Prof. Dr. Khawaja Amjad Saeed
Nov 29 - Dec 05, 1999

Economic revival is a subject of paramount importance. Several steps need to be undertaken after diagnosing the health of the economy of a Country. However, this piece looks at various aspects relating to financial defense of our beloved country. This defense is a pre-requisite for the stability and solidarity of Pakistan and her national-cum-territorial integrity.

SCOPE: For clarity sake, the scope of the paper has been restricted only to budgetary position of Pakistan. For quantitative analysis, the Federal Budget for 1999-2000 has been considered. This was presented in the then National Assembly of Pakistan on June 12, 1999 and was passed by the end of June 1999. Figures used for analysis have been picked up from the Budget Documents for the said year released by the Federal Government.

OBJECTIVE: The main objective is to present a forth-right analysis followed up by useful suggestions for strengthening the financial defense of the country. This is considered crucial for our strength, stability and solidarity. Alternatives as a strategy are being presented for consideration of the present set up in Pakistan.

BUDGETARY POSITION: Two budgets are prepared every year. One relates to Recurring Budget. This contains forecasted revenue and forecasted current expenditure. The other relates to development programmes and is known as Annual Development Plan (ADP). Quantitative position of Federal Budget for 1999-2000 is as under:

Table No. 1

Budgetary position for fiscal year 1999-2000

Particulars Rs. b %

A: Finances Needed 642

1. Current Expenditure 526* 82

Composition Rs. b %

a) Debt Services 287* 55

b) Defense 142 27

429 82

c) Other Expenditure 97 18

526 100

2. Annual Development Plan 116** 18

Composition Rs. b %

a) Federal Government 45 39

Development Projects

b) Financing of Autonomous 38 33

Bodies

83 72

c) Allocation for Provinces for 29 25

their Development Plans

d) Other Development 4 3

Programmes

116** 100

642 100

B: Finances Available 423*** 66

Composition Rs. b %

1) Net Current Revenue 127 23

a) Direct Taxes (Mainly

Income Tax)

b) Indirect Taxes 229 41

J Sales Tax 96 17

J Excise Duty 67 12

J Custom Duties 66 12

356 64

2) Other Sources

a) Non Tax Revenue 142 25

b) Surcharges 63 11

561 100

Less: Transfer to Provinces 138

423***

Shortfall (A-B) 219 34

642 100

C: Financing Strategy

1. External Assistance 185

2. Net Capital Receipts 53

3. Self financing for PSDP* by provinces 4

242

Less: Return to Banking Sector etc. 23 219

Source: Computed from Federal Government Budget Documents for 1999-2000, released on June 12, 1999.

* Public Sector Development Programmes

TEN POINTS SUGGESTED STRATEGY: The

following major suggestions can be drawn from the above information:

1) Net revenue (Rs. 423 billion) cannot even finance two heads of current expenditure namely, debt services & defense (Rs. 429 b). This speaks for increasing net revenue in substantial terms so that not only the total current expenditure can be met out of net revenues but finances are also available to substantially meet the ADP.

2) Debt Services constitute 55% of current expenditure. This negates the former government's slogan of self reliance. Continuous reliance on internal and external debt has tarnished the economic sovereignty face of Pakistan. Political sovereignty stands mortgaged as we have all along relied on loans. Increasing trend of loan has been putting tremendous pressure on the annual recurring budgets of the Federal Government through debt servicing. The following table presents break down of the debt servicing burden:

Table No. 2

Debt servicing impact on federal budget 1999-2000

Particulars Rs. b %

Domestic Debt 161 56

Foreign Debt 126* 44

Composition Rs. b

Foreign Debt Servicing 42

Foreign Loan Repayments 84

126*

287 100

Source: Computed from Federal Government Budget Documents for 1999-2000, released on June 12, 1999.

A bold and innovative effort to reverse the above trend is needed. We need to plan on self-reliance and say good-bye to the loan culture at home and abroad. Our economic sovereignty now stands bartered away. Virtually IMF and World Bank dictate to save their loans and ensure that capacity to repay is the main objective. It is high time that the present set up understands this perspective to improve our image which is at a low ebb.

Confidence building measures at home can enable us to motivate Pakistanis living abroad to invest in Pakistan and the Government should generate internal sources to pay off loans in respect of foreign debts. Government lands and unutilized property needs to be sold to repay internal loans. This challenging job must be addressed and later implemented at the earliest. Consequently the debt-servicing impact will be substantially reduced on a bur dent on the annual recurring budget.

3) Defense expenditure needs an internal review by the armed forces of Pakistan. Economy Committee may be set up and an appraisal may be undertaken to ensure possible reduction, wherever feasible.

4) A comprehensive exercise of reduction in Other Expenditure (Rs. 97 billion) is required to be undertaken. The Institute of Cost and Management Accountants of Pakistan can extend full support to the Government of Pakistan in undertaking this exercise. Austerity must be translated in reality.

5) Nobody knows what exactly is the total outlay of the Federal Government in respect of its Annual Development Plan. The official figure released was Rs. 116 billion for ADP 1999-2000. However, this does not include several projects under BOT (Build, Operate and Transfer) and BOOT (Build, Own, Operate and Transfer) and several other schemes. The system of preparing ADP in future must reflect all schemes so that a comprehensive picture is available.

6) Federal Government development projects (Rs. 45 billion) need to be carefully scrutinized. Ongoing schemes should be completed before starting new development projects.

7) Financing of Autonomous Bodies is likely to cost Rs. 38 billion. Right type of Chief Executives should be appointed in Autonomous Bodies and they should undertake self-financing projects rather than burdening the Annual Development Programmes. This challenge should be met by Chief Executives of the concerned Autonomous bodies.

8) It is a pity that 1973 Constitution of Pakistan does not lay down guidelines for distribution of ADP allocation to provinces. The ADP for 1999-2000 has an allocation as per following table:

Table No. 3

Adp allocation to provinces : 1999-2000

Province Rs. b Percentage

Punjab 12 43

Sindh 6 21

NWFP 5 18

Baluchistan 5 18

Total 28 100

Unfortunately the allocation is not in line with the population of the above provinces. The biggest looser is the province of Punjab.

9) It is high time that the canons of Taxation of Adam Smith are revisited and the new set up in Pakistan should extend a strong practical orientation in this respect. To narrow the gap between Haves and Have Nots, it is necessary that the ratio of Direct Taxes to Indirect Taxes should be substantially increased. The path of self-reliance to Pakistan lies in enlistment of around 10 million potential Income Tax Payers as against the present number of about 1.5 million. The present set up should develop a comprehensive plan for a thorough survey to achieve the above objective. Moreover, the exemptions available under Schedule Two of the Income Tax Ordinance, 1979 be substantially watered down, if not eliminated. If only this step is taken, the dream of self-reliance of Pakistan can be achieved and reliance on borrowing can be substantially reduced, if not eliminated. Moreover under the Wealth Tax Act, 1963, a ridiculously low amount of Rs. 4 billion is at present being received. This requires a thorough surgical operation of withdrawal of Wealth Tax exemptions so that the real purpose of narrowing the gap between Haves and Have nots can be achieved. The potential is too large and the tricks of vested interest need to be punctured.

10) Recovery aspects of Indirect Taxes need to be streamlined and simplified to achieve higher quantum of Indirect Taxes and Non-Tax revenues.

Conclusion

If the foregoing suggestions are favorably considered, the budget deficit of Pakistan will be wiped out and we can generate enough money to finance the Annual Development Plans in future. Too heavy reliance on external assistance can be significantly scaled down and the dream of moving on the path of self-reliance can be realized. Will power is needed to be demonstrated and committed action plan needs to be translated into reality. It is high time that we do it to strengthen Pakistan, extend stability to it and fortify its financial discipline. A strong financial discipline is the crying need of today and it should be given priority No. 1.

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

President, Institute of Cost and Management Accountants of Pakistan.

Member Governing Council, International Federation of Accountants.