Volatile fiscal front

Pakistan’s obligations on external and domestic debt are rising enormously as the government has failed to broaden the tax base and reduce expenditure

Volatile fiscal front

Managing high fiscal deficit (root cause of many economic ills) coupled with massive debt burden is the toughest challenge faced by our economic managers. The consensus solution of substantial increase in resources and drastic reduction in spending is easier said than done. For the last eight years, Pakistan’s fiscal policy remained under immense pressure owing to perpetual failure of the Federal Board of Revenue (FBR) to meet the assigned targets, continued security related outlays, rise in wasteful expenditure and greater than targeted subsidies.

In fiscal year 2013-14, total debt and liabilities increased to Rs18.24 trillion from Rs16.33 trillion in 2013-13. Since the government borrowed heavily from external and internal resources to finance the fiscal deficit, huge funds went to debt servicing. It increased to Rs1.792 trillion from Rs1.538 trillion within 12 months’ period. Pakistan’s obligations on external debt are rising enormously. In the coming years, the government will have to borrow more, just to repay past loans. The domestic debt will also increase as the government has failed to broaden the tax base and reduce expenditure.

In fiscal year 2013-14, the government registered huge shortfall in revenue generation (both taxes and non-taxes) and exceeded its sanctioned current expenditure by Rs112 billion. Total current expenditure in the budget was estimated at Rs3242 billion and tax revenue at Rs2475 billion, whereas the FBR claimed to have collected only Rs2262 billion resulting in revenue deficit of Rs1092 billion.

State Bank of Pakistan from July 2013 to May 2014 showed the FBR’s collection at Rs1956 billion (http://www.sbp.org.pk/ecodata/tax.pdf). How it collected Rs310 billion just in June 2014 is yet a mystery. There are allegations of taking funds as advance and blocking bona fide refunds -- Chairman FBR admitted before Senate Standing Committee that refunds of Rs97 billion were outstanding, whereas independent estimates were much higher.

Two major weaknesses of economic governance are its failure to raise tax revenues and check wasteful spending that includes funding losses of monstrous and inefficient PSEs.

According to the IMF, Pakistan would need nearly US$10.8 billion for the fiscal year 2014-15 -- the bulk of this will go towards returning foreign loans. The government will require US$3.1 billion alone to meet the current account deficit. It needs further US$ 5.4 billion to retire medium and long-term loans including US$1.3 billion to the IMF. Another US$ 3.6 billion are required to pay back loans acquired from other creditors like the World Bank and Asian Development Bank (ADB).

An amount of US$ 2.3 billion would be required to return short-term loans that the present government received in the last one year. The available financing is only US$ 6.5 billion while the rest is expected to come through foreign direct investment and privatisation proceeds. Many say bulk of it would not materialise as there are difficulties in attracting foreign investment due to the prevailing law and order situation, political upheaval and bureaucratic hurdles.

According to Debt Policy Statement 2013-14, issued by Debt Coordination Office of Ministry of Finance, "overall, analysis of the last two decades of fiscal performance revealed that high subsidies remained a major burden on fiscal account combined with falling tax-to-GDP ratio… Interestingly, even during the period of fiscal improvement (1999-2004), tax-to-GDP ratio continued to slide."

The statement concedes that "with drying up of external financing, the onus of financing fell entirely on domestic sources -- specifically the banking system. The government borrowing from domestic sources in 2012-13 was actually higher than the overall fiscal deficit as net external debt payments had to be paid from domestic sources owing to insufficient fresh external inflows."

It is undisputed that during FY 2007-14 both at federal and provincial levels no concrete measures were taken to foster fiscal discipline. No strategy was devised to mitigate risks of falling foreign reserves and increasing debt burden. Resultantly borrowings from banks increased manifold to pay off liabilities of the ailing Public Sector Enterprises (PSEs).

According to SBP, "this has inflicted economy heavily and resulted in billions of rupees increase in the stock of total debt & liabilities (TDL)". Our external debt and liabilities increased to US$ 54.79 billion in FY 2014 from US$ 50.89 billion in FY 2013 and domestic debt soared to Rs10.9 trillion as on June 30, 2014 -- showing phenomenal increase of Rs1.387 trillion just within 12 months (http://www.sbp.org.pk/ecodata/profile.pdf).

The five years of economic mismanagement of coalition government of Pakistan People’s Party brought the country to the verge of default. The present government sought the assistance of the IMF to prevent that and secured a new programme of $6.68 billion on September 4, 2013. The programme is presently in doldrums after failure of the government to meet some conditions and worsening of economic situation due to political instability in the wake of dharnas (sit-ins) and political demonstrations. Thus more borrowings to meet burgeoning fiscal deficit is inevitable. Two major weaknesses of economic governance are failure to raise tax revenues and check wasteful spending that includes funding losses of monstrous and inefficient PSEs.

The burgeoning fiscal deficit and ever-increasing debt burden are not isolated phenomena. These are related to lack of political will to undertake fundamental structural reforms, enforce fiscal discipline, crackdown on parallel economy, abolish perks and benefits of the ruing elites, eliminate wasteful expenses, dismantle rent-seeking structures, ensure the rule of law, and stop reckless borrowing and ruthless spending.

Shahid Javed Burki in "Provincial Rights and Responsibilities" [Journal of Economics, September 2010] opines that "about 40 million out of 170 million people in Pakistan have now succeeded in keeping their living standards from falling. Of these, about 15 million have improved their economic situation in spite of the sluggish economy." We are not taxing these rich 15 million. Our tax potential at federal level alone is about Rs7 trillion.

According to Household Integrated Economic Survey (HIES) 2011-12, conducted by Pakistan Bureau of Statistics, 5 million individuals have annual taxable income of Rs1.5 million. If all of them file tax returns, income tax collection from them at the prevalent tax rates will be Rs1650 billion. If income tax collected from corporate bodies, other than non-individual taxpayers and individuals having income between Rs400,000 to Rs1,000,000 is added, the gross figure would not be less than Rs. 4500 billion -- the FBR collected only Rs903 billion in 2013-2014.

Similarly, due to leakages in sales tax, federal excise and custom duties, the total collection is not more than 50 per cent of actual potential [joint study of Andrew Young School of Policy Studies at Georgia State University and World Bank].

The FBR in 2013-14 collected Rs1047 billion as sales tax, Rs169 billion as federal excise and Rs240 billion as customs duties. Collection under these heads should have been at least Rs2500 billion. Target of Rs7 trillion is achievable provided the mighty segments are taxed, tax machinery is overhauled, leakages are plugged and all exemptions to the privileged classes are withdrawn.

By collecting taxes of Rs7 trillion, Pakistan can become a self-reliant economy. This is the only way to get rid of "debt quagmire". Resource mobilisation should be given priority to build infrastructure, facilitate growth of small and medium sized firms in the industrial sector and small farms in the agricultural sector for an employment intensive and equitable economic growth process.

At the same time, large corporations with equity stakes for the poor can be established through public-private partnerships. This would set the stage for a structural change that could help achieve economic growth for the people and by the people which is presently confined to the elites only.

Volatile fiscal front