PAKISTAN’S economy is marked for its significant and steady growth in recent years, but now it is plagued by a number of problems which if not attended to diligently may negate the high growth and produce adverse consequences.

The government is aware of these problems but it is preoccupied with political and external problems to give sufficient attention to them and find viable solutions. Many of them have been touched in the October-December 2006 report of the State Bank of Pakistan which for its cautionary notes sounds more like its annual report which comes with definitive recommendations.

The report has identified most of the basic problems which are almost perennial and suggests permanent solutions to them, but they are not by any means easy to implement, however obligatory they are. While identifying most of them, the bank has focused more on four of them. They are high and enduring inflation, large current account deficit following heavy imports and lesser exports, the fiscal problem of low tax-GDP ratio and the low savings rate which makes the country depend on large external and domestic loans.

The State Bank also warns the government that after the grace period of the old rescheduled loans expires, it may not be able to meet its current liabilities as it raises more short term loans which are likely to increase. High inflation, low tax collection and poor savings rate, which is the lowest in the region, are not new problems. But the current account deficit has become too large because of the large trade gap and that has happened despite the increased home remittances which may touch the figure of six billion dollars this year and the FDI which is expected to exceed that figure.

These problems have to be dealt with honestly in view of globalisation of trade which has increased the competition for Pakistani goods in their traditional markets. If the government could not find adequate solutions to such problems because of its other preoccupations, the parliament, to whom the report is addressed, can focus attention on these problems particularly its standing committees on finance, but so far they have not been interested in taking up these problems seriously. Or, maybe, they find themselves helpless as the ruling party would not let them do so unless it wants. The third report about implementation of the UN millennium development goals has been presented by the government which finds its performance rather satisfactory. But the country is not satisfied with the reduction in poverty, increase in education and facilities for women. Prime Minister Shaukat Aziz who presented the report says that by 2015, the millennium goals will be achieved including reducing poverty by half.

When it comes to fighting inflation which is endemic and now a global problem too, the State Bank report says that in spite of the tightening of the monetary control, the average inflation during this year is 7.7 per cent while the target is 6.5 per cent and the country may not be able to realise the lower level of inflation in view of the rising prices at home ad abroad. What is very obvious is that a tight monetary policy alone cannot bring down inflation and the government doesn’t want the tightening too rigid lest it affects economic growth and enlarging the supply chain is very essential but that alone cannot bring down the prices, strong administrative measures are essential to support the efficacy of the supply chain.

It is equally imperative for the consumers to resist paying high prices for essential items, an instance being of Rs 40 per kg price of milk during Eid miladun- nabi. A few market officials cannot hold down the prices when the people are willing to pay any price for what they want. There has to be cooperation between local officials and the people when prices shoot through the roof. If there can be effective consumer resistance in the rich countries of the world and the consumer is regarded a king by Wal-mart, the premier retailer of the world, there is no reason why there cannot be resistance here too, against exorbitant prices.

The State Bank has suggested creation of a commodities future market which is common in advanced countries these days. That would stabilise the market and ensure reasonable supply and fair prices. An electronic commodities future market is to come into being next month in Karachi with branches in Lahore and Islamabad. The State Bank has said the capital market reforms should seek to promote real investment instead of speculation. The bank has been saying that for a long time now without impact on the stock exchange or the government. But the large bank lending for speculation is promoting it instead of increasing the investment. If investment is to be promoted, capital gains tax should be brought in on short term investments so that the buyers can keep the shares for long and not let the bulls rule the market too long. Because of the current account deficit arising out of the trade deficit the State Bank has focused on industrial production and exports. It has called for reduction of the cost of exports and the cost of doing business. It also wants many of the unnecessary regulations to be eliminated. It seeks elimination of the multiplicity of taxes and also suggests lowering of taxes.

Business executives complain they have to pay 40-45 taxes. Apart from the money involved, the physical tasks of making payments are exasperating. It increases the scope for corruption as well.

The overseas investors chamber has called for reduction of maximum corporate tax to 30 per cent from 35 and the federation of chambers of commerce and industry have called for the same tax rate. Reduction of taxes is a world phenomenon and Pakistan can’t escape that after having over 100 taxes, federal, provincial and local until recently.

The chairman of the CBR Abdullah Yusuf calls import duties and excise duties as dying taxes from which little revenues may come in future. But they are going to take a long time to die. Meanwhile, car buyers know how much import duties they have to pay along with a 15 per cent sales tax.

The State Bank has also called for geographical distribution of production. Earlier we sought a strategy of one village, one product. Having moved away from the strategy now, business and industry want the cost of production and doing business be made reasonable. For reducing the cost of doing business, the country needs fewer and lower taxes, sustained low inflation, few regulations, less red tape and cheap and easy labour conditions. They also need cheaper and more efficient transport instead of a system in which we are supposed to lose Rs210 billion due to transport inefficiency. They also need an upright and efficient judiciary which can enforce its decrees.

And to reduce the cost of production, the industrialists need enough power and gas at fair prices, low inflation, labour at competitive rates, an easy labour market and reasonable port rates. These have been long standing demands of trade and industry including foreign investors. The earlier these conditions are met the better it will be for the economy.

The Pakistan Institute of Development Economics, the old economic research institute, which has been accorded a degree awarding status has come up with a new six monthly publication- PIED economic barometer. Headed by Dr. Nadeem ul Haque, the PIED will conduct a survey of the business prospects and achievements of the companies listed on the stock exchanges and with the Securities and Exchange Commission of Pakistan. If the business fears things may go wrong and the industrial growth will be affected, the government could come up with the necessary correctives in advance.

Only 10 per cent of the companies approached have responded but more are likely to respond in future after seeing the new product.

We need more such economic indicators and professional forecasts for the future. The first issue shows 59 per cent of the companies forsee stable growth in the first half of the year, while 32 companies reported slower growth and eight per cent expected faster growth in the next 6 months.