EDITORIAL: The World Bank’s recent report titled Pakistan Federal Public Expenditure Review 2023 projects savings of 4 percent of 2022 Gross Domestic Product (GDP) – estimated at 2.72 trillion rupees – if its recommendations on fiscal consolidation measures are implemented. The identified fiscal consolidation measures are divided into three categories.
First, the reforms for fiscal expenditure rationalization envisage savings of 1.124 trillion rupees (1.68 percent of GDP) and include reduced operational spending on devolved ministries under the Eighteenth Amendment that remains pending for so many years after its passage projected to save 328 billion rupees (0.49 percent of GDP) as well as refocusing federal development spending on federal mandates instead of what became the domain of provinces through the constitutional amendment with a potential to save 315 billion rupees (0.47 percent of GDP).
In other words, implementing the Eighteenth Amendment that was passed with a consensus of the entire house in 2010 would release 643 billion rupees or nearly one percent of GDP.
While PTI (Pakistan Tehrik-e-Insaf) was not present in the assembly till 2013 and therefore not consulted on the amendment yet both the finance ministers appointed during the Khan administration – Shaukat Tarin and Dr Hafeez Sheikh – alternately held the finance portfolio from 2008-12.
The reason for failure to implement the amendment as has been evident in the implementation of nearly all economically sound policy measures: political considerations were allowed to take precedence over economic considerations.
The remaining savings of 481 billion rupees (0.68 percent of GDP) is envisaged from: (i) cost sharing by provinces for Benazir Income Support Programme to save 217 billion rupees (0.32 percent of GDP); (ii) subsidies elimination - on electricity tariff differential to achieve full-cost recovery to generate 167 billion rupees (0.25 percent of GDP), on tube-wells to generate 20 billion rupees (0.3 percent of GDP), and wheat support to save 7 billion rupees (0.01 percent of GDP); and (iii) devolution of Higher Education Commission and National Commission for Human Development to save 70 billion rupees (0.10 percent of GDP).
Second, the report identifies reforms for reducing debt servicing costs and the fiscal impacts of state-owned entities, envisaging savings of 737 billion rupees (1.10 percent of GDP) including: (i) divesting loss-making state-owned entities to generate savings of 458 billion rupees (0.68 percent of GDP) and while the market for sale or divestment does not exist at present yet there appears to be little effort to implement this decades old declared policy that remains unimplemented to this day; and (ii) implementation of a single treasury account envisaged to save 404 billion rupees (0.60 percent of GDP) – a policy that is reportedly being opposed by powerful stakeholders.
And finally, reforms for enhancing revenue to include removal of concessions, limiting zero ratings, limiting exemptions to save 402 billion rupees (0.6 percent of GDP), increase cigarette excise (applied on ad valorem basis to allow automatic indexation to inflation) to generate 268 billion rupees (0.4 percent of GDP) and merge tax schedules for salaried and non-salaried tax-payers, reduce tax free threshold and simplify personal income tax structure to generate 67 billion rupees (0.1 percent of GDP) - a far cry from the 170 billion rupees additional taxes recently approved in the mini-budget.
The report highlights the rise in debt stock, accounting for 4.7 percent of GDP or a one-third of total federal expenditure, and it is this rise in debt to GDP ratio that leaves no margin for Pakistan’s fiscal authority to run large fiscal deficits as this drives debt to unsustainable levels.
The report also notes that “Pakistan’s over reliance on short-term domestic and external financing instruments has led to rising insolvency risks to due to a growing gross financing needs.” And it is precisely this negative factor that is the reason behind the Fund’s insistence that gross financing needs (GFN) – estimated at around 6 billion dollars by the government and a little over 7 billion dollars by the Fund – be met before the ninth review is declared a success.
These observations and needed corrections have been highlighted on numerous occasions in these columns and now the World Bank has highlighted these aspects in a detailed report and presented it in the form of prescriptions/recommendations.
However, unfortunately, a quick review of ongoing policies would reveal that none of these is currently being considered/implemented with the entire focus for the past year on securing the Gross Financing Needs (GFNs) determined by a flawed expenditure criterion as well as a flawed tax structure that relies heavily on indirect taxes whose incidence on the poor is greater than on the rich.
Copyright Business Recorder, 2023
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