The recently-released World Bank report on South Asia infrastructure has revealed that Pakistan will have to enhance its outlay in infrastructure development from 3 percent to 10 percent of Gross Domestic Product (GDP) if we are to succeed in filling the gap between demand and supply. For energy sector alone around 6 percent of GDP would be required, 1.2 percent for transport, 0.71 percent for telecom and 0.83 percent for irrigation. These are disturbing figures and one would hope that the government readjusts its expenditure priorities based on this data given its considerable outlay in developing a road network. In economic theory investment has an identity with the savings rate and Pakistan has consistently performed very poorly in terms of savings. Thus investment has typically been higher than savings that accounts for heavy borrowing by the government to fund its budget deficit - both from foreign and domestic sources - thereby requiring an increasing budgetary outlay for associated debt servicing payments which, in turn, has resulted in a shrinking budgeted development outlay. A decline in investment in infrastructure has indicated a lower ability of the government to borrow based on the prevailing macroeconomic conditions. In 2007-08 investment was 19.21 percent of GDP while in 2012-13 it declined to 14.22 percent.
And alarmingly while public investment declined from 17.6 percent in 2007-08 to 12.6 percent last year (in the aftermath of the suspension of the International Monetary Fund programme in 2010 with other multilaterals/donors suspending their budgetary support) private investment plummeted by 8.7 percent last year with massive loadshedding cited as the major reason. National savings were 11 percent of GDP in 2007-08 and rose to 13.5 percent last year. However, some policies of the incumbent government, like its predecessors, are anti-savings, though it envisages a lower budget deficit than last year. It expects to reduce the deficit through borrowing from domestic and international markets with the implications of the former being a rise in inflationary pressure while the implication of the latter is failure to formulate in-house policies as foreign loans come attached with a range of politically challenging conditions. Thus one would argue that the government must focus on promoting national savings to meet the investment savings gap, which would have minimal if any negative repercussions on key macroeconomic variables. Unfortunately this has not been evident in the budget for fiscal year 2013-14 and one would be compelled to maintain that Federal Finance Minister Ishaq Dar has supported policies that have a definite anti-savings bias.
The policy with the most anti-saving bias announced in the budget for the current year was the income support levy which envisaged taxing the savings and moveable assets created from income that had already been taxed and acting as disincentive for domestic savers. Notwithstanding Dar's claim that the money was to be earmarked for supporting the poor, the fact remains that this burdens the existing taxpayers and militates against savings and investment. Instead of (i) widening the tax net to include those whose income from whatever source falls within the bracket that is taxed, (ii) eliminating all industry-specific statutory regulatory orders costing the treasury over 300 billion rupees per annum, and (iii) increasing documentation to expand the tax net, the government continues to focus on ease of collection and milking the existing taxpayers. In addition, as the IMF second staff review report points out the Prime Minister's Youth Investment package generates "challenges" in "aligning the policies of the National Savings Schemes (as those instruments offer the investors the option to redeem investments before maturity) with marketable instruments to minimise pricing risks and diversify investor base for fixed-income securities to ensure high liquidity and stable demand in the market".
Much needs to be done by Dar in terms of proactively encouraging savings on the one hand and prioritising investment into those sectors that remain an impediment to investment notably energy sector and one would hope that his obsession with revenue whatever the source be replaced with forward looking policies that can ensure improved sustained performance of the country's critical macroeconomic indicators.
Monday, April 7, 2014
Pakistan: WB report: some disturbing figures
The recently-released World Bank report on South Asia infrastructure has revealed that Pakistan will have to enhance its outlay in infrastructure development from 3 percent to 10 percent of Gross Domestic Product (GDP) if we are to succeed in filling the gap between demand and supply. For energy sector alone around 6 percent of GDP would be required, 1.2 percent for transport, 0.71 percent for telecom and 0.83 percent for irrigation. These are disturbing figures and one would hope that the government readjusts its expenditure priorities based on this data given its considerable outlay in developing a road network. In economic theory investment has an identity with the savings rate and Pakistan has consistently performed very poorly in terms of savings. Thus investment has typically been higher than savings that accounts for heavy borrowing by the government to fund its budget deficit - both from foreign and domestic sources - thereby requiring an increasing budgetary outlay for associated debt servicing payments which, in turn, has resulted in a shrinking budgeted development outlay. A decline in investment in infrastructure has indicated a lower ability of the government to borrow based on the prevailing macroeconomic conditions. In 2007-08 investment was 19.21 percent of GDP while in 2012-13 it declined to 14.22 percent.
And alarmingly while public investment declined from 17.6 percent in 2007-08 to 12.6 percent last year (in the aftermath of the suspension of the International Monetary Fund programme in 2010 with other multilaterals/donors suspending their budgetary support) private investment plummeted by 8.7 percent last year with massive loadshedding cited as the major reason. National savings were 11 percent of GDP in 2007-08 and rose to 13.5 percent last year. However, some policies of the incumbent government, like its predecessors, are anti-savings, though it envisages a lower budget deficit than last year. It expects to reduce the deficit through borrowing from domestic and international markets with the implications of the former being a rise in inflationary pressure while the implication of the latter is failure to formulate in-house policies as foreign loans come attached with a range of politically challenging conditions. Thus one would argue that the government must focus on promoting national savings to meet the investment savings gap, which would have minimal if any negative repercussions on key macroeconomic variables. Unfortunately this has not been evident in the budget for fiscal year 2013-14 and one would be compelled to maintain that Federal Finance Minister Ishaq Dar has supported policies that have a definite anti-savings bias.
The policy with the most anti-saving bias announced in the budget for the current year was the income support levy which envisaged taxing the savings and moveable assets created from income that had already been taxed and acting as disincentive for domestic savers. Notwithstanding Dar's claim that the money was to be earmarked for supporting the poor, the fact remains that this burdens the existing taxpayers and militates against savings and investment. Instead of (i) widening the tax net to include those whose income from whatever source falls within the bracket that is taxed, (ii) eliminating all industry-specific statutory regulatory orders costing the treasury over 300 billion rupees per annum, and (iii) increasing documentation to expand the tax net, the government continues to focus on ease of collection and milking the existing taxpayers. In addition, as the IMF second staff review report points out the Prime Minister's Youth Investment package generates "challenges" in "aligning the policies of the National Savings Schemes (as those instruments offer the investors the option to redeem investments before maturity) with marketable instruments to minimise pricing risks and diversify investor base for fixed-income securities to ensure high liquidity and stable demand in the market".
Much needs to be done by Dar in terms of proactively encouraging savings on the one hand and prioritising investment into those sectors that remain an impediment to investment notably energy sector and one would hope that his obsession with revenue whatever the source be replaced with forward looking policies that can ensure improved sustained performance of the country's critical macroeconomic indicators.
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