Economic revival of Pakistan and its future implication

Presented by: Ali Raza

Presented to: Mr. Rizwan Shabir

Riphah School of leadership Riphah international university

Economic revival of Pakistan and its future implication

UndertakingI hereby declare that all the contents of this report are original one and have not been copied from any source. Any resemblance will be accidental one during the preparation, I have consulted several websites. I have also come across certain research papers in this quest. I have also consulted many books.

AcknowledgementFirst of all thanks to almighty Allah, who has given me opportunity to be at this stage of professionalism? Next I owe a lot of thanks to my supervisor Mr. Rizwan without whose guidance it mat not be possible for me to prepare this report. Thanks to my parents to be always kind to me and help me through thick and thin to meet my studies requirements. Also I would like to mention here about my friend who also helped me a lot in making of this report.

DedicationI dedicate this report to every single person who guided me in this report and I would also like to dedicate this report to my parents for encouraging me in my studies.

AbstractThis report is about the economy of Pakistan. This report clearly tells about the present economical state of Pakistan and its future implications .in this report the present and past economical state and its progress in economy is being mentioned. Its tells us about the progress of different regimes in raising the Pakistan’s economy.

Table of contents

Undertaking

Acknowledgement

Dedication

Abstract

Table of content

Preface

IntroductionPakistan economy reviewEstablishment of WTO cell and improvement of external transparency.The tariff policy and Simplification of tariffGeneral sales tax for regimes and discouraging of smugglingFuture implications

PrefaceThis report describes the economical state and tells us about the present state of Pakistan’s regime. It also tells us about the progress of different government in increasing Pakistan gdp. It also describes about the future implication of economic revival. As credit goes to this government who increased the Pakistan’s gdp and decreased the loans.

ECONOMIC REVIVAL OF PAKISTAN AND ITS FUTURE

IMPLICATIONS1. INTRODUCTION

Pakistan is a poor and heavily populated country, which over the years had been suffering from internal political disputes, lack of foreign investment, and a costly confrontation with neighboring India.

Pakistan's economic outlook had always been marred by its weak foreign exchange position, notably its continued reliance on international as well as external creditors for hard currency inflows.

It would be interesting to have a look of the Pakistan Economy Overview- 2000, which would indicate the clear economic picture of one of the most under developed country, ranking at 142nd, (out of 177 total countries) in the human development-- as indexed by the UNDP in July, 2004

Pakistan Economy Review- 2000

GDP -real growth rate: 3.1% (1999 est.)

Population below poverty line : 34% (1999 est.)

Inflation rate : 6%(1999 est.)

Unemployment rate: 7% (FY98/99 est.)

Exports : $8.4 billion (1999)

Imports: $9.8 billion (1999).

Debt - external : $38 billion (1999 est.)

Economic aid - recipient : $2 billion (FY998/99)

In 1999 when President MUSHARRAF’s government came into power, it faced over $38 billion in external debt. The Military Government soon launched an economic revival programme and had now been able to nearly complete rescheduling with Paris Club members and other bilateral creditors.

President MUSHARRAF’s government economic agenda included measures to widen the tax net, privatize public sector assets, and improve its balance of trade position. His government made privatization a cornerstone of economic revival and has received positive endorsement from the World Bank.

Pakistan's Comprehensive Economic Revival Programme, launched in 1999 was

forcefully pursued which has resulted both in the successful implementation of a Stand-By Arrangement with the IMF and subsequent substantial support by the Fund under its Poverty Reduction and Growth Facility.

Boosted by continued buoyancy in domestic and external sectors, Pakistan's economy is expected to grow 5.5% in FY 2004 and 5.8% in FY 2005, according to a major Asian Development Bank (ADB) report released recently. The Asian Development Outlook 2004 (ADO) says that the foundation has been laid for significantly higher growth and the economy could possibly move to a path of over 6% in subsequent years.

The recovery of the economy, which started in the second half of FY 2002, gained momentum in FY 2003, when the economy grew at 5.1%, a pace not seen in the preceding 6 years. The current account surplus increased sharply, foreign exchange reserves touched new highs, the overall fiscal deficit declined further, and inflation remained low. Export growth was also the highest in over a decade. Some of the steps taken by the last two governments with regards to the revival of economy are explained in the succeeding paras:

2. ESTABLISHMENT OF “WTO” CELL

In line with its multilateral trade commitments and other obligations, including

those with international financial institutions, and with domestic political developments, Pakistan has undertaken changes in its legislative and institutional framework. The Ministry of Commerce was strengthened with the establishment of a WTO-cell and, as from October 2000, a “WTO Council” has looked into the effects of WTO-related policies on trade and production. Pakistan has participated actively in numerous aspects of the WTO's work. New legislation was or is to be enacted on safeguards, anti-dumping and countervailing measures, and intellectual property rights as well as in several other areas.

4. IMPROVEMENT OF EXTERNAL TRANSPARENCY OF TRADE AND INVESTMENT REGIMES

Pakistan has acted to significantly improve the external transparency of its trade and investment regimes. It has largely met its regular WTO notification requirements and responded to most questions raised by WTO Members in a number of areas (e.g. state-trading and domestic support in agriculture); tariff information has been submitted to the WTO Integrated Data Base, but there is still scope for improving notification in a number of fields. In addition to regulatory reforms aimed at simplifying and reducing trade-related regulations, and the presence of Internet websites at several public sector agencies, Pakistan has made efforts to make legislation

pertaining to trade (including the customs tariff) and investment publicly available in English through a web-based computer network.

5. THE TARIFF POLICY

The tariff remains Pakistan's main trade policy instrument; its relative importance has increased as a result of the recent elimination of non-tariff barriers on several items. At the same time, it is a major declining source of tax revenue. As a result of a major restructuring of Pakistan's customs tariff, the average tariff rate has fallen to 20% from 56% in 1993/94. Nevertheless, tariff protection is still relatively high, especially for a few sensitive items. Consequently, the tariff remains a potential restraint on domestic competition and thus an obstacle to the efficient allocation of resources, with adverse consequences for the economy's productivity and local firms' export competitiveness. However, the scope for improving efficiency through further substantial cuts in tariffs may be limited in the near future by the importance of the customs tariff to the Government as a source of revenue, and by the internal tax system's vulnerability to avoidance and evasion.

6. SIMPLIFICATION IN TARIFF

During the period of President Musharaf’s Government and thereafter, Pakistan's tariff has been considerably simplified and rates

significantly reduced which now fall into four tiers. Reduction and rationalization of tariffs has been accompanied with simplification of procedures. Regulations having a distortionary effect (e.g. user-specific concessions) are being done away with. The number of such Statutory Regulatory Orders (SRO's) has already been halved over last year and the government seems committed to totally eliminate them over the next couple of years.

7. GENERAL SALES TAX REGIMES

Reliance on Customs Duties as a source of government revenues had been one of the major factors compelling Pakistan's high tariff rates. This compulsion has been largely mitigated by tax administration reforms and a major shift to the General Sales Tax regime.

8. EFFORTS FOR DISCOURAGING SMUGGLING

Smuggling has been a menace which has damaged Pakistan economy the most. In fact the protection from imports is provided by several border taxes and charges. Moreover, withholding taxes are levied on imports (and exports); these taxes, which may be deductible from income taxes, are apparently intended to combat income-tax evasion. In addition, a capital-value tax is levied on imported motor vehicles, with the stated objective of discouraging smuggling which is always a menace to the economic viability of the country.

8. STREAMLINING OF CUSTOM CLEARENCE PROCEDURES

Efforts have been made to streamline customs clearance procedures by introducing an express lane Facility and an Electronic Assessment System. In the context of the implementation of the WTO Agreement on Customs Valuation now a Customs Valuation Information System, containing a database on assessed import values of each individual consignment may be accessed by the general public through the Internet.

9. AMENDMENTS IN CUSTOM ACT

Customs valuation has been switched from the traditional Import Trade Price system to the WTO complaint transaction based system. Necessary amendments to give effect to this have been made in the Customs Act

10. MAINTENANCE OF IMPORT PROHIBITATIONS AND RESTRICTIONS

Import prohibitions and restrictions have been maintained on a number of grounds. Their implementation continues to depend largely upon the status of the importer (e.g. public sector or industrial consumers), origin (e.g. Israel, India), prior approval, or other conditions.

11. CONTINUATION OF GOVERNMENT PROCUREMENT TO SUPPORT LOCAL INDUSTRY

Government procurement has continued to be used as an instrument to support local industry. Pakistan has a local-content scheme (Indigenization/Deletion Programme) for which it has secured an extension for its elimination under the WTO Agreement on Trade-Related Investment Measures.

12. REDUCTION OF EXPORT PROHIBITATIONS AND LIBERALIZATION OF EXPORT REGIME

The scope of export prohibitions seems to have been reduced by putting greater emphasis on compliance with international commitments. State involvement in exports of many items was recently reduced and is being curtailed. State participation in production and trade remains mainly in chemicals, transport equipment, fuels, machine tools, mining and energy, and in engineering, financial, telecommunication, transport, and tourism services. Export regime has been liberalized to do away with public sector monopolies to permit full private sector participation.

It is present government endeavor to do away with all export subsidies. Now there are no compensatory rebates. The duty drawback rates have been rolled back and rationalized on input-output coefficient basis, and the element of subsidy in export finance completely eliminated.

13. NEW MEASURES TO CATER GENUINE EXPORT NEEDS

New measures have been introduced to cater to genuine export needs. These consist of:

a.Notification of Duty and Tax Remission for Export rules.

b.Setting up of Input-Output Coefficient Organization (IOCO) to work out, on a professional basis.

c.Establishment (in the private sector) of Pakistan Export Finance Guarantee Agency (PEFGA), to provide bankable guarantees that may be used as collateral. This scheme is of particular interest to small and medium-sized exporters.

d.Creation of Foreign Currency Export Finance (FCEF) facility which would assist exporters.

e.Setting up of Pakistan National Accreditation Council (PNAC) that will provide accreditation services to certification bodies operating for ISO 9000, ISO 14000 etc. This will contribute to better quality standards for Pakistan's exports.

14. REFORMS IN TAX SYSTEM

Pakistan relies heavily on indirect taxes (including customs tariffs), which account for 71% of total tax revenues. The tax system involves a multiplicity of taxes, often narrowly based as a result of numerous concessions, if not exemptions, and some involving high tax rates. It can thus distort domestic prices, thereby constituting a potentially important obstacle to the efficient allocation of resources, and is unduly complex. Moreover, tax administration tends to be weak and tax evasion endemic owing to the large size of the “informal” economy. Reportedly, less than 1% of the population paid any income taxes in 1999). In order to address these deficiencies, steps have been taken to reform the tax system. They include:

a. Significant changes to the General Sales Tax (GST).

b. Self-Assessment Scheme intended to broaden the income tax base.

c. Reduced personal contact between taxpayers and tax collectors.

d. Clampdown on tax evasion.

e. Imposition of an agriculture income tax on farmers with high incomes at the provincial level, thereby placing agriculture and non-agricultural activities on a more equal footing.

f. Wealth tax and two local taxes (Octroi, Zilla) were abolished.

15. NEW LEGISLATION ON PATENTS, TRADE MARKS, LAYOUT DESIGNS OF INTEGRATED CIRCUITS, AND COPYRIGHTS

To ensure compliance with the WTO Agreement on Trade-Related Intellectual Property Rights (TRIPS) commitments, Pakistan passed a new legislation on patents, trade marks, layout designs of integrated circuits, and copyrights.

16. PROGRESS IN PRIVATIZATION

Although progress on privatization (divestment) appears to have been rather slow the government efforts in this regard have been reinforced with the establishment of short, medium, and long-term divestment plans affecting the restructuring and divestment of numerous entities.

17. POLICY ON FOOD ITEMS

Reflecting a policy largely focused on a few major crops (e.g. wheat, cotton, rice, and sugarcane) overall the agriculture, livestock, fisheries, and forestry sector has received little government support. Pakistan remains a net food importing country as production had been unable to keep pace with the rapidly expanding food requirements.

18. CONTRIBUTION OF THE “PLAN” FOR SETTING UP OF JOINT VENTURE WITH FOREIGN FIRMS

New policies have contributed to the setting up of joint ventures with foreign firms in mining and energy activities. State involvement has remained largely intact, although efforts have been made to privatize some state-owned enterprises.

19. ENCOURAGEMENT OF PRIVATE SECTOR

Since 1999 steps have been taken to reduce state involvement in the services sector and encourage private investment in several activities as under:

a.Financial services have been dominated by domestic and nationalized institutions, while the progressive introduction of the Islamic (interest-free) banking principles may discourage foreign banks.

b.The autonomy of the State (central) Bank of Pakistan (SBP) has been reinforced and prudential regulations are being strengthened.

c.Private sector involvement in telecommunications has increased in activities other than the fixed line services.

d.Despite the exclusive rights of state entities in broadcasting and audiovisual,

audiovisual services have been opened to joint ventures with foreign investors;

e.In air transportation the state-owned national carrier has been faced with private-sector competition on domestic routes.

f. Software development and exports have been a priority and are being encouraged in several ways (mainly through tax incentives).

g.The monopolistic role of state enterprises in trade has been done away with.

h.The Cotton Export Corporation and the Rice Export Corporation has been wound up. The private sector is now actively involved in the export of these products.

i. Trading Corporation of Pakistan occasionally intervenes in the cotton market, in terms of its charter. Its role is, however, quite limited.

j. Rice export is entirely in private sector hands.

20. TRADE POLICY AND ITS OBJECTIVES

The policy announced for the fiscal year 2004-2005 aims to continue the thrust on durability, consistency, and predictability of economic policies. The trade policy laid

emphasis on market-driven measures; government intervention was limited to ensuring a level playing field, removal of structural impediments, and to guiding investments to the more productive sectors. The policy specified the following broad objectives:

a. Reduce anti-export bias through reduction in import duties and trade liberalization, competitive exchange rates, and improvement in the export infrastructure.

b. Achieve sustainable and consistent growth in export earnings through diversification of export base and greater value addition in goods and services.

c. Liberalize the import regime to enhance competition in the economy with a view to achieving significant quality and productivity gains.

d. Simplify and streamline trade procedures and practices.

22. EFFECTS OF “REVIVAL PROGRAME”

Pakistan has a narrow export base concentrated in low-value-added products and a few markets. Minor changes in the composition and direction of imports have been due largely to the recent rise in oil prices;

the EU, the United States, and Japan have maintained their positions as Pakistan's main trading partners. Despite the 1997 opening of most sectors of the economy to foreign direct investment (FDI), inflows have dropped, reflecting a decline in investors' confidence. However, the continued successful implementation of the Revival Programme could well serve to improve confidence.

Pakistan's largest industry, textile production, has seen a sharp increase in investment, as indicated by the more than doubling of imports of textile machinery in the past three years. This has substantially improved the prospects of the industry. The large scale manufacturing sector, especially the textile industry, is expected to grow by 8% to 9% in the next two years.

Exports shot up by 19.6% to $11 billion and imports by 20.1% to $11.3 billion in fiscal year 2003. Better access to European Union markets, improved competitiveness of the domestic textile industry, and greater availability of export finance at lower interest rates encouraged exports, while the surge in imports reflected the upturn in the domestic economy, the ADO reports.

A sharp rise in worker remittances, as well as a decline in interest payments on foreign debt, pushed up the current account surplus by 49.5% to $4.1 billion. The capital account also

showed a significant improvement because of substantial increases in foreign direct investment, suppliers' credit, and disbursement of foreign assistance. Consequently, foreign exchange reserves at SBP more than doubled to $9.5 billion on 30 June 2003, compared with $4.3 billion held 12 months previously.

The country's external debt and liabilities also declined, by $1 billion to $35.5 billion in fiscal year 2003. Since 2001, the Government has implemented a comprehensive debt reduction strategy of paying off expensive outstanding liabilities. It has achieved much in implementing this strategy. The ratio of total public debt to GDP fell from 106.9% in fiscal year 2000 to 94.7% in fiscal year 2003.

23. FUTURE PROSPECTS AND EXPECTATIONS OF THE “ECONOMIC REVIVAL PLAN

It is expected that within the next few years, foreign exchange inflows from exports and remittances would easily cross the $20 billion mark and would comfortably meet the increase in import requirements and foreign debt payments.

Agriculture will get a lift from investments made in irrigation infrastructure in the past few years to combat drought. Adoption of water-saving techniques by farmers during the

drought years will also benefit agricultural production.

The Government's active debt management policy and tax reforms are expected to lead, respectively, to further reduction in debt servicing and to increases in revenues, the report says. The resulting fiscal leeway will allow it to spend more on operation and maintenance in the public sector. This will in turn improve physical infrastructure, which along with continuing low interest rates, is likely to further encourage investment."

Since there is expected a surplus in balance of payments, therefore it would keep the foreign exchange open market subdued and rates at reasonable level.

24. CONCLUSION

Pakistan's economy is supported by the global economic recovery and improved relations with India will further enhance the investment climate and give a boost to economic activity. In addition, the positive economic outlook is backed by a significantly strengthened economic base.

Pakistan’s long-term economic growth depends importantly on the continued implementation of the Revival Programme. Pakistan's long-term economic growth, however, depends importantly on the continued implementation of the Revival

Programme, particularly in the reduction of direct state intervention in the economy and improvements in the tax base. Long-term growth of the economy is also dependent on Pakistan's success in diversifying its exports, which in turn depends on its trading partners' willingness to keep their markets open, or even open them further, to Pakistani goods and services, notwithstanding the present global economic slowdown.

With the implementation of the Economic Revival Plan with commitments, the coming decade will prove to be a period of huge influx of foreign exchange and increase in trade activity which would stabilize the foreign exchange reserves requiring no more borrowings and making timely payments of foreign debt. There will be no more interference and meddling of foreign countries, agencies in our internal/external affairs and our planners would be able to plan better in the interest of the nation.