Pakistan's Economy-I: Inherent Problems

28 Jan, 2000    ·   316

D. Suba Chandran looks into the critical factors shaping Pakistan's economy

Pakistan ’s economy was in total chaos when the military regime took over power in October. The country is heavily dependent on foreign loans to meet its deficit repayment obligations, with 56 percent of the budget going towards debt servicing (as on 30 June 99 the total external debt of Pakistan was $ 38.8 billion). Foreign exchange reserves were a mere $1.45 billion; the IPP imbroglio had put a huge dent on foreign investment and Pakistan was yet to receive the $ 280 million tranche from the IMF. The tax collections in the previous year declined from 12.4 percent to 10.3 percent of the GDP.



General Pervez Musharraf, the Chief Executive of Pakistan, announced an economic revival package during the second week of December. Restoration of investor’s confidence, debt reduction, self-reliance and poverty alleviation are some of the major issues that was mentioned in the package. The government aims to achieve this by introducing General Sales Tax (GST), taxing the agricultural sector, eliminating all money whitening schemes and cutting down the defence budget. Will these efforts enable Pakistan to get out of its present economic mess?



There are certain inherent problems that the Pakistan economy is facing which is common to most third world countries, such as low domestic savings, narrow tax base, and lack of tax culture. Pakistan always had a low rate of domestic savings. According to an estimate, nearly 85 percent of its investments came from abroad by way of foreign aid, loans and foreign direct investment.  Low domestic savings leads to low investment, which resulted in low economic growth but in an economy banking heavily on foreign investment. Pakistan needs investment at 20 percent to reach an annual growth of over 6 percent to meet the demands of the population, which is increasing at the rate of 2.8 percent per annum. 



Besides a low rate of savings, the narrow tax base and prevalent tax evasion are two other problems that the military government has to tackle. Out of the total population of 140 million, only 1.6 million pay tax limit, more than 150 billion rupees evade taxes every year. The military regime has decided to initiate tax reforms that would minimise taxes and tax rates at the same time enlarging the tax base. Besides, the government has warned, that it will come down heavily on tax defaulters. How to promote a tax culture where there none exist, is a serious challenge facing Musharraf.



On the agricultural front, the government has announced that it would seek self-reliance. Despite more than 65 percentage of its population being engaged in agriculture, the contribution of this sector to economic growth is meagre. The government has decided to tax agricultural incomes.



A close look at the economic revival plan reveals that Musharraf is serious about it. Besides other measures he has announced a voluntary cut of Rs 7 billion in the defence budget, which is to be spent on programmes like eradication of poverty and employment generations.



An analysis of the economic history of Pakistan will reveal that its economy improved under military regimes. There was a spectacular growth in the economy during Ayub Khan’s period; the average rate of growth was around six percent per annum, which came down to 4 percent in the seventies, during Zulfikar Ali Bhutto’s regime. Again, during General Zia ul Haq’s period, the rate of growth reached 6 percent per year. The post Zia period, whether under Benazir Bhutto or Nawaz Sharif, witnessed a sharp decline in the rate of growth to 3 percent. Better economic management under the military rulers and populist programmes under the elected rulers, coupled with corruption and inefficiency, resulted in the Pakistan economy doing better under military rulers than under democratically elected leaders. However, an essential point should be noted. During the period of both the previous military regimes, an intense cold war was in progress between the US and former USSR , Pakistan was a “frontline” state for the US , which resulted in its receiving huge loans and foreign investments. This dried up during democratic rule when situation worsened due to lack of continuity, political instability, poor planning and dilatory decision making.



With the cold war coming to an end, the challenges facing General Musharraf are tremendous. Will he deliver the goods on the economic front?