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Budgeting in Pakistan structural imbalances

  1. Wheat supply and prices
  2. Increase in gas prices
  3. EPB's new move to promote exports
  4. Water scarcity: major threat to agriculture
  5. Budgeting in Pakistan

By PROF. DR. KHAWAJA AMJAD SAEED, FCA, FCMA*
August 02 - 08, 1999

Two deficits have been experienced by Pakistan since her birth. The first one is known as Current Account Deficit. The other is called Budget Deficit. This piece looks at structural problems of Federal Budget due to which our country has been suffering from budget deficits in the past. As we continue to be heavily dependent on financial assistance from abroad, donor/lending agencies remain worried and keep insisting that budget deficits be restructured to a minimum level. Budget deficit is worked out as a percentage of GDP. Even abroad, to qualify for membership of Euro, a member of European Community must not have budget deficit exceeding 4%. The Government of Pakistan has announced 3.3% budget deficit in Federal Budget 1999-2000. This target must be achieved to enable us to be in safe limits.

It is our ardent hope that we will manage to put our house in order and will fulfil the wish list of the Prime Minister of Pakistan to have self-reliance. It is high time that we identify structural imbalances in our budget framework and initiate steps to tackle the problems to pave the way for our reforms.

Nine structural problems

Out budget have suffered structural problems. These have been lingering on for a long time. It is high time that we must identify these and initiate steps to tackle the structural problems so that we achieve the tangible results for ensuring financial defence of Pakistan. This must stay on our agenda with a serious concern.

Significant structural problems of our budget for 1999-2000 are identified as under:

1.Revenue Budget has a deficit of Rs. 103b worked out as under:

Rs.b

Current Expenditure 526

Less: Current Revenue 423

Budget deficit 103

It is apparent that we will not be able to pay for our current expenditure out of current revenue. Resultantly the deficit will be financed out of loans.

2. Our net current resources cannot even finance two major heads of current expenditure. The following details will bear the out this fact:

Current Expenditure: Rs. b

Debt servicing 287

Defence 142

429

Less: Current Revenue 423

Shortfall 006

The above computation shows that nothing is left for "Other Expenditure", not to speak of ensuring a surplus for financing Annual Development Plan for 1999-2000. Other expenditure will also be financed from loans.

3.Direct Taxes constitute 23% of total Current Revenue. If Canons of Taxation are properly followed as advocated by Adam Smith, the contribution of direct taxes can be significantly higher and can play a vital role in equity, social justice and reducing the gap between haves and have nots. Gini coefficient can improve and poverty levels can be reduced. Liberal exemptions under the Income Tax Ordinance, 1979 (Second Schedule) and Wealth Tax Act, 1963, need to be re-examined for total withdrawal or significant water down.

4.Heavy reliance is placed on non-tax revenue (25% of current revenue). This is even higher than total amount of direct taxes. Considerable amount relates to interest recoverable from loans to Provinces.

5.Government relies to the extent of 11% on surcharges as a source of current revenue. This is also an indirect charge.

6. While 27% of the current revenue has been allocated for Defence, debt servicing has been budgeted at 55% (Rs. 287b), twice higher than the amount set aside for defence. Some revolutionary steps need to be taken to substantially reduce this amount by returning internal debts. Its major break down is as under:

Particulars Amount (Rs.b) Percentage

Domestic Debt 161 56

Foreign Debt Servicing 42 15

Foreign Loan Repayments 84 29

126 44

Total 287 100

7.While our Annual Development Plan for the above year is projected at Rs. 116 billion, external assistance is forecasted at Rs. 185 billion. The dream of self reliance cannot be realized in this situation. It will stay with us as our hope of distant tomorrow, if not tomorrow.

8.Autonomous Bodies development needs constitute 33% (Rs. 38 billion) of ADP. An Autonomous bodies ought to be administratively and financially self financing. Their burden needs to be off loaded. They ought to be self-financing.

9.Provincial ADPs have been allocated 25% (Rs. 29 billion). There is no guideline/formula given in the Constitution of Pakistan for the allocations amongst various Provinces. There are no pressures by the Federal Government to raise matching amount through domestic resource mobilisation to beef up provincial exchequers. This is the crying need of today. Capability at Provincial levels needs to be built to accept the above challenge.

SUGGESTED STRATEGIC APPROACHES FOR TACKLING

SIGNIFICANT STRUCTURAL IMBALANCES

The structural problems can be tackled with political will to be demonstrated by the Government with supporting cooperation by the various segments of society. Pakistan is a land of great opportunities. We need simple and easy to comprehend fiscal laws. Strategic directions to be operationalised for tackling the above nine structural imbalances are suggested below:

1.Revenue Budget Deficit : Rs. 103b:

The following three strategies are recommended:

a)Boost domestic resource mobilization.

b)Drastic reduction in two components of current expenditure namely:

(i)Debt Servicing and

(ii)Other Expenditure.

c)A combination of both (a) and (b) above.

For boosting domestic resource mobilization, there is a need to widen the net of income tax assessees. At present total number of income tax payers is only 1.4 million against a population of 133 million (1.05%). Potential is said to be in the range of 5 to 10 million.

Year 1999-2000 should be celebrated as "Let us increase the number of income tax payers to 3 million". If trade associations, stock markets, Chambers of Commerce & Industry and other segments of society fully cooperate and treat this with serious concern, we may succeed in developing a new culture of tax payment. This would be a welcome sign to enter into the 21st Century with an assured confidence. The budget deficit of Rs. 103b will be totally wiped out. In addition, there is a need to eliminate Second Schedule annexed to the Income Tax Ordinance; 1979. This will enable us to implement the golden principle of Public Finance i.e. every body should pay income tax if his/her income, from any source, is above the threshold fixed by the National Assembly. Moreover it is surprising to note that collection under Wealth Tax Act, 1963 is hardly in the neighborhood of around Rs. 4-5 billion. This legislation was enforced to reduce the gap between haves and have-nots. The impact of this legislation has been considerably watered down due to various available exemptions. It is high time that either this legislation must be fully implemented or scrapped.

Strategy relating to current expenditure will be taken up independently.

2.Matching two heads of Current Expenditure : Rs. 429b i.e. Debt Servicing (Rs. 287b) and Defence (Rs. 142b) against Current Revenue (Rs. 423b):

Debt Servicing has achieved alarming heights. The internal debt of Pakistan is around Rs. 2 trillion. The foreign debt is around US$ 30b plus. The Governments, in the past, had to resort to heavy borrowing due to low domestic resource mobilization and poor saving rates.

A staggered programme for retiring internal debt should be prepared. Government land, property and real estate be auctioned and proceeds be used to retire the internal debt. If supporting and favourable climate is created in Pakistan and high confidence level is built, Pakistanis living abroad can be motivated for retirement of foreign debt.

Serious attention needs to be given to this issue so that an institutionalized effort is undertaken to tackle this serious issue. Unless the trend is reversed relating to debt servicing burden, the danger to eat out the revenue receipts will continue to grow and eventually will leave hardly anything for defence and other expenditure headings.

Defence needs to be strengthened to protect the territorial integrity of Pakistan and eventually ideological frontiers of our country. Armed Forces have made a great contribution in the socio-economic development of Pakistan. In peace time, they should play the role of productive army and earn a high respect in the eyes of the nation. The agenda can be very long but serious work ought to start. The talent available in Armed Forces can really benefit our country in several dimensions. All of us must undertake this exercise and ensure benefiting from the role of productive army.

3.Direct Tax Ratio of 23% of Total Current Revenue

Direct taxes are generally collected in a progressively increased slab. The higher the taxable income, the higher should be the slab of income tax.

Unfortunately due to exemptions available under the Second Schedule annexed to the Income Tax Ordinance, 1979, the principle of elasticity stands punctured and a massive shop to shop, business to business, industry to industry survey needs to be undertaken to enlist potential income tax assessees so that new tax payers can be included in the Income Tax assessees list. As mentioned earlier, the Government must demonstrate political will to withdraw exemptions under the Income Tax Ordinance, 1979 and the Wealth Tax Act, 1963. Trade Associations must celebrate a week with the driving slogan of enlisting potential assessees. This is the clarion call of the day failing which the financial defence of Pakistan dream will be difficult to be realized. Through education and enforcement of fiscal laws, there is a need to help develop tax culture in Pakistan. This should be given priority one in the country, and the Hon'ble Finance Minister of Pakistan should devote his time in this area which, in our opinion, should be treated on war footing. The public needs to be educated about their social responsibility. The loss making companies need to be subjected to a thorough cost audit by the Cost and Management Accountants so that the tricks applied by the clever management in showing book losses should be uncovered, unfolded and brought to lime-light. This challenge can be met by the members of the Institute of Cost and Management Accountants of Pakistan (ICMAP). The Government should repose confidence in them and this will be the beginning of a new chapter in the financial discipline and good corporate governance in Pakistan.

The Government of Pakistan has announced Universal Self Assessment Scheme. It now requires a sustained effort for massive identification of potential Income Tax assessees as it presents the most simplified scheme in our history. Now the stamp placed for the receipt of the Income Tax Return under the above scheme will be considered as an assessment order. This is the boldest approach of simplification of Income Tax procedures ever attempted in the history of Pakistan. All stake-holders must contribute positively to ensure the success of the above scheme.

4.Heavy Reliance on Non-Tax Revenue : Rs. 142b - 25%:

Non-Tax Revenue constitutes 25% of the total Current Revenues. Besides earning from various commercial undertakings by the Government, the other two significant items included under this head are: (a) profit from State Bank of Pakistan and (b) Interest on Loans given to Provinces. There is a greater need to examine the credibility of this figure and ensure that the amount is eventually recovered. Unfortunately, last year the State Bank of Pakistan profit was budgeted at Rs. 23b. However, the actual amount turned out to be Rs. 8b. The shortfall was on account of two reasons, namely, Foreign Exchange loss and payment of dollar accounts at Rs. 46 per US dollar. It is expected that the State Bank of Pakistan will follow prudent policies in future and try to reduce this loss.

5.Surcharges : Rs. 63b. 11% of Current Revenue:

Surcharge consists of two categories, namely: surcharge on natural gas Rs. 5b and surcharge on petrol Rs. 58b This also represents an indirect tax. Every time this is increased, it has caused cost push inflation impact. Mechanism must be developed to readjust surcharge on the basis of international prices on petroleum so that consumers are the beneficiary.

6.Debt Servicing : Rs. 287b: 55%:

The break up of debt servicing has already been given earlier in this piece. It is high time that suggestions offered earlier in this piece be given favourable outlook so that the burden of debt services is off loaded from budget. Consequently, enough funds would be available to finance the ADP and this will also result in lower levels of borrowings. Resultantly this will enable Pakistan to step forward in its driving slogan of self reliance. This will enable us to achieve economic sovereignty. This is a serious area of concern and should receive high priority of the Government.

7. Financing of ADP of Rs. 116:

The Honorable Prime Minister of Pakistan in his round one had expressed his desire that at least 30% domestic funds should be available for carrying out projects in the ADP. This noble and positive desire needs to be realized with sustained efforts. At present heavy reliance on external assistance makes the implementation of our ADPs very vulnerable. Owing to change in foregoing policy and other international events, the impact is suddenly felt on our economy and the donors/financial assistance lenders always come up with their own question mark on our policies. Year 1999-2000 should be exclusively devoted to innovative measures for self financing of ADP.

Moreover developments Projects which are initiated under BOT, BOOT should also be included in the ADP. This will enable transparent disclosure of the total outlay involved in ADP together with sources of funding.

The break up of external resources is as under:

Particulars Rs. b

Project aid 44

Non-Project aid 141

TOTAL 185

8. Development Plans of Autonomous Bodies : Rs. 38b: 33% of ADP:

The principle underlying in autonomous institutions is that it must have financial autonomy. The right kind of selection of personnel should be undertaken with an assurance in writing that the autonomous public enterprises will be operated on self financing principle. Consequently, the development plans will need to be taken care of by autonomous bodies.

9.Provincial ADPs : Rs. 29b: 25%:

The break up of the provincial ADPs is as under:

Province Rs. b Percentage

Punjab 12 43

Sindh 6 21

NWFP 5 18

Balochistan 5 18

Total 28 100

There is a need to develop a formula for the distribution of amount for provincial ADPs. An amendment in the Constitution of Pakistan needs to be made in this respect. Alternatively the guidelines in terms of percentages be developed for the distribution of Consolidated Federal Fund be followed in the light of Award given under Article 160 of the Constitution of Pakistan.

Moreover, there is a need to develop financial discipline in the Finance Departments of our Provinces. Participation of the grass root people should also be encouraged in this respect. The success story of Agha Khan Rural Support System being followed in the Northern area of Pakistan should be implemented.

Conclusion

All problems have solutions. Greater initiative is needed to handle the foregoing critical imbalances with an innovative and creative approach. Fuller participation should be encouraged. Seminars should be organized, Workshops should be held, Colloquiums should be organized and all other efforts should be undertaken so that within the given framework of suggested directions, as stated above, Pakistan may achieve the goal of self reliance and we may succeed in organizing our house properly. Bold initiatives are needed. The society should be prepared to accept the change and 'Inshallah' prosperity on wider front will be ensured with a confident and self-reliant Pakistan as our tangible goal.

* The author is Dean: Executive Programs, Punjab College of Business Administration, Constituent College of Mohammad Ali Jinnah University.