Economy now reaches the take-off stage By MAHMOOD ZAMAN

ARTICLE (April 02 2010): The democratic government has completed two years of its establishment and this in itself is no mean an achievement. This is because the situation in which it started and a host of tricky problems in all disciplines of life it inherited on March 25, 2008, had so great a crisis as to give a feeling if the Pakistan People's Party leadership would be able to achieve even a starting point.

It was simply a nightmare, but the way the government rose to the occasion with initiatives that were, and continue to be, bold with priorities set in the right direction that were combined with result-oriented policies. The problem was massive but the political will was equally strong; it accepted the all-around crisis as a challenge and reached a position of take-off in an insignificant period.

The government dealt with the poverty issue with a strong instrument of the Benazir Income Support Programme (BISP), as a major socio-economic and welfare and safety initiative for the poor with an urgent financial assistance. It introduced wide-ranging reform for industrial workers in the shape of promulgating a new Industrial Relations Act in 2008 and restoring for the workforce their right to approach the National Industrial Relations Commission (NIRC), labour appellate courts and labour courts.

The government's contribution for women, particularly for working women, is second to none in view of the enactment to save them from harassment at workplaces. None of them is better or a lesser decision, yet the area which was attended to with a highly motivated step, is the national economy.

But before taking on the field, the mention of one achievement is pertinent. Perhaps the biggest achievement of the elected government has been the Seventh National Finance Commission (NFC) Award that has been unanimously adopted by all the provinces and other parts of the federation to implement it from the next fiscal year, 2010-11.

This has been only the fourth NFC award in the history of Pakistan and the first after a lapse of 19 years. The PPP government deserves a credit for displaying its political will to distribute national resources in a fair and judicious way. However, the government has to cover a long and arduous distance between the first day in power and a unanimous NFC award. The intervening period has all been a concerted effort to refurbish and restructure the declining economy that the elected government inherited two years ago.

What shape of the economy was when it took over in March 2008 may be assessed a little from the fact that it was through a record fiscal deficit of nearly eight per cent of GDP in 2007-08 that, in absolute terms, stood at Rs 781 billion, the highest ever in Pakistan's history.

External current account balance has swung from a surplus to a deficit of 8.5 percent of GDP and total public debt has risen massively - from Rs 3.8 trillion in fiscal year 2004 to Rs 5.9 trillion in fiscal 2008. A large part of the increase was in debt servicing that the budget is currently burdened with, dates back to the irresponsible fiscal management of the 2004-2008 period.

Of this, the previous government had printed currency to the tune of Rs 720 billion in only two years, fuelling inflation massively. Simultaneously, inflation had risen to 12 percent in the beginning of 2007-08 and touched the height of 25 percent in October 2008. Borrowing by the private sector had increased sevenfold between 2004 and 2007 - but most of it was channelled not into new manufacturing plants, but also investment in Karachi Stock Exchange or the property market in Dubai.

Imports had risen by two-and-a-half time and most of this expenditure was incurred on consumer goods like cars, mobile phones, durables, fashion accessories and food items, including fresh vegetables and fruits. The country had political and economic stability between 2002 and 2008 and an ideal environment for structural reform.

But the net outcome was that tax-to-GDP ratio declined to its lowest in history; restructuring of public sector enterprises was never contemplated. As a result, these entities continue to place a heavy burden of Rs 250 billion a year on consumers and taxpayers.

NINE POINT PLAN Cognizant of the pressure on economy, the democratic government evolved a pragmatic nine-point plan that envisioned not to reform economic irregularities and financial and fiscal odds alone but also embark on a fundamental change of the development paradigm. The new growth strategy envisaged to seek sustainable and equitable growth by means of structural improvements in the productive sectors of the national economy.

The new policy identified intervention in (1)macroeconomic stabilisation, (2) social Protection, (3) agriculture, (4) energy, (5) improving industrial competitiveness, (6) infrastructure development through public-private partnership models, (7) increasing the depth of capital markets, (8) human capital, and (9) administrative and governance reform.

As for macroeconomic stabilisation, the government has achieved a reduction of the fiscal deficit to 5.2 percent and a fiscal adjustment of over 2.4 percent of GDP in less than a year. The deficit is projected to be kept in check at 5.1 percent of GDP, despite the absorption of unprecedented security-related spending, during the current fiscal.

External current account deficit was brought down to 3.5 percent of GDP from 8.5 percent two years ago. Foreign exchange reserves rose to US $15 billion from less than US $6 billion in October 2008. The Pakistan remittance initiative helped achieve a target of US $800 million for the first time in Pakistan's history. The plan also resulted in inflation to go down from 25 percent in October 2008 to 10.5 per cent as of December 2009.

Similarly, Pakistan's international credit rating was upgraded by global agencies. Prices of Pakistan's Eurobonds have surged, making them amongst the strongest performers in emerging markets; and foreign portfolio investment in Karachi Stock Exchange has touched a level of about US $350 million since July 2009.

Likewise, the KSE-100 index has recorded impressive gains since January 2009, rising by 106 percent. The government took a major initiative of structural reforms to increase the tax-to-GDP, a key pillar of the government's economic strategy, by proposing a law to implement a broad-based value added tax (VAT) with minimal exemptions.

A bill on VAT is being prepared for parliament to enact a law. Besides, other measures like improving tax administration and reinstating tax audits have been taken. The cumulative effect of these policy measures will be an increase of Pakistan's Tax-to-GDP ratio to 13 percent by 2013.

Besides making full use of the Benazir Income Support Programme to augment social protection of weaker sections of the society, the a cabinet committee on restructuring key public sector enterprises was also formed to refurbish PIA, Pepco, Railways, TCP, USC, Pakistan Steel Mills and NHA with the objective of plugging leakages and checking irregularities caused by losses amounting to Rs 250 billion a year.

Source: http://www.brecorder.com/index.php?id=1038951&currPageNo=1&query=&search=&term=&supDate=