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An overview of the Economy of Pakistan

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By Zafar Iqbal

Pakistan has continuously been facing a deep fiscal crisis for decades and that seems to continue until the system is revamped. The tax-to-GDP ratio does not enable Pakistan to counter inflation, improve governance, deliver quality public services, or improve human resources to reach a take-off stage for economic development. The macroeconomic indicators, after short spells of the boom, start manifesting visible signs of rupture, because of fundamental flaws in policies where growth is mainly supported by import-based inputs. Local economic production and consumption have failed to develop endurance during challenging times. Consequently, as a cooling down measure, the government opts for scaling down the overall economic activity level in the country. These actions are undertaken to restrain domestic demand, prevent the compounding of inflationary density and reduce risks of external default.

In the short run, there is hardly a chance that these conditions would be improved. The decline in growth would have implications for poverty as the economy will be showing outright contraction. Higher interest rates and a strong dollar would have adverse effects on capital flows for emerging markets and developing economies, with consequences for debt burden and repayment capacities. Furthermore, this would have implications for the value of imports and thus add to inflationary pressures as well. Under these circumstances, Pakistan is facing unenviable challenges.

 Pakistan’s macroeconomic imbalances have further assumed dangerous proportions and the hope for economic recovery is yet to materialize. The absence of any concrete revival plan has led to a situation where the government is taking steps to slow down economic activities and suppress demand to reduce pressure on foreign reserves and inflation at the domestic level in particular. The present government’s economic team has ignored that such aggressive measures to reduce economic activities can lead to unemployment and a reduction in revenue collection. This approach will eventually enhance the vicious cycle where government ends up borrowing heavily to bridge the revenue gap, whereas most of the revenue receipts are consumed in debt servicing.

In the long run, Political Stability and Tax Administration Reforms are mandatory to get economic stability and prosperity. 

The countries like Pakistan where the economy has remained the prey of political unrest throughout history. Despite its vast economic resources, the country still faces severe economic stagnation due to the menace of political instability. An unstable political system is a hazard that halts the smooth running of governance and enforcement of law and authority in a country.

Research shows that countries facing low economic growth are often victims of irregular government shifts due to political unrest. In the case of Pakistan, the argument fits well. Hence, growth is vital for the economic recovery of Pakistan. A taxation concept is a regressive approach and it demotivates investors. The prime objective of an economy is to grow and export.

The policy framework of tax reforms includes an overall increase in the revenue collection for achieving fiscal targets; an increase in tax to GDP ratio through broadening of the tax base; professional capacity building of revenue officials; ensuring more equitable & transparent application of tax laws through the provision of high-quality tax services. 

The reform strategy has three main areas (a) policy reforms, (b) administrative reforms, and (c) organizational reforms. Policy reforms included simple laws. Administrative reforms aimed at (i) transforming tax collecting institutions on functional lines (ii) re-engineering manual processes of all taxes, increasing the effectiveness of institutions, and improving skills and integrity of the workforce and facilitation of taxpayers. Organizational reforms also included the re-organization of Institutions on functional lines, reduction in the number of tiers, and reduction in the workforce.

Taxation and economy is primarily federal subject according to schedule IV of the constitution. Primarily, it is the responsibility of the federal government to run the affairs of the economy and growth. However, after the 18th amendment, provinces are also empowered significantly to grow in the compartments of the economy. The capacity of the provinces is required to improve. They can play their role in boosting the economy, especially in the fields of the agriculture sector. There is a need to reform the Provincial board of Revenues on the likes of the Federal Board of Revenue. 

There is a dire need to reform the revenue services of federation and provinces. Specialization of services is a fundamental requirement to the cause of taxation and economy. Corruption among the revenue services is rampant alongside inefficient working modules. Specialized revenue officers will not only improve the taxation systems but also help improve the standards of the economy. A faulty and complicated tax regime demotivates investors and this results in the contraction of the economy.

The other important part of the economy is the localization of the economy. People, at the helm of the affairs, run the economy on the modules of developed countries. Pakistan is a complex federation and a distinguished landscape with different cultural, physical, and environmental propositions. Our economists must understand the complexity of the land and make economic policies accordingly. Pakistan should be a growing and manufacturing country.

Pakistan needs more internal investment than external investment. It is an overstatement that foreign investment leads the process of internal growth and development. How can an economy develop when foreign investors take more money out than invested money? Therefore, local investment should be encouraged and policies should be adopted to increase export and decrease imports. Foreign direct investment FDI is not the solution for our economy but Local direct investment LDI. Pakistan should encourage overseas Pakistanis to invest in Pakistan.

Services play a major part in the economy of a country. Pakistan is a country with a youth population and the skill development of youth is fundamental to the cause of growth and development. The information technology sector is very important for the economy alongside all other professions of skills and services. Pakistan is a no-objection certificate NOC economy. The procedures are so complicated that even local investors are finding it hard to invest smoothly. The coded law of economy and taxation must incorporate facilitation and service.  

Apart from all public and private initiatives, it is the political stability and consistency in economic policies alongside the resolve of the Government that will pave a way for sustainable economic revival and finally a path toward growth and development.

The writer is a charter accountant and CEO of Republic Policy. He also runs a taxation firm.

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