KARACHI, Nov 1: Three days after the 10/8 earthquake struck Pakistan’s northern areas leaving a trail of death and destruction in its wake, an economist of some repute was quoted to have said: “Given the northern areas’ small contribution to the country’s $100 billion economy, any losses would be more than compensated by the reconstruction efforts and aid inflow.”

And he said: “In fact, as reconstruction picks up it will be positive for the economy.” The reasons for such conclusion to which most other economists and analysts subscribed and so did the government (apparent by its slow reaction to rescue and relief) were based on cool calculations of financial numbers.

The human tragedy was of little consequence. “Pakistan’s economic infrastructure of ports, airports, dams, factories, telecommunications, financial system, power plants and refineries has largely been spared, and the northern areas constitute a minute portion of the country’s agricultural land and industrial estate,” was the economists’ conclusions.

As the full scale of devastations stares the country in the face, the government and economists have begun to realize and revise the quake’s impact on the economy. Ideas are changing. The same analysts are now figuring out that Pakistan’s public finances would be burdened by an additional Rs60 billion annually for the next 5-7 years.

Economists now talk of accepting the challenge of converting weakness into strength. Estimates of final direct fiscal costs range between $5 billion and $15 billion, and the assessment was still going on.

The question is where would that kind of money come from? The international community has shed a lot of tears but, all nations together have chipped in a measly $800 million. But the economist suggests that irrespective of the final tag, the amount would be well beyond the capacity of international donors and private philanthropy. “Consequently, Pakistan will have to dig deep into its pockets to cover the shortfall,” say the analysts.

Sakib Sherani, a senior economist and head of research at ABN-AMRO Pakistan, suggests several financing options that include: (1) Raise new resources from existing sources (either by new taxes or borrowing, or a combination of both); (2) divert existing budgetary allocations (PSDP, defence for example); (3) plug revenue leakages (by expanding the tax base, as well as controlling evasion/corruption); and (4) control leakages on the expenditure side (cost overruns/corruption).

“What form Pakistan’s incremental resource-generation effort takes could have a profound bearing on the investment climate, domestic interest rates, fiscal deficit, public debt trajectory, as well as future growth prospects,” says Mr Sherani. He rightly suggests that Pakistan must not miss a historic opportunity to improve its economic institutional framework and the governance of its public finances. By choosing to ignore the expansion of the tax base to include under-taxed sectors, or by not tackling the rampant corruption and widespread malpractice prevalent in public works and procurement (the tragic consequences of which have been exposed by the October 8 earthquake), the country would have done no service to itself, the economist observes and points to the scale of the problem and dimensions of the “opportunity”.

Currently, (1) Pakistan’s tax-to-GDP ratio is at a low nine per cent — and is in steady decline, despite high rates of nominal GDP growth. (2) Direct taxes constitute 31 per cent of total taxes, and are the equivalent of 2.8 per cent of GDP. (3) Deductions at source (i.e. withholding taxes) constitute the single-largest contributor to direct tax collection. (4) Total number of income taxpayers stands at 2.45 million. Approximately 0.6 million new taxpayers have been added to the rolls since the launch of a “drive” to expand the tax base in 2000. (5) Non-salaried income taxpayers (individuals) contribute less than 28 per cent to direct taxes, and pay the equivalent of 0.7 per cent of GDP as tax. (6) Agriculture contributes 23 per cent in the country’s GDP and 1.2 per cent share in taxes, while the manufacturing sector chips in 17 per cent in GDP and a huge 62.2 per cent in total taxes; services sector’s input in GDP is 54 per cent, with total contribution to taxes at 24.4 per cent. (7) By some estimates, up to 60 per cent of the budgetary allocation for the construction of schools is siphoned off by the contractors in conjunction with corrupt officials. Similar estimates appear for leakages in the construction of roads, highways, etc.