Pakistan’s major political parties have nominated their teams to interact with the government team headed by the finance minister with a view to putting the economy back on track. Each team has put forward a multipoint agenda covering both economic and noneconomic issues. In doing so, they have diluted the gravity of the budgetary problem currently faced by the country.
Pakistan cannot afford to indulge in politics at this critical juncture. The country is facing the pressing problem of insolvency as its revenue-expenditure gap continues to widen with a possibility of reaching as high as 7.5-8.0 per cent of GDP, if corrective measures are not taken immediately. How to finance the expected gap to the tune of Rs1300 billion on the back of dwindling external inflows is a serious challenge facing the country. Politics must not override economics. There should be only a one-point agenda, which is building consensus on adhering to the principle of sound fiscal management.
Political consensus needs to be developed on a medium-term budgetary framework. In particular, all the major political parties must agree to a roadmap of reducing fiscal deficit in the next three years. A workable fiscal deficit path should be as follows: let the budget deficit of the current fiscal year (2010-11) be targeted at 5.0 per cent of GDP; reduced to 4.0 per cent in 2011-12; further reduced to 3.0 per cent in 2012-13; and be maintained in the range of 2.5-3.0 per cent of GDP thereafter. If political consensus is built on this roadmap, Pakistan’s relationship with the international institutions, would improve significantly.
Consensus alone on the path of deficit reduction is not enough. What is important is the manner in which we achieve these targets. A consensus needs to be built on domestic resource mobilisation and expenditure rationalisation. On the revenue side, a consensus must be reached not only on broadening the tax bases but also on achieving a tax system which is equitable, fair, and transparent. The RGST, a high-revenue-yielding tax currently in vogue in 141 countries must be implemented in Pakistan as well.
Political parties may not agree on the RGST alone as some of them have been advocating for bringing agricultural income under direct tax net. Therefore, agricultural income must be brought under direct tax net. The provincial governments may ask the FBR to collect income tax from agriculture, deduct its collection charges, and transfer the rest to the provinces. Massive evasion is taking place in the withholding tax regime. Withholding agents have been collecting taxes from the people but not depositing the same to government treasury. A consensus needs to be developed in bridging the gap between the tax collected and the tax deposited.
Improving provincial tax efforts is essential to achieving deficit path. Provincial tax-to-GDP ratio has declined from 1.0 per cent to 0.3 per cent of GDP in the last 20 years. Several studies have identified the sources through which provincial governments can raise their own resources. The major sources of provincial revenue include property tax and stamp duties for which the valuation tables need to be updated for both urban and rural property transactions. Motor vehicle tax is yet another source of provincial revenue along with the broadening of the RGST on services.
Irrational allocation of resources between provincial and federal governments under the new NFC Award has sowed the seeds of perpetual macroeconomic crisis. A consensus must be reached on some binding constraints for provinces to generate surpluses. The deficit reduction path cannot be without this happening. On the expenditure side, consensus must be reached on rationalising and improving the quality of expenditure, particularly on passing the higher international price of oil to domestic consumers. The political parties may like to review the oil pricing formula. However, increasing the electricity tariff alone is not a solution for WAPDA’s financial difficulties. Four things must be done to improve WAPDA’s finances.
First, free electricity provision to WAPDA employees must be stopped forthwith. This is a major source of power theft. Secondly, energy audit of WAPDA’s power plants needs to be undertaken to identify fuel guzzler plants with a view to making targeted investments. Thirdly, the CEOs of all the DISCOs must be given line-losses targets and monitored by the parliamentary committee. Fourthly, WAPDA’s finance department must be strengthened with professionals.
A consensus must be developed on the bleeding PSEs. Should we go for outright privatisation of some PSEs in a transparent manner or should we restructure them with efficient management from the private sector? A parliamentary committee may monitor the performance of the restructured PSEs. A consensus on the size of the cabinet must be reached. The cabinet should not include more than 20 to 22 ministers. In addition, the Planning Commission must not become the vehicle of accumulating throw forward.
Pakistan’s finances are in deep crisis. The current government and its economic team are weak and lack the capacity to take difficult decisions without the support of the major political parties. In the larger interest of the economy of Pakistan, the political parties must develop a consensus on the fiscal roadmap as explained above.
The writer is Principal and Dean at NUST Business School, Islamabad. Email: ahkhan@ nbs.edu.pk
Pakistan cannot afford to indulge in politics at this critical juncture. The country is facing the pressing problem of insolvency as its revenue-expenditure gap continues to widen with a possibility of reaching as high as 7.5-8.0 per cent of GDP, if corrective measures are not taken immediately. How to finance the expected gap to the tune of Rs1300 billion on the back of dwindling external inflows is a serious challenge facing the country. Politics must not override economics. There should be only a one-point agenda, which is building consensus on adhering to the principle of sound fiscal management.
Political consensus needs to be developed on a medium-term budgetary framework. In particular, all the major political parties must agree to a roadmap of reducing fiscal deficit in the next three years. A workable fiscal deficit path should be as follows: let the budget deficit of the current fiscal year (2010-11) be targeted at 5.0 per cent of GDP; reduced to 4.0 per cent in 2011-12; further reduced to 3.0 per cent in 2012-13; and be maintained in the range of 2.5-3.0 per cent of GDP thereafter. If political consensus is built on this roadmap, Pakistan’s relationship with the international institutions, would improve significantly.
Consensus alone on the path of deficit reduction is not enough. What is important is the manner in which we achieve these targets. A consensus needs to be built on domestic resource mobilisation and expenditure rationalisation. On the revenue side, a consensus must be reached not only on broadening the tax bases but also on achieving a tax system which is equitable, fair, and transparent. The RGST, a high-revenue-yielding tax currently in vogue in 141 countries must be implemented in Pakistan as well.
Political parties may not agree on the RGST alone as some of them have been advocating for bringing agricultural income under direct tax net. Therefore, agricultural income must be brought under direct tax net. The provincial governments may ask the FBR to collect income tax from agriculture, deduct its collection charges, and transfer the rest to the provinces. Massive evasion is taking place in the withholding tax regime. Withholding agents have been collecting taxes from the people but not depositing the same to government treasury. A consensus needs to be developed in bridging the gap between the tax collected and the tax deposited.
Improving provincial tax efforts is essential to achieving deficit path. Provincial tax-to-GDP ratio has declined from 1.0 per cent to 0.3 per cent of GDP in the last 20 years. Several studies have identified the sources through which provincial governments can raise their own resources. The major sources of provincial revenue include property tax and stamp duties for which the valuation tables need to be updated for both urban and rural property transactions. Motor vehicle tax is yet another source of provincial revenue along with the broadening of the RGST on services.
Irrational allocation of resources between provincial and federal governments under the new NFC Award has sowed the seeds of perpetual macroeconomic crisis. A consensus must be reached on some binding constraints for provinces to generate surpluses. The deficit reduction path cannot be without this happening. On the expenditure side, consensus must be reached on rationalising and improving the quality of expenditure, particularly on passing the higher international price of oil to domestic consumers. The political parties may like to review the oil pricing formula. However, increasing the electricity tariff alone is not a solution for WAPDA’s financial difficulties. Four things must be done to improve WAPDA’s finances.
First, free electricity provision to WAPDA employees must be stopped forthwith. This is a major source of power theft. Secondly, energy audit of WAPDA’s power plants needs to be undertaken to identify fuel guzzler plants with a view to making targeted investments. Thirdly, the CEOs of all the DISCOs must be given line-losses targets and monitored by the parliamentary committee. Fourthly, WAPDA’s finance department must be strengthened with professionals.
A consensus must be developed on the bleeding PSEs. Should we go for outright privatisation of some PSEs in a transparent manner or should we restructure them with efficient management from the private sector? A parliamentary committee may monitor the performance of the restructured PSEs. A consensus on the size of the cabinet must be reached. The cabinet should not include more than 20 to 22 ministers. In addition, the Planning Commission must not become the vehicle of accumulating throw forward.
Pakistan’s finances are in deep crisis. The current government and its economic team are weak and lack the capacity to take difficult decisions without the support of the major political parties. In the larger interest of the economy of Pakistan, the political parties must develop a consensus on the fiscal roadmap as explained above.
The writer is Principal and Dean at NUST Business School, Islamabad. Email: ahkhan@ nbs.edu.pk
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