Tough times ahead as Pakistan turns 50

By Muhammad Aftab Khan

ISLAMABAD (JP): The Pakistan government has created a new plan to revive its economy as the nation celebrates its 50th year of independence today.

Moslems from the South Asian subcontinent struggled for more than 100 years for a homeland of their own and finally gained independence from Britain.

Poised at the threshold of the third millennium, the nation now faces new challenges. These include:

- entering the new millennium as a middle income country.

- increasing the literacy level beyond 70 percent

- striving for a standard of living which equals those in rapidly developing countries

- becoming a net exporter of technical skills and at least medium technology

- maximizing self-reliance

The achievement of these goals means a lot of hard work, something that should come naturally to this nation.

The challenges facing Pakistan on its golden jubilee have been compounded by nearly three years of economic recession and inefficient government policies.

Prime Minister Nawaz Sharif, who started his second terms in February, approached his role with a dramatically different philosophy in terms of economics and politics. The budget for the 1998 fiscal year (July 1997 to June 1998) is the government's key instrument for change.

While the tax-free budget is based on proposals prepared by the business and industry itself, the government expects everyone to pay taxes voluntarily. Sharif has placed enormous trust on the citizens -- especially the rich, businesspeople and industry tycoons -- to voluntarily pay taxes and help the government raise money for development, defense and debit repayment.

Some people, however, see Sharif's plan as a risk. But the initial response seems to be along the lines expected by Sharif.

Ilyas Billour, President of the Federation of Pakistan Chambers of Commerce and Industry, says: "It's time for business and industry to voluntarily pay their taxes and help revive the economy.

"Such an opportunity to enjoy major tax breaks, offered by the government, and an environment to produce more and earn more may never repeat itself," he said.

Sharif's economic recovery program revolves around four key elements.

- Introducing major tax breaks in personal income and corporate taxes.

- Reducing customs duties on a wide range of imports from the maximum average of 65 percent to 45 percent. This move will bring down the cost of imported raw materials on which a large number of industrial units are based

- Reducing the vat-type General Sales Tax. The tax slabs will be cut from five to three and the rate of tax from a maximum of 18 percent to 12.5 percent

- Enlarging the number of tax payers on a voluntary basis to collect more revenues rather than raising the rate of tax.

Finance Minister Sartaj Aziz said the new policies are the first important step toward the revival of the economy and advances in welfare for the people.

"Our economic philosophy is to shift the burden of taxes from production and investment to consumption," he said.

The government's primary objectives are alleviating poverty, controlling inflationary pressure and reducing unemployment, boosting exports and encouraging investment.

Defense is held supreme on the priority list. The government plans to strengthen the country's defense and accord priority to the tensions in South Asia.

The government is also mindful of its duties to develop and expand the social sector, despite resource constraints. A large sum of money -- Rs 100 billion (US$ 2.5 billion) -- has been set aside for social action programs in the next fiscal year. The programs aim to improve the amenities for the poor, particularly those living in the rural belt, basic education, health, population welfare, clean potable water and sanitation.

The second phase of these programs have started and an amount of Rs 270 billion ($ 6.50 billion) will be allocated for the next four years.

Small and micro entrepreneurs will be given special loans to establish and expand their business. Such loans will not be granted to rich people.

The agricultural sector is of the utmost importance for the government and the people. The idea is to boost output, increase raw materials and food production. In the past, there have been shortages of cooking oil, wheat and sugar. The reason: agriculture was not given due attention in an economy which is still largely agriculture-based.

Industrial growth was slow in the last three years, causing a crisis-like situation. Large scale manufacturing nose-dived to negative 1.4 percent in 1997 and on average stayed as low as 2 percent.

Was this industrial crisis not the result of the economic policies pursued during the last three years? Taxes worth Rs 120 billions (US$3 billion) were imposed under these policies, the charges of gas and electricity were doubled and the price of raw material prices increased about 40 percent.

Bank loan interest rates continued to climb -- with the devaluation of the currency -- and averaged 22 percent to 23 percent.

The outgoing government claimed last year that the budget deficit had fallen from 8 percent to 4 percent, while in remained 6.2 percent of GDP. The deficit is now being brought down from Rs 154 billion (6.2 percent of GDP in 1997) to Rs 144 billion (or 5 percent in 1998).

A revival of the industrial sector is government's main aim. Without growth in the sector, from the present 2 percent to the planned 7 percent, the export target cannot be realized. Neither the tax revenues will increase nor inflationary pressure will decline.

The industrial sector will not make any headway unless its burden is off-loaded. Hence the downward revision of taxes was announced on March 20.

Another important measures is a reduction in the bank mark-up rate on advances. This will be achieved by curtailing excise duty by up to 1 percent. The gas and electricity rates will not be raised in the foreseeable future.

Without reforming the tax machinery, taxes cannot be collected. Hence the modernizing, upgrading and computerizing of the Central Board of Revenue. The expectations are that by reducing the tax rate and expanding the tax base, the revenue collection will increase. All this is based on the economy bouncing back and people paying their taxes.

The total tax collected during the 1997 fiscal year was Rs 286 billion whereas in 1996 it was Rs 284 billion. The target for 1998 is Rs 324 billion.

Foreign exchange reserves which had fallen to US$638 million in November, 1996, are now US$1.05 billion.

The second wheel of the economic agenda is the development and expansion of the social sector and Rs 100 billion has been allocated to improve the condition of the masses. The aim is 17 percent of total expenditure -- compared to the UN standard of 20 percent. The social sector allocation is still 15 percent to 20 percent higher than the previous year's funding.

The government is going to adhere to a new economic philosophy of giving more concessions to corporate, industrial and agricultural sectors to ensure they flourish. Attracting foreign private investment is key. A large number of industrial and hi- tech ventures have been identified by the government's Board of Investment as suitable for foreign private entrepreneurs. An attractive package of incentives, developed infrastructure and facilities are offered to these investors.

According to reports, removing the unnecessary burdens of taxes and creating an investment-friendly government will help Pakistan reach its goal. The government has provided constitutional and local guarantees, offered foreign and domestic protection and health policies to boost economic growth.

That seems to be the recipe of growth for Pakistan to meet the challenges of the 21st century. And Sharif's dream of taking Pakistan into the third millennium as a prosperous, middle-income country may well come true.

The writer is former director general of the Associated Press of Pakistan.