerned. The sooner the country is gotten rid of this image of
political instability, poor law and order situation and insecurity, whereby investors
from all over the world hesitate in coming to Pakistan and invest, we will not be
able to make any progress in this country. In 2007, Pakistan was one of the most
favourite countries among the international investor community. A thirty year
piece of paper was floated which was a bond for Pakistan to be paid in 2037 and
Pakistan got four times over subscription at a price which was only 300 basis
points above the US treasury. Very few countries can claim to have that kind of
credibility with international fund managers. However, in two years time we have
missed that boat. Therefore, it is imperative that we resume the journey which
has been interrupted by nurturing a stable, secure and peaceful political
environment.