Amongst the key challenges facing the newly formed government headed by Imran Khan the two most important are: 1) declining foreign exchange reserves and 2) mounting fiscal deficit. His government has embarked upon austerity drive, but curtailing expenses is not an easy job because of presence of groups having vested interest in the parliament and bureaucracy. Those used to lavish spending and following the IMF recipe are advising boosting revenue collection through introduction of new taxes and/or increasing tax rates. The two unavoidable or inevitable expenses are debt servicing and defense spending.
Fiscal deficit has already surpassed the record high level and breached the GoP’s revised target of 5.6% of GDP. Aggregate fiscal deficit is inching towards 7% of GDP (becoming the highest in absolute terms at Rs2.26 trillion, up 21%YoY, which is nothing but expenditures outpacing revenues. Despite tax revenue collection of Rs4.47 trillion (up 13%YoY – inclusive of Rs121billion collected under tax amnesty), non-tax revenue amounted to Rs761billion, down Rs206billionYoY due to the absence of receipts from foreign agencies (including inflows under Coalition Support Fund).
On the expenditure side, GoP curtailed its PSDP budget by 26.7%YoY from the initial allocation. The actual disbursement amounted Rs1.54 trillion as against revised budgeted of Rs1.55 trillion. The debt servicing touched Rs1.5 trillion – up 11%YoY along with slippages in provincial expenditures increasing by up 20%YoY to Rs2.06 trillion for FY18. The situation aggravated due to advanced outlays to extend an already hefty deficit. In this regard, provinces posted combined deficit of Rs22.4billion against revised budgeted surplus of Rs274billion. These deficits were primarily financed through domestic borrowing, constituting 65% of total. The borrowing from State Bank of Pakistan (SBP) and through Market Treasury Bills amounted Rs2.34 trillion were the key sources of borrowing elevating government domestic debt to Rs17 trillion (49% of GDP as compared to Rs9.8 trillion or 43% of GDP at end FY13-end).
The prevailing scenario indicates that fiscal expansion during the tenure of last government alongwith substantial investments in development projects have led to massive external imbalances and a debt ridden economy. The newly formed PTI-led government has prioritized fiscal discipline including mobilizing domestic resources as well as restraining excess outlays. However fiscal consolidation would require unpopular measures, including: 1) increasing the tax base, 2) rationalizing tax exemptions, 3) removing subsidies and 4) reviving sick units. Let us examine the likelihood of achieving the desired results by adopting the above stated measures.
Increasing the tax base and rationalizing tax exemptions will not be difficult provided there is a political will. The first step in this direction is to make filling of tax return mandatory irrespective of quantum of income or source of income. Ideally, all the tax exemptions must be discontinued immediately. However, it is suggested that rate of tax should be reduced substantially to avoid any retaliation from those who have never paid tax despite earning billion of rupees. In this regard performance of provincial tax authorities must be examined microscopically. The collection of tax on income from agriculture is the responsibility of provincial governments that has remained paltry. The feudal lords have been singing a mantra that taxing income from agriculture will adversely affect the small farmers, which is totally incorrect. Since feudal lords enjoy majority in the national and provincial assemblies and even senate they fully resist all the moves aimed at taxing their income by taking refuge behind the small farmers. Many export oriented industries are paid rebate, this sound anti local population. Interestingly those selling their produce to foreign buyers are rewarded and those catering to the needs of local consumers are penalized. The logic behind rewarding the exporters is that they earn foreign exchange, but the wiz kids totally forget that if the companies catering to the needs of domestic consumers are not there, billions of dollars will have to be spent on import of these products.
One of the copybook option suggested by IMF is removing subsidies that successive governments have been following is blindly. Pakistan is not the only country in the world that offers subsidies, even the most developed countries pay subsidies to insulate the local manufactures from the shock of volatility of prices of these commodities in the international markets. This could be best understood by examining fertilizer industry of Pakistan. The cultivable land of the country is grossly deficient in nutrient contents, particularly nitrogenous. Therefore, substantial quantity of urea has to be applies to overcome this deficiency and boost yield. To overcome this problem the successive governments have been selling gas (feedstock) to fertilizer units at a lower price. However, it was not the supply of gas at subsidized rate,but supply of lower quality gas at a discounted price as compared to pipeline quality gas. This encouraged the local urea manufactures to increase installed capacity. The industry can produce exportable surplus of not less than half a million tons of urea, if the required quantity of gas is supplied and units operate at optimum capacity utilization. In this regard reply to a basic question has to be found. Which is more important, fertilizer industry or power generation?
To date the circular debt of power sector exceeds one trillion rupees. It is not because of high cost of generation, but because of blatant theft going on with the connivance of employees of electricity distribution companies. Added to this is the failure in recovering the overdue amounts. To make power sector vibrant, the above mentioned two menaces have to be controlled. Running power plants on gas cannot help in containing T&D losses and recovering overdue amounts.