Changing Pakistan’s economic policy

Since 1947, organized interest groups have controlled Pakistan’s economy, and the political power structure continues to be the real issue, almost causing a socioeconomic collapse.

Even if the following issues are the most pressing ones, we should all be aware of their underlying causes and what may be done to remedy them through reforms. The following are the main issue areas:

  • Revenues fall short of expenses
  • Debt incurred internationally, domestically, and in circles
  • Deficits in the current and trade accounts, as well as a preference for imports over exports
  • Super consumption and one of the lowest Gross National Saving Rates (GNSR)
  • Financial inclusion and the undocumented population
  • State-owned enterprises (SOEs) that are in the red
  • Investor confidence and foreign direct investment
  • Infrastructure for energy
  • Changing weather
  • Youth bulge
  • There is no regional economic integration, and there are no resources for general welfare, health, or education.

Even though the majority of the world’s population is aging, our population is getting younger, there are 220 million people in our thriving market for goods and services, and non-residents’ foreign remittances are a significant source of foreign currency that are steadily increasing.

By examining the most important macroeconomic realities, this may be further clarified: According to the World Bank, tax collections exceeding 15% of a country’s GDP are a crucial component for economic progress and the alleviation of poverty. However, tax to GDP is still less than 10%. In compared to India at 13%, Turkey at 24%, China at 18%, and Egypt at 15%, Pakistan needs 18% of its GDP to be taxed.

Pakistan need a fair, efficient, and “No Sacred Cows” policy tax system. Even though it could take some time, this procedure needs to be given top importance.

The mix of direct and indirect taxes at the moment is 35% and 65%, respectively, demonstrating the extremely low chargeability of income taxes. Only 25 lac people are getting taxed on income. Real estate, retail, agriculture, and financial markets are a few of the sectors that need to be taxed.

With a GNSR of 8%, we have one of the highest consumption-based economies, outperforming Bangladesh’s 25%, India’s 28%, Iran’s 38%, China’s 44%, and Korea’s 35%. Islamization of the economy, which will be covered in more detail later in the text, can help with this.

The rates and term tenors of our domestic and foreign debt have grown to be a serious issue. We are currently unable to even survive without a new loan to provide the annual demand of USD 25 billion needed to pay the interest on the existing portfolios. This is the product of the successive economic governments’ criminal carelessness.

Cash flow management in foreign currencies is the nation’s top issue right now since there is an increasing impression that Pakistan may go bankrupt.

Because imports have climbed from USD 41 billion to USD 72 billion and exports have increased from USD 24 billion to USD 28 billion since 2014, the trade gap has increased from USD 17 billion to about USD 43 billion.

Our exports continue to hover around $30 billion, whereas Bangladesh’s are $48 billion and India’s are $670 billion. Particularly the long-running loss-making SOEs, which include losses from PIA, Railway, Steel Mill, DISCOs, and GENCOs, pull down GDP by 8% on an annual basis. Even profit-making SOEs, like those in the oil and gas industries, have inefficient operations and low profitability when compared to their peer group in the private sector.

The wealth and income distribution is another major area of inequality, with the top 10% of Pakistanis controlling 60% of the country’s wealth and 43% of its income, the middle 40% controlling 35% of wealth and 40% of its income, and the poorest 50% having just 5% of the country’s wealth and 17% of its income. (World Inequality Database). Comparatively, if we examine the allocation of land, we see that, in actuality, 5% of the population controls 64% of the farmland, while more than 50% of the population is landless. (Land Portal).

We continue to have one of the lowest rates of financial inclusion and economic documentation among emerging nations. Less than 35% of currency is still in circulation, indicating a bigger undocumented economy that is not subject to taxation or regulation. Since 88% of deposits originate from Karachi, Islamabad, and sixteen other significant Punjabi cities, the banking industry continues to be underrepresented. Only 12% of Pakistan’s population contributes, showing a relatively low level of confidence in banks; this may be due to interest-based banking or tax evasion.

The way forward

By fixing the flaws in our system, there are some immediate and short-term remedies that may be reached. The 18th Amendment has to be revised in light of the NFC. (National Finance Commission). First, the criteria for resource distribution need to be revised and rationalized, giving population a much smaller weight and development parameters a larger one.

Provincial Finance Commissions (PFCs) and the devolution process through local government elections and legislation must be completed by provinces within six months, with an emphasis on expanding the pie of local taxes, sales taxes, farm taxes, etc. The federal government should modify debt repayments and defense spending from the provincial contribution in order to cut the share correspondingly if the provinces do not comply.

This knowledge is crucial since the provinces get 56% of federal resources, or around PKR 4 trillion, or roughly the same amount as the fiscal deficit, and corruption and inefficiency in both the federal and provincial administrations have truly turned into a curse.

Reduce federal and provincial governments to no more than fifteen ministries, which could include the following: Cabinet, Finance and EAD, Foreign Affairs, Revenue & FBR, Climate Change (along with NDMA), Science & Technology, Maritime, Health & Education & FS Policy, Energy (Power & Petroleum), Interior, SAFRON, and Industrial Development & EPZs.

Similar to this, 30 to 40 percent of provincial and federal ministries will collapse within six months since the majority of them are ineffective. The cost of administering the government may be cut in half with these two solutions.

aggressively renegotiate three to five years’ worth of our international bilateral and multilateral debt with robust pledges to implement changes. This might reduce payments by almost USD 16 billion and relieve strain on foreign currency cash repayments.

The damaging Despite being valued trillions of rupees, SOEs are unproductive real estate investments. These should be quickly sold for transparent revenues, their defaults should be corrected, and management changes should be made so that the current ineffective senior management and boards are replaced with market-based expertise. If not, privatization should start right now.

Reopening the regional trade markets right away, with a renewed emphasis on the SAARC, India, Afghanistan, Iran, and CIS nations. Preferable trade agreements and avoiding competing items on global marketplaces should be included.

Increase the proportion of business and industrial users of energy and power. Pakistan’s domestic-to-commercial ratio is 65:35, which is lower than the 35:65 global average. Create a regulated energy model based on evolving market trends.

Islamization of the economy is a strong alternative that can significantly improve underlying issues. It can genuinely aid in boosting revenue (the ratio of taxes to GDP), documenting the economy and financial inclusion, including GNSR, so enhancing the capacity for local investments and luring FDI. a hybrid official “Zakat” structure being introduced to the income tax system.

About 75 million people in Pakistan pay zakat, yet none of it reaches the government coffers. To collect and use Zakat in a transparent manner, we should establish a separate organization that is not affiliated with the Federal Board of Revenue (FBR). Everyone who participates will receive a three- to five-year tax exemption. an approximate calculation based on the income per capita and income distribution structure

Similar to this, the addition of “Ushr” to agricultural output on the day of valuation might bring in an additional PKR 2 trillion for the government coffers. 5% of major landowners, who control the intermediaries and own flour, rice, sugar, and textile mills, own 64% of farmland, as was previously described. However, they either evade paying taxes or do not pay any taxes at all. Ushr can genuinely assist in the development of this untaxed industry given that Pakistan is the seventh-largest producer of agricultural, with an estimated 65 billion USD in production.

In a nation where 97% of the population is Muslim, Islamic banking only accounts for 19% of the business. A strategic reorientation can benefit the economy greatly in the areas of documentation, financial inclusion, replacing traditional debt instruments with new Sukuks, raising GNSR, and greatly expanding the current banking footprint.

Farm to market inefficiencies and anomalies, such as water management, PCR Abiyana, seed, fertilizer, intermediary replacements, storage/silos facilities, simple access to bank financing, and integration/connectivity with local and regional markets, are being addressed through reforms in the agriculture industry. The establishment of an agro-based export and value-added business should be prioritized for all important crops, dairy products, fruits, and animals. Our agricultural departments need to be completely redesigned or privatized since while being the seventh greatest producer of agricultural products, we have one of the lowest yields.

The industrial sector’s performance and capacity are well behind what the nation’s economy requires. This sector has to be reshaped once more along the lines of value addition and export focus.

It is imperative to create a regulated energy model based on developing market trends. To lessen dependency on thermal energy, place an emphasis on alternative energy sources including solar, nuclear, and run-of-the-river hydropower. To decrease line losses and keep theft under control, this might be done while bolstering the transmission lines. In comparison to the global average of 7%, our transmission and distribution losses are 21%, and our revenue losses are 10%.

It is necessary to increase regulatory capacity, limit home gas usage and shift it to industry, and privatize Discos and Gencos. To emphasize ease of doing business, it is necessary to restructure the FBR, Planning Commission, BoI (Board of Investment), and other institutions. We need to start a 10-year

Last but not least, devolution in practice by increasing the effectiveness of local governments and reducing the involvement of the federal and provincial governments to the absolute minimum. To get rid of the “political electable mafias,” another idea is to replace the current political system with proportional representation.