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2020: main fiscal challenges

An unusual decline in revenue collection and steep rise in current expenditures caused a deterioration in all major fiscal indicators during FY19. The overall budget deficit during the year stood at a historic high of 8.9 percent of GDP, which was also in excess of the 4.9 percent target set in the Budget 2018- 19. Meanwhile, the primary and revenue balances worsened substantially, highlighting growing debt stress for the government and a shrinking space for the needed development expenditures”-State Bank of Pakistan,

Annual Report 2018-19-The State of Pakistan’s Economy

A tax gap analysis recently completed by the World Bank indicates that Pakistan’s tax revenue would reach 26 percent of GDP if tax compliance were raised to 75 percent-World Bank $400 million

Pakistan Raises Revenue Project

The two most challenging areas of our fiscal management are debt servicing and high government expenditure. In 2018 and 2019, expenditure amounted to over 21 percent of GDP. On account of debt servicing in FY 2018, actual expenditure was Rs 1,987 billion against the budgeted figure of Rs 1,620 billion. Allocation for the current fiscal year is Rs 2,891 billion, 78% higher than last year! Even if Federal Board of Revenue (FBR) collects Rs 5000 billion against originally fixed target of Rs 5,503 billion, after share of provinces under 7th National Finance Commission (NFC) Award, net tax collection available to the federal government will be around Rs 2,400 billion, that would be short by Rs 491 billion for debt servicing of Rs 2,891 billion alone!! This shows the gravity of the fiscal crisis faced by the federal government.

The historic high fiscal deficit of 8.9% of GDP for fiscal year 2018-19 posed enormous challenge for the Government of Pakistan Tehreek-i-Insaf (PTI) on assumption of power. It also inherited record public debt, trade and current account deficits. The callous and imprudent economic policies of Pakistan Muslim League (Nawaz) [PML-N] from 2013 to 2018 left the PTI Government with no choice but to seek yet another bailout from the International Monetary Fund (IMF) and resort to massive rupee devaluation along with austerity measures as well as high interest rate to counter riding inflation-all this lead to what many categorized as stagflation.

There are many economists who are critical of IMF’s conditions, but the PTI’s economic team says these are working positively as the results of IMF’s prescriptions within a few months, trade deficit fell from $11.7 billion from July-October of FY18-19 to $7.8 billion during the same period of this year and current account deficit declined to $1 billion a month (in FY19) compared to $2 billion a month last year. Critics say despite high interest rate, inflation remained in double-digit and hit record of 12.28% in November of 2019 from 11.08% in October and public debt witnessed unprecedented surge hitting the level of Rs 36 trillion.

Perpetual failure of FBR to meet assigned targets is not something new. In 2018-19, it was assigned the target of Rs 4,435 billion that was later reduced to Rs 4013 billion and then to Rs 3,935 billion. FBR collected only Rs 3,828.5 billion which was 0.4% lesser than the collection of 2017-18. This year the target of Rs 5,503 billion is an uphill task and there is news of its downward revision very soon. Every year, FBR fails to collect downward revised target what to speak of originally assigned figure in the budget estimates. This widens fiscal deficit resulting in more borrowing and cutting away large part of the budget for debt servicing.

It is an undisputed fact that FBR has not only miserably failed [see table] to tap the real tax potential despite imposing all kinds of oppressive taxes, it has singlehandedly destroyed Pakistan’s growth by anti-business actions during 2013-18. The then Finance Minister gave free a hand to tax officials to block bona fide refunds, take undue advances from large business houses, use negative taxes like raising unjust demands and freeze bank accounts for recovery. Exporters and other taxpayers, still waiting for refunds, have been denied lawful right of payments/compensation within stipulated time. Had we concentrated on growth above 6%, as done by China, India and even Bangladesh in the region, we could have avoided the present fiscal and economic mess. Higher growth yields higher taxes and harsh taxation only hampers business expansion.

SBP in its ‘Annual Report 2018-19-The State of Pakistan’s Economy’ has rightly criticised the provinces for what it called “lack of institutional capacity” giving rise to “lower revenue collection that contributed less to tax-to-GDP ratio and fiscal consolidation efforts”. The report further noted that “an important agenda on fiscal reforms should be the capacity building of the provincial authorities, which are responsible for mobilising revenue via the agriculture income tax, sales tax on services and property taxes, and carrying out crucial spending on important sectors like education, health, social spending and regional infrastructure”. It is observed in the report that even after nine years of the passage of the 18th Constitutional Amendment, “the provinces still seem to lack capacity to adequately assume these responsibilities”.

The SBP in its report has failed to mention that in Pakistan the privileged classes pay no or meagre taxes on their colossal incomes and wealth but the poor are subjected to all kinds of oppressive taxes. Adding insult to injury, they get nothing in return-even deprived of protection to their lives and property, what to speak of basic facilities of health, education, transport and housing.

For fiscal year 2018-19, the SBP appreciated the provinces for adhering to a better fiscal discipline as they cumulatively posted a surplus of Rs 190 billion, compared to a deficit of Rs 17.5 billion in fiscal year 2017-18. However, this surplus fell short of the target of Rs 285.6 billion. It is a bitter reality that after the 7th NFC Award, both the federal government and provinces failed to observe strict financial discipline. Monstrous size of governmental departments is causing colossal wastage of resources. The governments are spending recklessly, a tendency that continues under civilian and military regimes alike since the last many decades

HUZAIMA BUKHARI AND DR IKRAMUL HAQ, "2020: main fiscal challenges," Business recorder. 2019-12-20.
Keywords: Economics , Political science , Revenue collection , Fiscal management , Constitutional amendment , Economic surveys , Economic policies , Foreign investment , pragmatic decisions , Taxes , Business , Economists , Nawaz Shareef , Pakistan , PTI , IMF , PML-N , GDP , 2018

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