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Archive for category Economic Hitmen

Pakistan’s external debt likely to swell to $110b in four years By Shahbaz Rana

 

Image result for Pakistan's Debt Bomb

Pakistan’s external debt likely to swell to $110b in four years

By Shahbaz Rana

Published: November 13, 2016
 
ISLAMABAD: Pakistan’s external debt is projected to grow to a whopping $110 billion within four years and it will need over $22 billion a year just to meet external payment requirements, posing a serious threat to the country’s solvency.

By that time, Pakistan will again be back to the International Monetary Fund (IMF) to avoid default on international payments as it did in 2013, according to independent projections revealed at the National Debt Conference on Saturday.

Circular debt in power sector: Govt could not repay bank loans of Rs136.5b

Two renowned economists, former finance minister Dr Hafiz Pasha and former director general debt Dr Ashfaque Hasan Khan, have made the external debt projections. The $110-billion external debt level by 2019-20 will be $24 billion higher than projections made by the IMF in its latest report on Pakistan.

Khan shared his assessment at the debt conference, arranged by the Policy Research Institute of Market Economy (PRIME) – an independent think tank.

The duo updated their previous external debt forecast for fiscal year 2018-19 from $90 billion to $98 billion after the government borrowed heavily in the past one year.

At present, the external debt stands at $73 billion, which has been projected to swell 50% to $110 billion in just four years.

They did not see a major change in Pakistan’s export situation and anticipated that by 2019-20, the exports would stand roughly at $25 billion, a level that the country crossed in the last year of previous government of Pakistan Peoples Party (PPP).

Owing to slowdown in exports, Pakistan’s external debt to export ratio has been projected at 441.8% by 2019-20, which is highly unsustainable. By that year, the country will consume 40% of its export earnings to service the external debt.

“Pakistan is fast slipping into the debt trap and neither the government nor parliament is playing its due role,” remarked Asad Umar, MNA of Pakistan Tehreek-e-Insaf while speaking at the conference.

Khan said by 2019-20 amortisation payments would increase to $10 billion. To fill the current account gap, the country will require another $12.5 billion a year, increasing the total external payment requirement to $22.5 billion. The current account deficit will mainly widen due to imports of machinery and plants for projects being developed under the China-Pakistan Economic Corridor (CPEC).

Against IMF’s projection of $16.7 billion, Khan said total external financing needs to bridge the current account deficit and repay loans would stand at $22.5 billion by 2019-20.

After exhausting all available resources including CPEC financing, foreign investment and funds from traditional donors, there would still be $11-billion financing gap, which the country would not be able to bridge without IMF’s help, said Khan.

He predicted that Pakistan would return to the IMF in 2018-19 – the fiscal year when the country’s external debt would be $98 billion and its financing gap will be $9 billion.

“Pakistan’s debt situation is deteriorating rapidly and posing a serious threat to its solvency,” he cautioned. Commercial borrowings comprised 25% of external debt, which was a matter of concern, said Shahid Kardar, former governor of the State Bank of Pakistan.

He said low returns on the country’s foreign currency reserves compared to the borrowing cost were also a matter of concern.

Khan said the PML-N and PPP governments had added $49 billion to the current external debt of $73 billion. Most of this amount, estimated at $32.6 billion, was added from 2008 to 2016 while the remaining $17.4 billion was added during the 1990s.

Pakistan’s trade deficit widens 22%, stands at $9.3 billion

“We need to develop a more effective borrowing strategy, which should be consistent with the country’s development priorities,” suggested Khan.

“Pakistan can keep its debt at sustainable levels by achieving about 6% annual economic growth,” said Dr Ali Kemal, research economist at the Pakistan Institute of Development Economics (PIDE). He, however, said despite the increase in debt levels, Pakistan was still not Greece.

“We are at a comfortable stage and there is no need to worry about anything,” said Zafar Masud, Director General of the Central Directorate of National Savings, while speaking at the conference.

Published in The Express Tribune, November 13th, 2016.

 

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Dr Ashfaque, Dr Pasha, Dr Salman write open letter to IMF “Wrong sides of the Picture”

Dr. Ashfaque H. Khan, Dr. Hafiz A. Pasha and Dr. Salman Shah, who have served on key posts in Finance Ministry and Planning Division have written an open letter to the IMF, exposing wrong picture presented by the Dar-led economic team about Pakistan’s economy. Dr Khan send this article to the Editor of Corporate Ambassador, Javed Mahmood today.

corporateambassador-master-logo1 

The three year program under the IMF’s Extended Fund Facility (EFF), has now come to an end. Pakistan has received $6.1 billion loan from the IMF under this program. During the tenure of the program, Pakistan was required to undertake wide – ranging structural reforms and implement the type of macroeconomic policy that would restore macroeconomic stability, gradually promote economic growth and build foreign exchange reserves to bolster external buffers.

After the completion of the twelfth and the final Review, the IMF Staff Mission Report has declared ‘victory’ and stated that “the Fund Supported Program has helped the country restore macroeconomic stability, reduce vulnerabilities and make progress in tackling key structural challenges. Economic growth has gradually increased and inflation has declined. External buffers have been bolstered, financial sector resilience has been reinforced, and the fiscal deficit has been reduced while social safety nets have been strengthened”.

On the reform side, the Report stated that “tax policy and administration reforms allowed for further revenue mobilization.Steps have been taken to strengthen the State Bank of Pakistan’s autonomy. Energy sector reform allowed a reduction of power outages, energy subsidies, and accumulation of power sector arrears. A country – wide strategy to improve the business climate was adopted”.

The Staff Report contains the views of the IMF on the “success” of the program. We, the three independent economists, through this open letter would like to present the other side of the picture. In particular, we identify the extent of the success, how these “successes” have been achieved and express our disappointment with the failure to implement reforms that are critical for achieving higher economic growth. Needless to mention, the three authors of this open letter have all dealt in the past with the IMF in senior management capacity at the ministry of finance, either as Federal Ministers or Advisor.

Firstly, building foreign exchange reserves to bolster the external buffer was the main pillar of the hurriedly put together IMF Program. The idea was to build reserves and repay the then IMF loan on time. That is why many independent economists including the ones who remained associated with the IMF for a long time termed the program as ‘Self-Serving Program’.

Such an objective of the program forced the government to borrow extensively to build foreign exchange reserves and in the process accumulate net external debt of over $12 billion during the program period. Incidentally, Pakistan added exactly the same amount to its foreign exchange reserves, that is, from $6 billion in end-June 2013 to $18.0 billion in end-June 2016. The above facts clearly suggest that we improved the external buffer entirely through adding external debt. Isn’t it simply postponing the current problem of insolvency to a future date?

Secondly, in a three year program, the IMF has extended sixteen waivers. Perhaps never in the history of the IMF did Pakistan receive such a large number of waivers. This diluted the purpose of the program and also reflected on the lack of emphasis towards implementing and achieving the stated goals of the program.

Sadly, the IMF Staff Mission has selectively highlighted the improvement in some economic indicators from 2012-13 to 2015-16. This includes rising economic growth, falling rate of inflation, rising tax-to-GDP ratio,  higher spending under BISP and private sector credit and falling subsidies as percentage of GDP.

The rate of economic growth achieved in the last three years remains contentious. The Pakistan Bureau of Statistics (PBS) has estimated the GDP growth rate as 4 percent or above each year, reaching 4.7 percent in 2015-16. The authors have presented contrary evidence that the growth rate has been exaggerated each year, and it has ranged between 3.1 to 3.7 percent during the program periods. The Data Quality Assessment Framework (DQAF) of the IMF should have been used to check the reliability of the national income estimates.

We would like to quote the recent statement of the Managing Director of the IMF as posted on September 1, 2016 by iMF direct. In her words “The longer demand weakness lasts, the more it threatens to harm long-term growth as firms reduce production capacity and unemployed workers are leaving the labor force and critical skills are eroding. Weak demand also depresses trade, which adds to disappointing productivity growth”.

This statement clearly depicts the current state of economic growth and unemployment in Pakistan in terms of the social costs of the excessive focus on stabilization policy. The persistence of lower economic growth has failed to create enough jobs. People in general and youth in particular, are finding difficulties to get jobs. People remaining unemployed for a longer duration are becoming unemployable, with all its social and economic consequences. Not only that the unemployment rate has surged to a 13 years high at over 8.0 percent (including the ‘discouraged worker’ effect), youth unemployment rate has also increased to over 11 percent in 2014-15. Furthermore, between 2012-13 and 2014-15, the annual number of entrants into the labour force has been approximately 650,000 as against 1.3 million during 2008-13.

A particularly worrying feature of the current employment situation is the extremely high unemployment rate of 20 percent of workers with either graduate or post graduate degrees. There are 2.4 million educated workers with bad employment prospects. This is the unfortunate outcomeof the IMF Program

On the size of the fiscal deficit, the IMF Report claims that this has been reduced from 8.5 percent to 4.6 percent of the GDP. A number of steps have been taken to report smaller deficits. For example, holding back refunds and forcing  commercial entities to pay taxes in advance to jack up revenue, privatization proceeds and foreign grants treated as non-tax revenue to inflate overall revenue rather than treating them as financing items, engaging in quasi-fiscal operations outside the budget, allowing for large statistical discrepancy each year (cumulatively Rs. 600 billion in three years) to show lower expenditures, exaggerating the size of the Provincial cash surplus, retaining earmarked revenues in the Federal consolidated Fund and building up large contingent liabilities (over Rs. 1400 billion of power sector circular debt, accumulation of debt in commodity financing and pending tax refunds). The IMF staff has either been blissfully unaware of or has condoned this creative accounting. Adjusting for these practices implies a fiscal deficit each year in the range of 7.0 to 8.0 percent of the GDP.

Other areas, where serious distortions exist, are: the estimates of the GDP deflator; investment and saving rates and rate of inflation, especially for poor households. A case ought to have been made for complete operational autonomy of the PBS.

Yet another “success” of the program as stated by the IMF Staff Mission is the sharp reduction in inflation rate. It has declined from 7.4 percent in 2012-13 to 2.9 percent in 2015-16. Does this decline owe to the ‘prudent’ fiscal and monetary policy pursued during the program period? The answer appears to be in the negative. The international oil and commodity prices started collapsing since June 2014. Such a collapse in the oil and commodities prices led to a worldwide decline in inflation, including in Pakistan. Furthermore, as stated above, the pursuance of stabilization policy for a prolonged period weakened the domestic demand, resulting into deceleration of prices. Thus, the sharp decline in inflation during the program period owes to the weakening of domestic demand, as well as a collapse in the international prices of oil and commodities and not to the prudent use of monetary and fiscal policy. In fact, when inflation rate was rapidly on the decline, the SBP was pursing an easy monetary policy.

The quarterly reviews have ignored the deterioration in key economic indicators. They failed to discuss big decline in exports – to – GDP ratio, stagnation in the overall and private investment – to – GDP ratio, fall in FDI, rise in external debt and public debt – to – GDP ratios, fall in total PRSP pro-poor expenditure to GDP and very importantly, a rise in the rate of unemployment especially among young, educated, and female workforce. Only 750,000 jobs were created annually in 2013-14 and 2014-15 as against 1.1 million jobs annually earlier.

As stated above, Pakistan was asked to implement a wide-ranging reforms under the IMF Program. What has been the performance on the reform side?

Power Sector Reforms

The glaring failure of the Fund program is in the implementation of power sector reforms. The 12thReview Report declares victory primarily by demonstrating that the subsidy to the sector has fallen massively from 2percent of the GDP in 2012-13 to only 0.6percent of the GDP in 2015-16.

How has this been achieved? The answer is not by any major improvements in efficiency through big reduction in losses. Instead, the policy has been to raise the power tariffs to generate more revenues and thereby reduce the need for subsidies. From 2012-13 to 2015-16, the average electricity tariff (including surcharges) has been enhanced by 40percent, leading to extra revenues of distribution companies of over Rs 250 billion. The tariffs have been increased at the time when the fuel costs have fallen by over 49 percent.

On top of this, contingent liabilities have increased exponentially in the sector. Today, the circular debt of the sector stands at almost Rs 630 billion, over 2percent of the GDP. Sooner or later, this debt will have to be retired, as happened in 2012-13, if a breakdown is to be avoided in supplies due to liquidity problems in the sector.

IMF also claims on behalf of the Government, that power load-shedding has been substantially reduced, especially in industry. Evidence to the contrary is the large continuing demand-supply gap according to NEPRA, and the fact that electricity consumption per industrial consumer has fallen in nine out of ten distribution companies, in comparison to the level achieved in the pre-load-shedding years.

Tax Reforms

The IMF Twelfth Review has highlighted, as one of the key successes of the Program, the over two percent points increase in the tax-to-GDP ratio. Much of the improvement has come in 2015-16. How has this been achieved? The main contribution is actually from enhancement in effective tax rates and not by broadening of the various tax bases. The tax structure has become more regressive and created more distortions in economic activity. Furthermore, various levies which used to be the part of non-tax revenues prior to the IMF Program were renamed as ‘other taxes’ and added to the tax revenue collected by the FBR to arrive at ‘new’ tax – to – GDP ratio. Such a practice has made the ‘new tax – to – GDP ratio non-comparable with the pre-IMF Program period.

The biggest failure is in lack of development of the direct tax system. The elite continues to enjoy wide ranging tax exemptions and concessions like the virtually no or low taxation of global income, profits of private companies, agricultural income and unearned capital incomes. The IMF clearly prefers not to antagonize the ruling elite through its reform agenda.

Improvement in Living Standards

Contrary to the claims by the IMF, living standards have probably fallen in Pakistan during the tenure of the Program. A number of reforms undertaken have contributed to rising unemployment and poverty.

The anti-poor actions include, firstly, the rise in input costs of fertilizer and electricity in agriculture due to hike in power and gas tariffs and additional taxation in the form of the GIDC. The result is that food prices have risen faster than the overall CPI and wages of unskilled workers. Today, Pakistan has the extremely serious problem of malnutrition. In the 2016 ranking of the Global Hunger Index, Pakistan has the 11th lowest position, even below Bangladesh, out of 118 countries. The non-implementation of the PMs agricultural package of September 2015 under the IMF pressure has contributed to the recent debacle in the sector.

Secondly, the primary adjustment mechanism for achieving the fiscal deficit targets in the Program has been large cut backs of up to 30percent in budgeted development spending by the Federal and Provincial governments. In 2015-16 alone these cuts have implied less employment generation of almost 300,000 jobs.Thirdly, hikes in indirect taxes have affected the cost of living adversely. This includes the levy of minimum import tariffs on basic food and other items and jump in GST rates on petroleum products, especially HSD oil.Fourthly, the decline in exports has contributed to loss of employment in labor-intensive sectors like SMEs and textiles. Consequently, as highlighted earlier, the underlying unemployment rate has gone beyond 8 percent. Fifthly, social indicators have shown only minor improvement in three years. This is due particularly to the pressure on Provincial governments to spend less on social and other sectors so as to generate large cash surpluses.

Anti-Export Bias

According to the original Program projections, exports were expected to show a steady annual growth rate of 8 percent and reach $30 billion by 2015-16. Instead, they have been falling since 2012-13 to below $22 billion last year, a short fall of over 23percent. This is perhaps one of the single most important failures of the Program. It has adversely impacted on growth and employment in the country and frustrated the achievement of greater self-reliance.

How did the Program reinforce the anti-export bias? The record level of external borrowings during the last three years has led to a form of ‘Dutch Disease’. Larger reserves, based completely on external borrowing, have created artificial stability in the value of the rupee, thereby reducing competitiveness. Enhancement of electricity tariffs by over 40percent and gas price to industry by 64percent, further affected competitiveness. In an effort to meet the Program revenue targets, FBR has held back over Rs 200 billion of refunds, leading to liquidity problems for exporters. Further, levy of a minimum import duty on raw materials and intermediate goods has added to costs.

Today, the decline in ability to service external debt obligations, including those to the IMF, is clearly demonstrated by the phenomenal increase in the external debt to exports ratio. It was 193percent in 2012-13 and has risen to 266percent by the end of 2015-16. It is likely to continue rising and go beyond 300percent by 2017-18. There is no other option now in the post-Program scenario but to present a strong export incentive package, including significant depreciation of the Rupee.

External Financing Requirement

The original Program projections were that external financing requirements, consisting of external debt amortization and the current account deficit, would reach $9.2 billion by 2016-17 and fall to $8 billion in 2017-18. However, following the much larger build up of external debt, the latest estimates of the financing requirement in the 12th Review is $ 10.9 billion in 2016-17, rising to $13.2 billion in 2017-18.

However, these estimates are based on significant positive growth in remittances and exports and a big jump in FDI. This is highly unlikely given the current trends. A more realistic estimate of external financing requirement is $15 billion in 2016-17 and $18 billion in 2017-18. This is more than 5percent of the GDP, which is considered the danger point. Part of this requirement will have to be met by a sizeable depletion of foreign exchange reserves. There is a high likelihood that by June 2018, reserves may fall to about half of the present level.

Where is the sustainability of our external position? Has the IMF Program reduced our vulnerabilities? Are we doomed to go back once again to the IMF? Will conditionalities next time go beyond the usual prior actions? Already, two weeks after the end of the IMF Program, Pakistan has been forced to float relatively high cost bonds externally of $1 billion. This indicates a lack of confidence in the sustainability of reserves in coming months and years.

Finally, in the immediate aftermath of the IMF Program, the economy has begun to unravel. Agricultural growth was negative last year and the prospects for the current cotton crop are not much better. Growth of the large-scale manufacturing sector has also turned negative in the last four months for which data is available. Seven out of the twelve industrial groups are showing declining output. The fall in exports continues and the trade deficit has risen sharply. Remittances are also contracting, along with a sharp reduction in FDI. FBR tax revenue growth has plummeted and large borrowing has been resorted to by the Federal Government from SBP. Development releases of funds have been relatively small and the process of implementation of CPEC infrastructure projects is very slow. Contingent liabilities have reached alarming levels and the bleeding of public sector enterprises/utilities continues. Can we still say that the reforms implemented during the tenure of the Fund Program have left the economy in a ‘sustainable position’? The answer, unfortunately, is an unambiguous no.

 

* The authors have worked for the Ministry of Finance and dealt with the IMF at the highest level for a long time.

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Economic Hit Men- Weapon of Choice By Saeed Malik

 Opinion

Economic Hit Men- Weapon of Choice 

By Saeed Malik.

18 June 2016

 
For about fifty years now, the weapon of choice for the world’s primary power, to bring lesser states to heel, is through economic war. And within economic war, the chief weapon of use is that of economic Hit Men, and the overt use of the army to invade countries is the weapon of the last resort.
 
The chief ally of the hit men in the country to be subverted is the corrupt leadership of that country.
 
And the methodology used by the hit men is basically to encourage the leadership of the target country to over-spend on large projects, mostly infra-structure; and get this country under debt to the extent, where it no longer has the capacity to repay the same.
 
This is the time at which the principal power which has either advanced the major portion of the loans, or facilitated the same, has many options open to it to demand its pound of flesh.
 
Many countries in the world, at one time or another, have been subverted in this manner.
 
This is exactly where Pakistan will be standing in two years from today when the repayment of our loans becomes due, without us having the means to repay the same.
 
This is not a matter of speculation. It is purely a mathematical equation. We know how much we will have to pay back; we can also calculate from available figures, Pakistan’s capacity to pay back. According to most projections, the earnings of the country will fall short of the payments due.
 
 In other words Pakistan will be bankrupt.
 
We should be under no illusion that when Pakistan cannot repay its loans, it will not be treated kindly by the creditors.
 
It can quite easily be predicted, what Pakistan will then be forced to give in to the demands of the creditors, or face economic sanctions, which it will not be able to withstand for more than six months to a year.
 
What we will have to give up is:
 
a. Our nuclear assets. If the U.S and some of its allies could contemplate going to war against Iran, whose bomb lay some years in the future, it will be a fool who thinks that our nuclear assets and capacity will not be the first target of our creditors.
 
b. The second target will be our China corridor. The pivot to China is the most momentous shift in U.S defense policy since WW2, whereby priority has been shifted from the defense of Europe to the containment of China. The China corridor will serve to loosen the noose around China’s neck. If any one thinks that Pakistan will be allowed to do this, he must be stupid. And if any one else thinks that China will go to war with the U.S over CPEC, he should consider himself twice as stupid.
 
c. Baluchistan, will be severed from Pakistan. The reasons for this are many, but the primary reason is that India has to be built up as a credible counter weight to China. This cannot happen till such time Pakistan has the capacity to keep India distracted from the role crafted for it. So it will suit the powers that be, that Pakistan be left a rump state.
Our political leadership is not bothered about this scenario, because it is a willing tool of the economic hit men in partnership with whom Pakistan is being pushed to the edge.
 
The real tragedy however is that our Generals, the only ones with the capacity to save us from our fate, are adamantly refusing to see the end game.  
 
What makes this tragedy greater is that our Generals are failing to appreciate this not because they they do not have it in their heads to do so, but because their hearts seem to have given way when the heart was most needed.
 
For eight years now they have seen death gather at the gates of their country, and having the power to move on behalf of their country, they have preferred to take the veil. They have allowed their country to resemble a badly managed brothel, rather than move and cut short its agony and disgrace.
 
I am posting a talk by John Perkins in three parts. I urge you all to see it. But those of you who may be averse to seeing long video talks, should at the very least try and see the first link from minute 5.30 to minute 8.30—just three minutes.
 
And for God’s sake, instead of diffusing your energies in all directions, ask about our national debt and its  implications–ask every General in uniform that you know. Ask because it  is teetering at the edge, and for us there is no tomorrow.
 

 

Preview YouTube video Confessions of an Economic Hit Man

Confessions of an Economic Hit Man

Preview YouTube video Confessions of an Economic Hit Man – Part 2/3

Confessions of an Economic Hit Man – Part 2/3

Preview YouTube video Confessions of an Economic Hit Man – Part 3/3

Confessions of an Economic Hit Man – Part 3/3

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Economic Hit Men- Weapon of Choice By Saeed Malik.

 

 

Economic Hit Men- Weapon of Choice 

 

By Saeed Malik.

18 June 2016

 
For about fifty years now, the weapon of choice for the world’s primary power, to bring lesser states to heel, is through economic war. And within economic war, the chief weapon of use is that of economic Hit Men, and the overt use of the army to invade countries is the weapon of the last resort.
 
The chief ally of the hit men in the country to be subverted is the corrupt leadership of that country.
 
And the methodology used by the hit men is basically to encourage the leadership of the target country to over-spend on large projects, mostly infra-structure; and get this country under debt to the extent, where it no longer has the capacity to repay the same.
 
This is the time at which the principal power which has either advanced the major portion of the loans, or facilitated the same, has many options open to it to demand its pound of flesh.
 
Many countries in the world, at one time or another, have been subverted in this manner.
 
This is exactly where Pakistan will be standing in two years from today when the repayment of our loans becomes due, without us having the means to repay the same.
 
This is not a matter of speculation. It is purely a mathematical equation. We know how much we will have to pay back; we can also calculate from available figures, Pakistan’s capacity to pay back. According to most projections, the earnings of the country will fall short of the payments due.
 
 In other words Pakistan will be bankrupt.
 
We should be under no illusion that when Pakistan cannot repay its loans, it will not be treated kindly by the creditors.
 
It can quite easily be predicted, what Pakistan will then be forced to give in to the demands of the creditors, or face economic sanctions, which it will not be able to withstand for more than six months to a year.
 
What we will have to give up is:
 
a. Our nuclear assets. If the U.S and some of its allies could contemplate going to war against Iran, whose bomb lay some years in the future, it will be a fool who thinks that our nuclear assets and capacity will not be the first target of our creditors.
 
b. The second target will be our China corridor. The pivot to China is the most momentous shift in U.S defense policy since WW2, whereby priority has been shifted from the defense of Europe to the containment of China. The China corridor will serve to loosen the noose around China’s neck. If any one thinks that Pakistan will be allowed to do this, he must be stupid. And if any one else thinks that China will go to war with the U.S over CPEC, he should consider himself twice as stupid.
 
c. Baluchistan, will be severed from Pakistan. The reasons for this are many, but the primary reason is that India has to be built up as a credible counter weight to China. This cannot happen till such time Pakistan has the capacity to keep India distracted from the role crafted for it. So it will suit the powers that be, that Pakistan be left a rump state.
Our political leadership is not bothered about this scenario, because it is a willing tool of the economic hit men in partnership with whom Pakistan is being pushed to the edge.
 
The real tragedy however is that our Generals, the only ones with the capacity to save us from our fate, are adamantly refusing to see the end game.  
 
What makes this tragedy greater is that our Generals are failing to appreciate this not because they they do not have it in their heads to do so, but because their hearts seem to have given way when the heart was most needed.
 
For eight years now they have seen death gather at the gates of their country, and having the power to move on behalf of their country, they have preferred to take the veil. They have allowed their country to resemble a badly managed brothel, rather than move and cut short its agony and disgrace.
 
I am posting a talk by John Perkins in three parts. I urge you all to see it. But those of you who may be averse to seeing long video talks, should at the very least try and see the first link from minute 5.30 to minute 8.30—just three minutes.
 
And for God’s sake, instead of diffusing your energies in all directions, ask about our national debt and its  implications–ask every General in uniform that you know. Ask because it  is teetering at the edge, and for us there is no tomorrow.
 
 

 

 
 
Preview YouTube video Confessions of an Economic Hit Man

 
 

Confessions of an Economic Hit Man
 
 

Preview YouTube video Confessions of an Economic Hit Man – Part 2/3

 
 

Confessions of an Economic Hit Man – Part 2/3
 
 

Preview YouTube video Confessions of an Economic Hit Man – Part 3/3

 
 

Confessions of an Economic Hit Man – Part 3/3
 
 

,

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STOP NAWAZ SHARIF’S WILD SPENDING: PAKISTAN’S DAUNTING DEFICITS

PAKISTAN’S DAUNTING DEFICITS

DR.ISHRAT HUSAIN 

 Former Governor
State Bank of Pakistan

 

 

 

 

The writer is dean and director at the Institute of Business Administration, Karachi.
The writer is dean and director at the Institute of Business Administration, Karachi.
Pakistan’s daunting deficits The government of the day has to answer these questions and satisfy its critics.

But this excessive preoccupation with short-term issues leads to the neglect of long-term issues that responsible governments must address. It is hard to predict where we would be in the next 10 to 20 years but evolving global trends do leave some pointers. Action will follow only if the gravity of the situation is realised. Benchmarking Pakistan of 2015 with other countries at the same level of development in the past and taking stock of the future determines that a few big deficits are critical for our future development.


Action will follow only if the gravity of the situation is realised.


Coping with climate change

The risks to energy, water and food security arising out of patterns of climate change are now well documented and substantiated by strong scientific evidence. The vast network of irrigation canals, barrages, headworks etc. has allowed us to be self-sufficient in food. But the global warming that will melt the Himalayan glaciers — the source of our rivers — would result in floods and then prolonged droughts. Already a water-stressed country, the non-availability of irrigation water for our major food and cash crops would be simply devastating. Population growth by that time would add another 100 million mouths to feed. International trade in food would be minuscule as the extreme weather would hurt the harvest in the surplus countries also. Pakistan has hardly done any preparatory work to develop drought-resistant, high-yield varieties of major crops that can be grown in a highly water-scarce environment.

Governance deficit

Underpinning most of the challenges and crises facing Pakistan is the deep-rooted governance deficit. Energy shortages are not due to inadequate generation capacity but to theft, losses, non-recovery of dues, and mismanagement by electric and gas companies. Low-tax revenues accrue due to inefficiency, lack of effort and connivance between taxpayers and tax collectors. Public enterprises incur heavy losses subsidised by the exchequer because of nepotism and favouritism in the appointments of chief executives. Poor law and order, arms, drug smuggling, terrorist hideouts all owe their sustenance to the auction of thanas to the highest bidders. A neutral, competent civil service imbued with a sense of public service can alone fill this deficit.

Trust deficit

Pakistani society has become more fragmented, highly divisive, excessively polarised and stubbornly intolerant. Mistrust, intolerance, sectarian rivalries, religious and ethnic divides have gradually eroded social capital, the glue that binds diverse communities. In a deeply divided, suspicious and insecure society the transaction cost becomes high and the speed of the economic vehicle is slowed down. Post-9/11 events have exacerbated these cleavages and nurtured new forces of violence, extremism, radicalism and terrorism throughout the country.

Skill deficit

The average schooling years of the labour force in Pakistan is low and the demographic dividend is unlikely to be cashed if the present educational policies and management practices continue to persist. Thousands of unemployable graduates produced by the universities are either attracted to terrorism, crime or suffer misery and deprivation.

Conversely, garment factories are looking for stitchers and construction companies are short of welders. Technical and vocational enrolment is less than 1pc while the country needs five times more technicians, mechanics, welders, HVAC operators, nurses, paramedics. These can be absorbed not only in the country but also abroad. Internet penetration, mobile phone, broadband wireless and fibre optic backbone have not been used for training or upgrading the skills of the existing workforce or others living in the country’s remote areas.

Gender deficit

Gender disparity (only 20pc of women participate in the labour force, most of them unpaid family workers in rural areas) has sapped the economy’s vitality. Bangladesh which was lagging behind until the early 2000s has been able to overtake Pakistan in key economic and social indicators. High rates of female literacy and female labour force participation explain much of the variance. Unless one half of the population is empowered to take part in production and services sectors, economic stagnation is likely to persist.

Technology deficit

Japan, Korea and China have been successful because of technology diffusion and application in their production processes. They went through a cycle of learning by doing, by reverse engineering, imitating and adapting the techniques of production to their factor endowment and selling them at competitive prices. New firms and start-ups replaced old firms. In Pakistan, the industrial production base has remained unaltered for several decades. Rent-seeking and extracting concessions by existing firms have become commonplace. Innovation, new start-ups and entrepreneurship are sadly missing. R&D institutions are mired in red tape and academic-industry interactions are almost non-existent.

Competitiveness deficit

Pakistan inherited one of the world’s finest irrigation systems covering 80pc of arable land. The Indus Basin Works, dams and reservoirs, barrages and link canals and a large reservoir of groundwater added to our capacity. Any other country would have utilised such a scarce resource for producing high-value crops and their industrial derivative for exports. But we are contented with producing low-value crops. Water losses, neglect of maintenance and desilting of canals, the poor state of barrages, absence of lining water courses, waste and inefficient utilisation, inadequate assessment and weak recovery of water charges have eroded the natural resource-based comparative advantage. Cotton yields in India have more than doubled in the last decade while our national average has remained stagnant. The productivity gap between the average farmer and the progressive farmer, if narrowed, could restore this advantage. Pakistan’s export structure has remained unaltered since 1990. Consequently, our share in the markets is declining while that of India and Bangladesh has doubled and tripled.

The writer is dean and director at the Institute of Business Administration, Karachi.

Published in Dawn, January 16th, 2016

Additional Reading

Pakistani Elites Must Pay Fair Share of Taxes For National Independence

 
As Pakistan’s ruling elite and its ghairat brigade, led by PML’s Sharif brothers, engage in loud empty rhetoric about infringement of their national sovereignty by the United States, here is something to ponder:

Pakistan runs chronic budget deficits of around 5% of its GDP, and its government collects less than 10% of GDP in tax revenue which is among the lowest in the world. A big share of these deficits is funded by foreign aid and loans, making Pakistanis beholden to the interests and whims of major foreign donors and lenders.

Pakistan’s tax policies are among the most regressive in the world. Direct taxes make up less than 3.5 percent of GDP, with wide ranging exemptions to powerful segments of society coupled with governance issues at Federal Board of Revenue, according to former finance minister Shaukat Tarin. The bulk of the tax receipts are collected in the form of sales tax, placing the heaviest burden on the lower-income people who spend almost all of their income on their basic needs.

The other major weakness in public finances is the lack of fiscal effort by the provinces. With some of the largest segments of economic activity such as agriculture, real estate, and services in the provincial domain, the provincial tax receipts total an abysmal 0.7 percent of GDP.

Farm income, mostly earned by the nation’s feudal ruling elite, accounting for about 20% of the GDP is entirely exempt from any income tax under the law. Only about2 million of 180 million Pakistanis pay income tax. Of them, 1.8 million are salaried and paid Rs.27.37 billion in taxes during ended fiscal 2008-09, according to a report to the Senate by Minister of State for Finance and Economic Affairs Hina Rabbani Khar. The government runs large current account deficits, forcing it to beg and borrow to meet the budget needs. The budget deficit for2008-09 was 4.3%of GDP and it is likely to grow with lower revenue amidst slowing economy in 2009-10. The tax evasion in Pakistan is estimated atRs500 – 600 billion a year, almost half of the total tax collection of about Rs1200 billion during 2007-08. The untapped amount is almost equivalent to the country’s annual budget deficit.

In a country where majority of the transactions, including purchase of big ticket items, occur in cash, there is widespread tax evasion and a sizable informal economy. The estimates for Pakistan’s underground economy vary from 25% to 50% of the formal economy. A recentWorld Bank (WB) report concluded that every Pakistani citizen evaded tax amounting to Rs 4800 in the year 2007-08, while the total tax evaded in the period stood at Rs 796 billion.

Food prices have dramatically increased since the current PPP government took power in 2008. These higher food and commodity prices are resulting in the transfer of additional new tax-free farm income of about Rs. 300 billion in the current fiscal year alone to Pakistan’s ruling party’s power base of landowners in small towns and villages in Southern Punjab and Rural Sindh, from those working in the the economically stagnant urban industrial and service sectors who pay bulk of the taxes. The downside of it is an even bigger hole in Pakistan’s pubic finances which is being funded with increased foreign aid and loans.

During the height of corruption under Bhutto-Zardari-Sharif governments in the 1990s, the size of the underground economy rose to almost 55% in 1999, by one estimate. As the military regime of President Musharraf cracked down on tax cheats, the nation’s revenue collection doubled from Rs. 500 million in 2000 to to Rs. 1.04 trillion in 2007-08.

While the income, assets and taxes of the president and top government officials are publicly disclosed and heavily scrutinized by all in the US, no such transparency exists in Pakistan. In fact, tax cheating in Pakistan starts at the top. The richest and the most powerful politicians in the ruling elite pay little or no taxes, setting a horrible example for the rest of the nation.

For example, Benazir Bhutto, Asif Zardari and Nusrat Bhutto declared assets totaling $1.2 million in 1996 and never told Pakistani authorities of any foreign bank accounts or properties, as required by law in Pakistan. Zardari declared no net assets at all in 1990, the year Bhutto’s first term ended, and only $402,000 in 1996, according to a report in the New York Times.

Bhutto’s family’s income tax declarations were similarly modest. The highest income Bhutto declared was $42,200 in 1996, with $5,110 in tax. In two of her years as prime minister, 1993 and 1994, she paid no income tax at all. Zardari’s highest declared income was $13,100, also in 1996, when interest on bank deposits he controlled in Switzerland exceeded that much every week. In June 2008, a senior PPP leader and president of Pakistan’s Supreme Court Bar Association, Mr. Aitzaz Ahsan, who was interior minister in Benazir Bhutto’s first government, told James Traub of the New York Times that most of the corruption and criminal cases against PPP Co-Chairman Asif Ali Zardari which were dropped recently in Pakistan were justified, and that the PPP was a feudal political party led by a figure (Zardari) accused of corruption and violence. After a moment’s reflection, Ahsan further added, “The type of expenses that she had and he has are not from sources of income that can be lawfully explained and accounted for.”

It was only in 2007 that President Asif Ali Zardari returned to Pakistan under an amnesty, euphemistically called National Reconciliation Ordinance (NRO), sponsored by the Americans. However, the Americans know that the corruption charges against  Zardari were credible and he, along with his late wife, was convicted in at least one case by a Swiss judge. The conviction was under appeal in Switzerland when Pakistan government withdrew all charges pursuant to the NRO signed by then President Musharraf under pressure from the Americans.

The PPP leadership is not alone in evading taxes. The PML leadership appears to be just as guilty. The entire Sharif family paid a nominal income tax of Rs 250,000, wealth tax of Rs 550,000 and agriculture tax of Rs 130,000, considering their vast assets and properties of at least 23 sugar and textile mills and huge agricultural land, according to the News. The tax evasion by the Sharif family was the reason that the donor agencies giving aid to Pakistan in late 1990s insisted on publishing tax records of all lawmakers and senior bureaucrats, The News said, adding that for this reason, the donor agencies insisted on broadening the tax net to prop up government revenues.

As Pakistan faces a severe economic crisis and the current leaders appear ready to mortgage the nation’s future, the chances of the ruling elite setting a good example by paying their taxes in full appear rather remote. In fact, the feudal politicians are fighting the current IMF condition for even a modest tax on farm income. The only hope for a fairer tax system and improved collection from the rich and powerful to fund education and health care lies in serious and sustained pressure on Pakistan’s ruling elite from the donors and lenders, backed by the United States.

To conclude this post, let me quote former finance minister who said the following in a recent op ed: “At the heart of it, these issues are related to governance. This state of affairs is a manifestation of a broader challenge that Pakistan has grappled with virtually since independence– the shifting of the burden of responsibility by a small, self-serving and venal elite to the rest of the population.”

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