Revenue collection remains a key issue

From Shamim Ahmed Rizvi, Islamabad
August 16 - 22, 1999

Despite high rate of taxation, the highest in the world, Pakistan is facing difficulties to meet its routine expenditure through its own resources. This situation has arisen after decades of unprudent living beyound means. As a result, the dependence on borrowed money is growing heavily. There has been an increase of over Rs. 350 billion in Pakistan's loans (both domestic and foreign) during the last 2 years which stood at over Rs. 25,000 billion on June 30, 1999.

Unplanned and reckless growth in expenditure, massive tax evasion in connivance with the corrupt tax collection authorities and large scale smuggling depriving the state of a heavy chunk of its revenues are some of the factors for this gloomy picture which is going to be the worst if some drastic steps are not taken immediately. Luckily we have received, a respite of about 2 years because of rescheduling of foreign loans of about $5 billion out of the total of about $29 billion. The payment of installments of the principal amount as well as the interest on this $5 billion has been deferred till year 2001 and that is why Pakistan's expenditure on debt servicing has been static in 1999-2000 budget at Rs. 287 billion. Has it not been done, debt servicing during the current fiscal year would have crossed over Rs. 325 billion as against the total tax revenue of Rs 304 billion collected during last year.

The projections for the year 1999-2000

Rs. in billions

Net Federal Revenues 422.9

Current Expenditure 525.9

Development Allocation 116.3

642.2 642.2

Shortfall for the year 642.2-422.9 219.3

Main items of current expenditure

Debt Servicing 287.4

Defence 142.0

As against total revenues of 422.9

If may be pointed out that estimates of Revenue generation have never proved correct. For example in the year 1998-99 we could generate only Rs. 304 billion against the target of Rs. 354 billion. Expenditure side was always slightly over the original estimates. Shortfall is being met through fresh loans and curtailment in development expenditure.

IMF is insisting that government of Pakistan must raise the prices of Petrol, Gas and Electricity besides 15% general sales tax to yield another Rs 50 billion if the revenue target of Rs 356 billion for 1999-2000 is to be achieved.

The economic survey 1998-99 records the failure of economy in all vital sectors.

A. Growth rate came down to 3.1% from estimated 6%.

B. Agriculture, despite its high potential, recorded a growth of 0.35 per cent against estimated 5%. This situation is the worst in the last 50 years.

C. Exports declined by about 9% against the expected increase of about 8% and stood at $ 7.60 billion.

D. Imports increased by about 7.5 and stood at about $9 billion against the target of $8.4 billion.

E. Foreign remittance declined by almost 40% as it came down from $1,260 million in 1997-98 to $874 million in 1998-99 in earlier years the quantum of foreign remittances ranged between $ 1400 million to $1500 million.

F. National Savings dropped from 14.2 % of GDP in 1997-98 to 11.1 % in 1998-99.

G. Foreign investment dropped by over 60 % from $760 million dollar in 1997-98 to $334 million in 1998-99.

H. Burden of Loans (both internal and external) increased by over Rs. 2000 million during the year. The total loans have gone up to $ 25,000 billion by June 29, 1999 (about Rs. 14,000 billion foreign and about Rs 11,000 billion domestic loans.

The present government has a big challenge ahead to retrieve the economy in this period of respite of two years. In the year 2001-2002, it will need at least Rs. 350 billion for debt servicing alone.

By taking some firm and drastic measures the economy can be brought out of the oxygen tent. We must cut our expenditure and raise revenues to balance our economy.

Following steps are suggested for cutting expenditure.

1. Pakistan is spending about $2 billion annually on import of wheat, edible oils, dry milk, pulses and other food items. By adopting policies to develop agriculture, live stocks and dairy industry, Pakistan can remove this item from the import list bringing the trade deficit to zero which stood at $1.6 billion during 1998-99 fiscal year.

2. A sincere and effective drive for austerity should be launched from the top. We should learn to live within our means.

3. Grand and high profile projects, like new airports, motorways, should be shelved for the time being.

4. Expenditure on establishment such as huge size Cabinet, committees and commissions should be curtailed. We cannot afford to pay MPL office bearers salaries and perks of ministers. Even otherwise it is not proper.

5. Textile Industry should be given full attention and support as it has high potential for raising the exports.

Following steps can help in improving revenues.

1. Strong and effective measures to check tax evasion and the corruption in the tax collecting machinery facilitating the evasion must be initiated with strong will. It is estimated that if all of us pay our due, taxes at the prevailing rates the revenues can be doubled. Exemplary punishment should be awarded to tax evaders and the conniving tax collectors. It should start from the top

2. Crack down on smugglers and Bara markets which are causing losses of billions of rupees to state revenues.

3. Crack down on bank loan defaulters who owe ever Rs 200 billion to the state.

4. Ensure speedy privatization of state owned commercial organisations within the next 2 years and use the entire proceeds for retiring debts.

5. Settle all dispute with IPPs and take all necessary steps to regain the confidence of foreign investors.