And in the first two months (Jul-Aug) of fiscal year 2017-18 (FY18), Pakistan's current account deficit has widened by 102%, to stand at $2.6 billion compared to $1.29 billion in the same period of the previous fiscal year, according to the latest State Bank of Pakistan (SBP) data.
As a percentage of GDP, the deficit rose to 4.6% in the first two months of FY18 as opposed to just 2.5% in the same period of the previous year.
Balance of trade in both goods and services in the first two months of FY18 was a negative $6.03 billion compared with a deficit of $4.35 billion in the same period of previous year.
Remittances that remained an important source of financing the external account are on a decline due to changing economic conditions in the Gulf countries. Overseas Pakistani workers remitted $12.36 billion in the first eight months of last fiscal year, which were about 3% less than the previous year.
Unemployment, budgetary deficit and public debt including foreign debt are all soaring making it almost impossible for Pakistan to postpone the inevitable - going to the IMF for emergency aid - any longer.
The government has been mobilizing resources mainly by raising taxes and its dependence on withholding taxes has increased so much that now almost about 70 percent of income-taxes accrue under this head. The government has also been exploiting the petroleum sector for raising revenues. Still the widening gap between revenue collection and expenditure is being continuously plugged by resorting to extensive borrowing.
Pakistan's income tax-to-GDP ratio was 4.2 percent in 2016-17. It was 6 percent in India, 8 percent in Malaysia, 5 percent in Nepal, 7 percent in Thailand and 8 percent in Vietnam.
According to independent economists, the actual economic growth has averaged 3.6 percent per annum over the last four years - more or less in line with the previous five-year average.
Human capital has worsened as both the literacy rate and the gross enrollment rate in primary education have declined.
Performance of agriculture also remained lacklustre over the last decade and has grown at an average rate of 2.3 percent per annum since 2007-08 to date. Large-scale manufacturing numbers are said to be grossly overstated.
In fact, 67 percent of the contribution to economic growth over the last four years is said to have come from the services sector and within the services sector, an overwhelming contribution came from 'general government services' and 'other private services'.
Investment as a percentage of the GDP has virtually remained stagnant at 15.5 percent over the last almost one decade (2008-17).
The government took circular debt off the budget to understate expenditure and lower the fiscal deficit. Circular debt has been a part of expenditures since 2010-11. Hence, the fiscal deficit numbers since 2013-14 onwards are not at all comparable with prior years. The outstanding stock of circular debt is estimated at over Rs 800 billion.
It is in view of the above mentioned statistics that one finds it almost impossible to agree with Bloomberg's recent assertion that Pakistan's burgeoning youth and their freewheeling attitude towards rising incomes have turned the nation into the world's fastest growing retail market.
Quoting research group Euromonitor International Bloomberg said the market is predicted to expand 8.2 percent per annum through 2016-2021 as disposable income has doubled since 2010. The size of the middle class is estimated to surpass that of the UK's and Italy's in the forecast period, it said.
Pakistan's improving security environment, economic expansion at near 5 percent and cheap consumer prices are said to be driving shoppers to spend up big.
"We have a new millennial shopper at hand. They don't mind spending to have the kind of lifestyle they would like," said Shabori Das, senior research analyst at Euromonitor. "It's not like the Baby Boomer generation where savings for the future generation was important."
The prestigious American media house said Pakistan is bucking the trend in the US - where stores are closing at a record pace as e-commerce undermines bricks-and-mortar. It's also attracting foreign operators: Turkish home appliance maker Arcelik AS and Dutch dairy giant Royal FrieslandCampina NV entered the market last year via acquisitions. Meanwhile, Hyundai Motor Co, Kia Motors Corp and Renault SA are all building plants in a South Asian nation.
Pakistan's retail stores are expected to increase by 50 percent to 1 million outlets in the five years through 2021, Euromonitor said.
Pakistan is said to be mirroring what India went through about four years ago. Both countries have young populations with more income and less inclination toward saving which is a distinct difference to what retailers elsewhere are dealing with, said Das.
According to a research study conducted by Standard Chartered Bank last year, between 2011 and 2015, the size of the retail pie in Pakistan jumped from $96 to 133 billion, a 38.5% increase in four years. The current value of Pakistan's retail sector is estimated to be $152 billion, as per Planet Retail (a global retail consultancy) figures. It is the third largest contributor to the economy (after agriculture and industry), accounts for 18% of the total GDP, and is the second largest employer (after agriculture), providing jobs to more than 16% of the total labour force.
With an annual growth rate of eight percent, retail sales are expected, it is believed, to cross the $200 million mark by the end of 2018. The main factor fuelling this growth, apart from increasing urbanization, is an improving employment-to-population ratio, which has led to higher disposable incomes, thereby expanding the middle class, which in turn, has increased consumer spending manifold (estimated at $293 million in 2017 and projected to cross $333 million by 2018). This is mainly because Pakistan has a young population (more than 73% of the 220 million residents are below 35 years of age) that is upwardly mobile, social media savvy, brand aware and on the lookout for quality products - and enjoyable experiences.
But if the shops are full and the shopping items are getting replenished by the hour because shoppers are lifting them off the shelves as quickly then someone must be producing them at the same speed. That would mean the manufacturing and the agricultural processing sectors are keeping pace with the services sector that is being kept in an accelerating mode by the retail sector. And this in turn would mean someone is investing in these three sectors significantly and again at a fast pace to meet the fast paced demand at the shops.
Since Pakistan does not have the basic industries to keep supplying the raw materials and intermediaries for fabricating consumer goods to the manufacturing sector and its cotton textile sector, the backbone of Pakistan's economy in virtual doldrums, the logical assumption could be an increased dependence on imports.
And that perhaps is the reason why despite the oil prices going down by almost 50% our import bill has not only not come down but has in the meanwhile gone up considerably widening the current account deficit and brining the balance of payments position under tremendous pressure forcing the government to borrow left and right both domestically as well as externally pushing up the combined debt burden to $ 90 billion and needing as much as Rs 1.5 trillion this year to service this enormous debt burden.
The reason why the boom in retail business is not getting reflected in the official picture of the economy which is too dull, drab and on the decline is because the so-called boom is occurring in the informal sector which is being fueled by the money siphoned off from the formal economy through evasion and avoidance of taxes.
A rule of thumb estimate puts the size of the informal economy almost equal to that of the formal economy.
Here is how the informal economy is expanding by the day: According to Dr Hafiz Pasha (Income tax: some key facts--Business Recorder August 15, 2017) 1.The accrued capital gains in the stock market of Pakistan are almost Rs 540 billion. But the tax paid is only Rs 15 billion; 2. There are 304,000 farmers in Pakistan with farms of 25 acres or more. The total income is estimated at Rs 1085 billion, but the agriculture income tax paid by them in 2016-17 is less than Rs 2 billion; 3. Revenue loss due to tax concessions and exemptions is as much as Rs 377 billion; 4. The domestic wholesale and retail sector is one of the largest sectors in the country, with income generated to the tune of Rs 3980 billion in 2015-16. However, the revenue collected from the sector is only Rs 60 billion. Therefore the effective burden is not even 2 percent; 5. The Independent Power Producers (IPPs) enjoy lifetime exemption from corporate income tax. Cumulatively this has led to a loss of over Rs 400 billion in revenue since 1995. They also enjoy high rate annually on equity of over 26 percent; 6. The calculable losses accruing from transfer pricing.
But what is not being understood and appreciated by our official economic policy framers and managers is that by plugging these holes and reducing drastically through economic instruments the practice of tax evasion and avoidance, the formal economy would get a real boost which in turn would further boost the retail sector with the size of informal economy shrinking significantly at the same time.
Copyright Business Recorder, 2017