In the earlier two articles the focus was on the foreign (external) currency account of Pakistan. In this article the projections as made by the IMF (International Monetary Fund) for their program relating to the rupee account have been discussed. Table 4a of the Report on page 37 has been reformatted for sake of simplicity.
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2022-23 2023-24 2024-25 2025-26 2026-27 2027-28
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Revenue
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Income Tax 3,884 4420 4961 5536 6232
Sales Tax 3,607 4297 4853 5404 6019
FED 600 711 800 897 1004
Custom duty 1,324 1524 1716 1916 2124
Petroleum Surcharge 869 1008 1134 1265 1415
Gas Surcharge 69 80 90 100 112
GIDC 40 47 52 58 65
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7789 10,393 12087 13606 15176 16971
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Increase % 33% 16% 12.5% 11.5% 11.8
Provincial 868 1007 1133 1264 1414
Non tax revenue 2,116 2202 2477 2764 3092
Grants 49 103 107 105 102
Non Tax 3033 3312 3717 4133 4608
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Total available 9637 13426 15399 17323 19309 21579
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Increase 39%
Less: Provinces under NFC 3864 4,595 5331 5995 6691 7484
Available with Federal
Government 5773 8831 10068 11328 12618 13995
Used for interest cost 5568 8,614 8926 8085 8045 8217
Increase 54%
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Net Available 205 217 1100 3243 4573 5778
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Expenses other than PSDP
Defence 1510 1,804 2093 2354 2627 2938
Grants 1008 1,312 1522 1712 1910 2137
Subsidies 1128 1,396 1493 1679 1874 2096
Others 1212 1554 1811 2026 2182 2439
Total 4858 6,066 6919 7771 8593 9610
PSDP 1757 2,354 2605 2944 3286 3675
Outlay 6615 8420 9524 10715 11879 13285
Fiscal deficit (6410) (8203) (8424) (7472) (7306) (7507)
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These figures convey a rosy picture in the sense that they assume a reduction in fiscal deficit at the end of the period and an increase in revenue by over 100%. Let us discuss the major items.
Receipts
The first and foremost item is the increase in Federal Tax Revenue from Rs 7,789 billion to 10398 billion in 2023-24. This is a 33% increase over last year’s. On a similar count the increase in overall revenue over the year is around 39% being Rs 13,426 billion from Rs 9,637 billion.
Keeping in view our track record this target is highly optimistic. On account of our external account problems Pakistan is not in position to be out of the IMF program in the following five years.
The fundamental condition or parameter to judge the performance is revenue collection target. If we commit to the aforesaid projections then the IMF may be satisfied, however, the people of Pakistan and the government in office will remain in serious problems.
It is not possible to increase the tax base during this period. This would mean that there will be more collection of tax from the same people who are already being taxed. This is what we did in 2023-24. If so, the formal or documented economy will collapse and Pakistan will go back to the regime of high indirect taxes and tax withholdings.
Corporate income tax has increased over time by 11% (39 from 28%) in the last two to three years. It is expected to increase further. The federal government’s track record on this subject is very bad. This therefore requires the IMF to ensure that one of the conditions of the program should be a freeze on the tax rate for the existing taxpayers.
The increase is to be gathered from those who are not taxed or under taxed that primarily are traders, dealers in agricultural commodities, real estate income, un-organised service sectors like restaurants etc. In Pakistan the market called ‘Bazaar’ in Urdu and Persian acts like a ‘mafia’.
There is effectively no collection of tax if someone is in a ‘Bazaar’— be it agricultural commodities, meat, fruit, sweet meat shops, restaurants, etc. This ‘Bazaar’ mafia is the biggest hurdle in the expansion of the tax base and documentation in Pakistan.
Expenditure
Interest
The next big ticket item is the increase in interest cost from 2022-23 of Rs 5,568 to Rs 8,614 billion in 2023-2024. This is a 54% increase. This is the result of what we have done in the last 20 years. However, the other major reason is ‘devaluation of rupee’ and increase in the ‘discount rate’ at which the government borrows from the private sector banks. A major portion of this is on account of domestic interest.
There is an increase in overall debt; however, the killing feature is increase in cost due to increase in discount rate. There has been a 49% increase in discount rate from 14.75 to 22% during this period. Pakistan is in a trap. Increase in discount rate adds to cost of borrowing for the government which results in increase in fiscal deficit that leads to more borrowing at even a higher cost. It is the author’s view that domestic debt at this level is not serviceable and there is a need for a haircut. But bankers do not agree. There will be a separate article on this matter.
Provincial share
There can be a very detailed discussion on this subject; however, the primary question is the technical validity of NFC Award where interest to meet the national fiscal deficit and development project throughout the country is borne by the Federal Government whereas the benefit accrues to the provinces.
Notwithstanding the economics considerations, this is a bad account. In these projections there is effectively a net surplus from the provinces of Rs 1,000 billion per year. This appears to be an overestimate and provinces do not generate surplus as per history.
Expenses other than PSDP and interest
Expenses other than PSDP (Public Sector Development Programme) and interest include a sum of an average Rs 1500 on account of these subsidies. The break-up is not available; however, the major subsidy is on account of the power sector. The power sector needs complete overhaul and in the present circumstances there is an effective rent-seeking in the form of fixed charges coupled by sovereign guarantees and payment in USD.
One of the expenses ballooning in Pakistan is ‘pension’. There are three primary problems in relation to that subject. Firstly, on account of the very large number of personnel in departments like the Military, Railways, Municipal Bodies, etc the number of persons required to be served is very high. Secondly, over time there had been decisions and orders, whereby at time the amount of pension exceeds the last drawn pay in effective sense.
There had been no funding in the past. In accounting and financial sense one of the unsustainable liabilities which governments in developing countries have accumulated is pension. There is no immediate solution. The problem is so serious that Taimur Jhagra being a Minister of Finance of KPK and a Partner in Mckinsey & Co discussed (during his ministership) with this writer the increase in the retirement age to reduce the immediate liability of pensions. The amount is at least 800 billion.
PSDP
PSDP is a legacy of a large government mentality. The primary question for a Federal Government is whether or not there is a need for PSDP by the Federation. Why the same cannot be delegated to Provincial or Local Governments. The country’s Planning and Development Ministry, which was supposed to draw economic plans for the country, has become an approving authority for development plans.
What are these development plans? It is generally considered as official compensation to legislators for their face-saving before the public. It is good that PSDP as a proportion of total budget has reduced substantially. It is the author’s view that this amount be reduced further and Ministry-wise allocation should coincide with the reduction in the size of the number of Ministries.
The author is not able to understand the reason for maintaining over 60 Divisions in the Federal Government after the passage of 18th Amendment. Now there should be only 6 to 8 Divisions and the infrastructure for the Ministries being diluted in Islamabad be used as an educational institution. This size of Islamabad is not sustainable with this size of Federal Receipts.
Overall balance
The overall budget deficit as per projections will start decreasing after 2024-25. This appears to be a good omen. However, the fundamental question is whether or not all the assumptions in the IMF reports will work in the manner projected.
There are many ‘ifs’ and ‘buts’. This needs a very strong principled government. The experiences in Pakistan had not been encouraging, however at this corner of history there are no more chances for mistakes.
The question how things will move in the next five years will find a plausible answer in the next seven to eight months. In this author’s view, the only solution is the formation of a ‘National Consensus Government’ comprising all parties, even if one of the parties enjoys a clear majority.
Copyright Business Recorder, 2023
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