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Pakistan ECONOMY: Key Stakeholders perspective
CITIZENS
INVESTORSMULTILATERAL
AGENCIES (IMF/WORLD BANK etc.)
Slide 2
THE CITIZENS PERSPECTIVE
Lack of Employment Opportunities
Crushing Inflation
Source: State Bank of Pakistan
FY-2
000
FY-2
001
FY-2
002
FY-2
003
FY-2
004
FY-2
005
FY-2
006
FY-2
007
FY-2
008
FY-2
009
FY-2
010
FY-2
011*
3.6% 4.4%3.5% 3.1%
4.6%
9.3%7.9% 7.8%
12.0%
20.8%
11.7%
14.6%
Consumer Price Inflation %
* July-DecemberFY
-2000
FY-2
001
FY-2
002
FY-2
003
FY-2
004
FY-2
005
FY-2
006
FY-2
007
FY-2
008
FY-2
009
FY-2
010
FY-2
011*
3.9%
2.5%
3.6%
5.1%
6.4%
8.6%
6.6% 6.8%
3.7%
1.2%
4.1%
2.5%
Real GDP Growth Rate %
* SBP projectionSlide 4
THE CITIZENS PERSPECTIVE (CONT…)
Lack of Economic Justice:
Rich don’t pay fair share of taxes
Government not able to control cartel’s (mafias)
Poor and unequal access to services and opportunities (gas, electricity, education, health etc.)
Slide 5
Source: State Bank of Pakistan
2006 2007 2008 2009 20101,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
0
10
20
30
40
50
60
Domestic and External Debt
Domestic Debt - Rs. Billion External Debt - USD Billion
Dom
est
ic D
ebt
- R
s. B
illion
Exte
rnal D
ebt
- U
SD
Billion
FY-2
00
1
FY-2
00
2
FY-2
00
3
FY-2
00
4
FY-2
00
5
FY-2
00
6
FY-2
00
7
FY-2
00
8
FY-2
00
9
FY-2
01
0
(1,000)
(900)
(800)
(700)
(600)
(500)
(400)
(300)
(200)
(100)
-
-8.0%
-7.0%
-6.0%
-5.0%
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
-4.3%-4.3%
-3.7%
-2.4%
-3.2%
-4.3%-4.4%
-7.6%
-5.3%
-6.3%
Fiscal Deficit
Fiscal Deficit - Rs. Billion As % of GDP
Rs.
Bill
ion
As
% o
f G
DP
THE MULTILATERAL PERSPECTIVE: DEBT TRAP
Slide 7
THE MULTILATERAL PERSPECTIVE: DEBT TRAP
Caught in a debt trap and unable to survive without constant external support
Source: State Bank of Pakistan
FY-2
000
FY-2
001
FY-2
002
FY-2
003
FY-2
004
FY-2
005
FY-2
006
FY-2
007
FY-2
008
FY-2
009
FY-2
010
2
4
6
3
5
3
5
6
9
11
9
New External Debt - USD Billion
Slide 8
THE MULTILATERAL PERSPECTIVE
Under taxed and poorly documented economy
FY-2
002
FY-2
003
FY-2
004
FY-2
005
FY-2
006
FY-2
007
FY-2
008
FY-2
009
FY-2
010
9.2% 9.5% 9.2% 9.1% 9.2%9.7% 9.9% 9.8% 10.1%
Tax to GDP Ratio - Pakistan
Ind
ia
Th
aila
nd
Ch
ina
Ma
lay
sia
Sri
lan
ka
Ph
ilip
pin
es
Ind
on
esi
a
Pa
kist
an
Ba
ng
lad
esh
17.7%17.0% 17.0%
15.5% 15.3%14.4%
11.0%10.1%
8.5%
Group's Average; 14.1%
Tax to GDP Ratio Comparison with the Region
Source: State Bank of Pakistan
Slide 9
THE MULTILATERAL PERSPECTIVE
Weak trade competitiveness: Lowest regional trade integration in the
world Poorly educated, low skill workforce
Source: Promoting Economic Cooperation in South Asia, World Bank, 2010
27%
16%
6% 5%3%
1%
Intraregional Trade as a share of GDP - %
Slide 10
THE MULTILATERAL PERSPECTIVE
Source: State Bank of Pakistan
Over and poorly regulated economy
Large, highly inefficient, cash draining public sector
FY-2
002
FY-2
003
FY-2
004
FY-2
005
FY-2
006
FY-2
007
FY-2
008
FY-2
009
FY-2
010(19)
(12)(3)
(13)
8 20
33
153
85
Credit to Public Sector Enterprises - Rs. Billion
FY-2003 FY-2004 FY-2005 FY-2006 FY-2007 FY-2008 FY-2009
11 11
28
97
72
2 1
Privatization Proceeds - Rs. billion
Slide 11
Private & Public Sector Borrowings
The Investors Perspective: Out of control Public Spending
Heavy borrowing by the government has resulted in classic crowding out effect on borrowing , reducing private investments & driving down private demand for credit.
2005-2007 2008-2010
768
132 207
1,169
Private Sector Borrowing
Government Borrowing
Source: State Bank of PakistanFY-2006 FY-2007 FY-2008 FY-2009 FY-2010
15.7% 15.4% 15.0% 12.7% 10.7%
4.8% 5.5% 5.4%
4.6%
4.3%
Public & Private Sector Investment as % of GDP
Private Sector Investment as % of GDP
Public Sector Investment as % of GDP
2005-2007 2008-2010 Spot *
8.5%
12.5%13.7%6 Months T-Bill Rate
* Feb, 2011
20.5%
20.9%
20.4%
17.3%
15%
Slide 13
B- B- B- B B B+ B+ B+ B+ CCC+ B- B-1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
B-
B
B-
B+
CCC+
The Investors Perspective
Badly deteriorated credit standing
Pakistan's Credit Rating by Standard & Poor’s (S&P)
Source: Bloomberg Slide 14
THE SOLUTIONOn a war footing address the severe energy crisis by taking critical reform decisions which tackle pricing distortions, production and distribution inefficiencies, remove bottlenecks for urgently needed imports and develop the indigenous energy resources.
Take urgent & concrete steps to sharply reduce public finance deficits.• Overhaul the tax & tariff structure and bring all sectors
into a uniform documented tax net.• Reform and restructure public sector enterprises, starting
with the transparent appointment of capable / professional top management and boards which are empowered to take the necessary actions.
• Eliminate waste in Govt. expenditure.• Phase out broad based non targeted subsidies which
unnecessarily benefit the well off also.
Significantly increase education, health and income support expenditures (targeted subsidies) for the most vulnerable segments of the Society.
Strengthen intra-regional trade linkagesSlide 16
ADDRESS THE SEVERE ENERGY CRISIS
Expedite LNG imports
Eliminate pricing distortions between different fuels / sectors created by GoP taxation / pricing decisions.
Accelerate development of Thar Coal
Revamp obsolete power generation / distribution / transmission facilities
Deregulate the sector to bring in innovation and allow market to allocate molecules
Accelerate gas exploration through political initiatives by settling high prospective zones in Baluchistan & KP - offer high incentives, which are consistent with global prices, for offshore drilling
Slide 17
IMPROVEMENT OF PUBLIC FINANCE: OVERHAUL THE TAX STRUCTURE
Same rate of tax regardless of source of income. Bring all exempted/severely under taxed sectors in the tax net
Lower the tax rate and remove all exemptions.
Document the Economy
Revamp FBR. Deploy technology
Carry out strategic review of tariff structure to create level playing field for local manufacturing
Check abuse/misuse – Afghan Transit Trade/ under invoicing / smuggling
Pakist
an*
Indi
a
Thailand
Chin
a
Indo
nesia
Malay
sia
Viet
nam
Turk
ey
35.00% 33.99%
30.00%
25.00% 25.00% 25.00% 25.00%
20.00%
Corporate Tax Rate
* Exclusive of 7% levies (WWF, WPPF)
Source: State Bank of PakistanSlide 18
IMPROVEMENT OF PUBLIC FINANCE: REFORM, RESTRUCTURE AND DEREGULATE
Reform and restructure public sector enterprises
• Create a "supra board" which overseas the restructuring program of all these PSE's
• Take these PSE's out of control of line ministries and have the "supra board" report to a parliamentary committee for restructuring.
• Appoint capable/professional top management and boards which are empowered and accountable.
• Mandate to reform and restructure these PSE's within two years.
Focused and integrated deregulation of key sectors like energy and agricultural commodities
Strengthen regulatory agencies (CCP, OGRA, NEPRA, SECP) by building capacity and ensuring independence.
Slide 19
IMPROVEMENT OF PUBLIC FINANCE: ELIMINATION OF WASTE
Reduce size of Govt. structure by eliminating ministries and subordinated institutions which add little or no value
Introduce stronger parliamentary oversight over Govt. expenditure, including defense expenditure, by strengthening parliamentary committees
Make Freedom of Information Act operational and provide citizens access to Govt. expenditure, particularly by using information technology
Slide 20
INCREASE EDUCATION, HEALTH AND INCOME SUPPORT EXPENDITURE
Significantly enhance resources for education, health and social protection
Instead of broad based subsidies use targeted income support programs
Use innovative strategies to provide education and health coverage
Enhance citizens engagement and oversight over public education and health programs
Slide 21
REPRIORITIZING EXPENDITURE PHASED OVER THREE YEARS
5% Improvement by increasing Tax to GDP
Ratio by 5%
2% Improvement by 10% Reduction in Expenditure
2% Improvement by elimination of PSEs Losses
Total Improvement:9%
3.3% Reduction in Fiscal Deficit
5.7% Increase in Education, Health and
Income Support
expenditure
Slide 22
INTRA-REGIONAL TRADE LINKAGES
Revisit Afghan transit treaty to take care of Pakistani business concerns and address trade opportunities with Afghanistan and Central Asia
Increase trade linkages with Iran with specific emphasis on energy
Work for creation of a fully integrated South/Central/ West Asia energy grid
Expand trade linkages with India
Slide 23