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:
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
Less: Current Revenue 423
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
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
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 :
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
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
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
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
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
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
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
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.
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.