Economic Policy-Future Options for Pakistan-Presentation

A Presentation on Economic Policy and Future Options for Pakistan

1. Economic Policy - Future Options for Pakistan (Economic Reforms) This course aims at exploring future economic policy options and reforms for Pakistan. It also highlights structural impediments to economic growth and all other contemporary economic problems, which the country is faced with.

2. A CRITICAL OVERVIEW OF PAKISTAN’S ECONOMY Fiscal Deficits: Chronic income-expenditure imbalance, fiscal deficits ranging from 2.95% to 12.2% of GDP. Tax-to-GDP Ratio: One of the lowest in the world due to sectoral imbalances and low revenue generation. Taxation Focus: Heavy reliance on taxing the salaried class and manufacturing, impacting purchasing power and export costs. Defense and Debt: A significant portion of the budget allocated to defense and debt servicing. External Imbalances: Over-dependence on imports, stagnant exports, low foreign investment, and falling remittances. Low Investment: Limited investment in productive sectors, focusing on unproductive areas like real estate.

3. STRUCTURAL IMPEDIMENTS TO ECONOMIC GROWTH Immature Structural Transition Consumption-led Growth Model Low Tax-to-GDP Ratio INVESTMENT CLIMATE IN PAKISTAN In case of Pakistan, the investment to GDP ratio remains below 15%. With no investment, the alternative policy adopted is borrowing. Due to the continuous borrowing over the years, Pakistan cannot borrow much anymore because it does not have repayment capability.

4. Barriers to Investment Security Threats Chromic Twin Deficits Policy Inconsistency and Discouraging Taxes Strategies to Attract Investment Strategies to Improve Investment Environment Sovereign Wealth Funds Asset Allocation Economic Propositions Investment Focus and Policy Framework Prioritize investment in the technical industry Develop a policy framework that fosters competitive industries Institutional Reforms Economic Zones and Engagement Establish corporate economic zones on the model of Dubai & Qatar Correct the economic structure to ensure timely payments and build trust. Promote engagement with East Asian markets for trade opportunities.

5. A CRITICAL APPRAISAL OF PAKISTAN’S TAXATION SYSTEM Structural Weaknesses in Taxation System Low Tax-to-GDP Ratio Sectoral Imbalance Federal Imbalance and Indirect Taxes Federal Imbalance in Tax Collection Heavy Reliance on Indirect Taxes Tax Evasion and Non-Filers Low Number of Tax Filers

6. Improving the Tax Collection: Strategies to Address the Fiscal Deficit Decentralization of Tax Collection Learn Tax Decentralization from China Continue the Federal Devolution Project for decentralized tax collection in Pakistan. Targeting Real Estate and Land Holdings Exploit the Untapped Real Estate Taxes Establish a national tax agency with a simple and harmonized tax code Addressing Tax Evasion and Non-Filers Implement strategies to recoup sales tax losses Cracking Down on Smuggled Goods Tax Simplification and Institutional Reforms Simplify laws Merge all tax collection agencies into a single entity called 'Pakistan Revenue Board (PRB)‘ Rationalize perks and privileges of government officers

7. THE ISSUE OF PUBLIC EXPENDITURES MANAGEMENT IN PAKISTAN High Public Expenditure and Growing Deficits Pakistan's public sector expenditures (federal and provincial)/ Cost of running government has reached 23% of GDP. Around 20% of the budget is financed by external borrowing. Interest Payments and Fiscal Challenges Interest payments make up around 70% of all tax revenues. Impact on Development and Human Well-being Public spending on development remains low and static.

8. Fiscal Management Strategies Implementing the fiscal responsibility and debt limitation Act, enacted in 2005, is crucial. Encourage austerity to curb twin deficits. Close down federal departments and ministries responsible for functions that have been devolved to provincial governments, reducing redundancy and expenses. Targeted subsidy reforms are needed to eliminate unproductive subsidies. Ensure Defense Budget Scrutiny, especially the non-combat defense budget. Reform pension funds management to gradually eliminate direct fiscal allocation for pensions and focus on superannuation.

9. BALANCE OF PAYMENT CRISIS IN PAKISTAN Pakistan has been facing balance of payment crisis over a decade, caused by ever-ballooning trade deficit, dwindling investment and barriers to foreign remittances. Recently, the State Bank of Pakistan (SBP) published the balance of payment data. It revealed that the country had a $17.41 billion CAD for the fiscal year 2021-22. Factors Contributing to External Imbalances: Increasing Reliance on Imports Declining and Static Exports Lack of regional trade Productivity challenges

10. Policy Measures to Address Balance of Payment Crisis Fixing the Trade Deficit Diversification of Energy Sources Implement import duties to discourage imports while providing subsidies to the export sector. Merge social sector ministries into a single human development ministry for efficient resource utilization. Enter currency swap agreements to manage and control dollarization, reducing the demand for foreign exchange. Enhancing Productivity Encourage competition, technology transfer, and innovation to improve productivity levels. Encourage firms to adopt international certifications to enhance productivity and boost exports. Establish venture capital and technology support funds in collaboration with international partners like China and multilateral banks. Increasing Remittances Leverage Pakistan's human capital as a significant export asset by sending skilled labor to foreign countries. Focus on strengthening primary and secondary educational foundations to produce skilled workers. Improve the transparency and security of remittance channels, promoting digital technology platforms like PayPal. Encourage the diversification of banks and exchange companies to facilitate remittances. Leveraging young workforce by training them and linking them with global markets Attracting Investment

11. ECONOMIC REFORM AGENDA: OTHER RECOMMENDATIONS Policy Consistency, Legal Strengthening, and Resource Mobilization Diversify Borrowing and Promote Private Investment Strategic Focus on Asia