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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