The Ministry of Finance has claimed that the targets of public debt, under the Fiscal Responsibility and Debt Limitation (CDRL) Act, 2005, have been achieved and, in certain cases, exceeded.
A 26-page ''Fiscal Policy'' and 29-page ''Debt Policy'' statements, issued by the Debt Policy Co-ordination Office (DPCO) for 2006-07, say that the targets of reducing revenue deficit, ensuring that public debt does not exceed 60 percent of total GDP and higher expenditures on social sector have been successfully met.
It claims that Pakistan has made considerable progress in fiscal consolidation over last six years and it has undoubtedly contributed to a sharp recovery in economic growth within a stable microeconomic framework.
The report on compliance with the FDRL Act 2005 requires the measures by the federal government to reduce total public debt and maintain it within prudent limits thereof and identify targets to reduce the revenue deficit to nil till June 13, 2008 and thereafter maintain a revenue surplus.
Revenue balance (Total Revenue minus current expenditure) averaged 0.4 percent of GDP for last four years (2003-04 to 2006-07). However, it is fractionally in deficit by 0.2 percent of GDP but budgeted 0.6 percent of GDP in surplus for 2006-07. It implies that the government has already eliminated revenue deficit ahead of target date 2007-08 envisaged in FRDL Act 2005.
FDRL Act requires to ensure "that within a period of ten financial year, from July, 1 2003 to June, 2013, the total public debt at the end of the tenth financial year does not exceed 60 percent of the estimated GDP for that year and thereafter maintaining it (public debt) below 60 percent of GDP) for any given year."
The Ministry claims that the government has already met, and actually exceeded, the requirement on the level of public debt as a percentage of GDP. Further, this limit has been realised within three financial years, instead of 10 years, as envisaged by the FRDL Act.
At the beginning of July 2003, the total public debt stood at 75.1 percent of GDP while at the end of June 2006, the same item stood at 56 percent of GDP. By end-September 2006, the public debt-to-GDP ratio stood at 50.1 percent of the projected GDP for 2006-07.
The Act requires to ensure "that in every financial year, beginning from the first July, 2003, and ending on June, 13, 2013, the total public debt is reduced by no less than two-and-a-half percent of the estimated gross domestic product for any given year, provided that social and poverty alleviation related expenditures are not reduced below 4.5 percent of the estimated gross domestic product for any given year and budgetary allocation to education and health, will be doubled from the existing level in terms of percentage of gross domestic product during the next 10 years."
The government has successfully met and exceeded this requirement in fiscal year 2005-06. Public debt stood at 61.5 percent of GDP by end-June 2005 and declined to 56.0 percent of GDP by end-June 2006, which implies 5.5 percentage points reduction in public debt to GDP ratio against specified target of 2.5 percentage points. By end-September 2006, the public debt-to-GDP ratio further went down to 50.1 percent, which implies a further reduction of 5.9 percent of GDP in one quarter of 2006-07. This is an indication that the government is fiscally prudent as required by the FRDL 2005. The important thing about this fiscal prudence is that it is not achieved at the expense of reduction in social sector and poverty related expenditure. These expenditures are 4.9 percent of GDP in 2005-06 and are targeted to rise further to 5.1 percent of GDP in 2006-07. It means legal obligation to keep these expenditures at 4.5 percent of GDP is well taken care of.
Expenditures on education and health are also growing briskly. "New guarantees, including those for rupee lending, bonds, rates of return, output purchase agreements and all other claims and commitments that may be prescribed, from time to time, for any amount exceeding two percent of the estimated gross domestic product in any financial year: Provided that the renewal of existing guarantees shall be considered as issuing a new guarantee."
The government met and exceeded this requirement for fiscal year 2005-06 where the total number of new guarantees issued amounted to Rs 14 billion or 0.18 percent of GDP which is fraction of what is required by FRDL 2005.
The Ministry says that a sound fiscal policy is essential for preventing macroeconomic imbalances and realising full growth potential. Pakistan has made considerable progress in fiscal consolidation over the last six years. The overall fiscal deficit is down from an average of 7.0 percent of GDP in the 1990s to 3.4 percent last year (2005-06) and underlying fiscal deficit is still below 4 percent of GDP in 2006-07. The associated public debt burden also declined sharply from over 100 percent of GDP to close to 50.1 percent in the same period.
It claims that the fiscal consolidation has undoubtedly contributed to a sharp recovery in economic growth within a stable macroeconomic framework. Every effort will be made to continue to improve the fiscal balance, notwithstanding the pressure generated by the earthquake of October 2005. Revenue performance on the other hand is better than the target and will help ease some pressure on the earthquake-related spending. Going forward, Pakistan will have to allocate substantially large resources for strengthening the country''s physical and human infrastructure to sustain the growth momentum.
The challenge will be to significantly enhance Pakistan''s tax-to-GDP ratio in order to generate the resources required to finance the development of both human and physical infrastructure.
The government will, therefore, have to make efforts to broaden the tax base ie to hitherto untaxed or under taxed sectors. Broadening of tax base will enable the government to reduce marginal tax rates, which will help further stimulate investment and production and will promote voluntary tax compliance.
Broadening of tax base will also ensure fair distribution of the tax burden among various sectors of the economy. The overall services sector including wholesale and retail trade as well as agriculture are potential candidates for broadening the tax bases, it said.
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