A Reuters file photo of Athens.
But there are many similarities as well.
Both countries have been living much beyond their means and have to seek bailouts from the International Monetary Fund (IMF) as well as from other friendly countries. In fact, during the last 10 years, each of them took three bailouts.
Both countries have been facing serious problems with tax evasion. A study by Chicago University concluded that tax evasion in 2009 by self-employed professionals (accountants, dentists, lawyers, doctors and other service providers) alone in Greece was €28 billion.
Pakistan is facing the same problem. IMF estimates that tax capacity of Pakistan is 22.3% of gross domestic product (GDP), which implies a tax revenue gap of at least 10% of GDP or about the same as of Greece.
Other common factor is that both countries have seen several military governments. Both have been involved in long-standing and intractable territorial disputes with neighbours. Both countries spend heavily on defence compared to their GDP.
However, Greece is now turning the corner. Its new prime minister, Kyriakos Mitsotakis, has embarked on a series of bold reforms. As a result, Greece has become the fastest-growing eurozone economy with consumer confidence rising to a 19-year high. Its 10-year bond yield has dropped to 1.59%, enabling Greece to repay the expensive IMF loan of 3.7 billion euros much earlier than the deadline.
On the other hand, Pakistan’s economy is still not stabilised. The annual fiscal deficit has risen to the highest level of 8.9%, not seen in the last three decades. Foreign direct investment (FDI) has continued to fall and this year it is down by over 50% compared to last year.
How has Greece finally managed to change things for the better while Pakistan’s economic situation seems to be worsening?
First, the new Greek government embarked on bold taxation and other reforms including cutting the corporate tax from 28% to 24% in 2020. Banking restrictions on the transfer of money have been removed to restore confidence.
Second, it is going for quick gains and focus on those areas where it already enjoys a preferential advantage. In 2018, there were 32 million overseas visitors, which were more than double the number in 2010.
It has introduced a golden visa scheme, which grants five-year residency rights for third-country nationals. Greece has become a top destination for China’s middle class.
Third, it has been working on improving its balance of trade through an export-led growth strategy rather than import substitution. This is despite a recurring substantial trade deficit, with exports of $30.2 billion versus imports of $52.8 billion, resulting in a trade deficit of $22.5 billion. This year, its exports are expected to exceed $33-34 billion, which is the highest ever. It has modernised trade procedures and explored new markets and new products.
If Pakistan wants to halt its falling growth rate, it has to start freeing the economy of most of the restrictions. Liberalisation of telecom, financial and construction sectors during 2002-04 was the main driving force behind the fast GDP growth during the Musharraf era.
Due to recent adverse changes in taxation and other recent regulatory restrictions, business activities in all these areas have slowed down considerably.
Second, the government has to embark on an export-led strategy rather than trying to stick with the outdated import substitution policy. Its mild tariff reforms during the last budget have boosted local production and exports to some extent but to reach a tipping point, it needs to speed up the reform process.
Furthermore, it is high time Pakistan brings interest rate to a more reasonable level to stimulate growth. It has also to be more practical about its accountability drive, which has had a rather dampening impact on the economic growth and new investments.
If Pakistan is to get out of its economic woes, it will have to embark on bold reforms. It has to open up its economy and cut red tape so that it can also attract some of the industries now being relocated from China to Vietnam, Bangladesh and other developing countries.
The writer served as Pakistan’s ambassador to the WTO from 2002 to 2008
Published in The Express Tribune, September 23rd, 2019.
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