Saturday, January 8, 2011

Domestic debt, defence spending make 2011 a difficult year

KARACHI: The year 2011 will be another difficult year for the country as there are a host of structural issues facing Pakistan, including one of the lowest tax collection, highest domestic debt servicing and one of the highest defence spending in the world.
“If a serious and concentrated effort is made to start addressing these issues, the investors will take it as a positive signal and start investing in Pakistan again,” said Dr Amjad Waheed, Chief Executive Officer, NBP Fullerton Asset Management (NAFA).

In 2011, government borrowing is expected to remain excessive, thus, inflation and interest rates are expected to rise further.

He said that some segments of the economy remained outside the tax ambit such as agriculture, services and real estate, thus, tax collection was under 10 percent of the GDP, one of the lowest in the world.

Domestic debt servicing was eating up around 44 percent of the government tax revenues, while defence spending was around 33 percent of the government tax revenues, which was among the highest in the world.
About structural issues, he said that the development spending, including education, healthcare, population planning, flood protection and infrastructure, etc, was substantially lower relative to other emerging markets.

“Government-owned organisations are incurring losses of around Rs300 billion per annum and excessive government borrowing during the last three years has crowded out the private sector, which is the more efficient sector.”

Private sector borrowing has come down from Rs366 billion during FY2007 to Rs71 billion during FY 2011 (July-December, 2010), whereas government borrowing during the same time has risen from Rs164 billion to Rs450 billion and no focused effort has been made by successive governments to develop alternative sources of energy, such as coal, hydel, wind, etc.

In 2010, foreign portfolio investment in the Pakistani stock market stood at around $500 million. In the same year, around $30 billion has been invested by foreign investors in the Indian stock market.

India’s economy is 10 times larger than that of Pakistan. On this basis, if $30 billion is invested in the Indian stock market, than around $3 billion should have been invested in the Pakistani stock market instead of $500 million.

“Concrete progress to redress the abovementioned structural issues can help increase foreign investment in Pakistan several fold, improving job creation and government tax collection

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