Investments were 22.1 percent of GDP when the current coalition formed the government. In four years, the same ratio has thinned to 12.5 percent of GDP; its lowest level in five decades. Foreign investments have dropped to one-eighth since democracy returned to Pakistan. Domestic investments have also shown little growth. Poor law and order, energy shortage, inconsistent policies and lack of reforms all have played a role in abysmally low capital formation.
The financial architecture of these issues is to be addressed in budget making process with a medium-term framework. But previous budget making exercises have been very inconsistent; government gravitated between the imposition of VAT and RGST, only to maintain status quo, then sales tax was hiked up from 15 percent to 17 percent only to be cut again.
Regarding documentation VAT was introduced, Capital Gains Tax on stock markets was introduced and replacing Capital Value Tax and tax on cash withdrawal was introduced. But VAT is yet to be implemented; capital gain tax calculations are altered to reduce its potency on catching big fish, and cash withdrawal tax has been as good as ended albeit in a gradual manner. Where is the mantra of documentation making headlines two years back?
The core issue of energy is to sway away from the indigenous resources to replace expensive imported furnace oil. The budget could have supported this by creating fiscal advantages for gas exploration, especially tight and shale gas, as well as coal. Concurrently, fuel based power plants could have been shifted to coal. The saving on fuel price difference can cover the cost of doing it in ten months, according to experts.
Given all these constraints, other fiscal and monetary steps could have been taken to spur savings by discouraging excessive consumption. National savings have dropped from 17.4 to 10.7 percent in the last five years. Banking penetration is at mere 20 percent of population, very low compared to global standards. Lazy banks not making adequate efforts to improve their presence and clientele in rural areas must share the blame here.
The major borrower is the government; there were ideas to develop short-term public saving instruments. This could have attracted more people towards depositing savings in the formal sector, which would help banks enhance lending. But these ideas did not see the light of day, and will likely stay in the closet for the rest of the tenure. A higher tax rate on Treasury Bills was floated but burned into ashes. There is no concrete step is being taken to develop the debt capital market.
Exemptions on new investments and new listings appear peanuts in trying to lure new investments in the economy. Absolutely nothing is being done on the privatisation front, which now appears a distant hallmark of the previous government; none is budgeted this year.
Inflation is another impediment to growth. Studies suggest that single digit inflation is imperative to boost growth over 5 percent. Persistent double-digit inflation is primarily attributed to running high fiscal deficit, and its increasing reliance on domestic banking sources. This is also crowding out investment. The sustainable option is to enhance revenues and curtail expenditure and till the time this is being done explore external resources to finance the deficit.