Pakistan : Terrorist Wahabi Islamic Rep Pakistan 6

[Naresh]

.

[size="4"]The storm ahead[/size]



[url="http://www.thefridaytimes.com/14012011/page4.shtml"][center][size="7"][color="#006400"]The future of the economy[/color][/size][/center][/url]



[color="#4B0082"]Safiya Aftab[/color]



[color="#0000FF"]The government, which appears rattled by the unmasking of an aggressive popular mood, is already using economic policy in a partial attempt to appease[/color]



The 4th of January 2011 may just become one of the more significant dates in Pakistan’s history. To the less optimistic amongst us (and that number is increasing day by day) it marks [color="#FF0000"]what may well be the “tipping point.”[/color] A mindset that was deemed to be dangerous and destructive, but limited to a small number, actually appears to have permeated every layer of society. The assassination of Salmaan Taseer has exposed the cleavages in Pakistani society, which at the moment seem insurmountable.



That Pakistan’s society stands ever more deeply divided and hostile, at a time when the economy is going through a bad patch, is not good news. The government, which appears rattled by the unmasking of an aggressive popular mood, is already using economic policy in a partial attempt to appease. Two days after the Governor’s murder, soon after attending his funeral, the Prime Minister announced a reversal of the fuel price hike that had gone into effect on 1 Jan, bringing prices down to 31 October 2010 levels. The PM then made a visit to 90 Azizabad, and succeeded in winning back the support of at least one former coalition partner who had deserted the government on the issue of the fuel price hike.



On RGST, the government is silent for the moment, and is probably not going to raise the issue for another month or so. By March, when the budget process begins in earnest, the bill will have to be presented in Parliament if the government has any intention of imposing the tax and successfully completing the IMF SBA. In any event, there will be no new tax until the next fiscal year.



The federal government’s tax revenues for the first five months of the current fiscal year amounted to Rs 500 billion according to the State Bank’s data, 28 percent of the target of Rs 1.8 trillion for the year. Collection this year was, in fact, 8.7 percent higher than the corresponding period in 2009, in spite of the fact that impacts of the floods were supposed to have kicked in by November. Last year also, about 30 percent of the tax target had been collected by November. This is a good performance on the part of the revenue collection agencies, but with no RGST and a reduction in taxes accruing from the sale of petroleum products, tax collection is likely to fall short of the ambitious target set for the year.



Total expenditure was controlled in the first quarter of the current fiscal compared to last year, at Rs 629 billion compared to Rs 636 billion for the same period in FY2010. The most obvious difference was in development expenditure, which was curtailed because of the floods, [color="#FF0000"]and came to just Rs 62.7 billion for the period from July to September 2010,[/color] compared to Rs 108 billion for the same period last year. Defense expenditure increased slightly, from Rs 86 billion for the first three months of FY2010 to [color="#FF0000"]Rs 93 billion for the first three months of the current fiscal.[/color] The figures for the second quarter are not yet out, but expenditure is likely to have gone up substantially with Watan Card compensation payments to flood victims alone coming to over Rs 27 billion (1.3 million cards have been activated according to NADRA, and a payment of Rs 20,000 should have gone out against each). The extent of the government’s borrowing from the State Bank over the first five months of the current fiscal (Rs 1.8 billion a day) points to the fiscal crunch. The borrowing from the central bank in turn is almost certainly fueling the inflationary trend, with year end figures likely to top 15 percent.



Industrial production was not doing too well even before the impact of the floods set in, [color="#FF0000"]with growth in large scale manufacturing recorded at -2.8 percent for the period from July to October.[/color] Textile production in particular has taken a hit with production falling by 10 percent compared to the same period last year. And with the energy supply crisis worsening over the winter months, the sector can hardly show significant recovery.



In the midst of all this domestic gloom, the external sector is doing better than expected. Total exports have amounted to $9 billion dollars for the first five months of the year compared to $7 billion in the previous year, with textiles, doing well on the back of a recovery in FY2010. The current account deficit for the first quarter of the ongoing fiscal year was 40 percent lower than the previous year, helped also by the continued strength of foreign remittances. Foreign investment, on the other hand, was down by 28 percent compared to the previous year by November 2010. Flows from western countries were particularly slow, but China and Hong Kong combined brought in almost $90 million of FDI in the first five months of FY2011. Perhaps buoyed by this news, as well as the stability of foreign exchange reserves at over $15 billion, the stock market made a recovery in 2010. The KSE-100 closed at over 12,000 points at the end of 2010, compared to just over 9000 in 2009, and has maintained its position in spite of the upheavals of the first week of January.



There is still half the fiscal year to go, and things could go either way. Export growth typically takes place after a lag and is linked to production in the previous year. This may have run its course, or may still sustain for the next few months. The commodity producing sectors won’t do well this year, but services may show reasonable growth, particularly if reconstruction efforts gain momentum. It will not be a high growth year, but a stable performance in even one major sector (probably services) would be a blessing.



In the larger context though, it’s hard to see how an increasingly beleaguered government facing an alarmingly angry citizenry will be able to implement tough policy decisions. The about-turn on the fuel price does not bode well and shows policy inconsistency. If the government wanted to provide relief, it should have done so by reviewing the tax structure on petroleum products rather than tampering with the mechanism of price determination by announcing arbitrary changes. It will also be interesting to see how it deals with the RGST. If the socio-political atmosphere vitiates further, bringing in the tax will be impossible. The government should at least start a debate on new direct taxes, most notably one on agricultural income. This will earn it a few brownie points amongst the masses, but more importantly may become inevitable in the medium term.



The writer is an analyst with Strategic and Economic Policy Research (Pvt) Ltd



Cheers