Critical weaknesses in budgetary framework: There's no coordination between governments: Ishrat

The economists at a discussion forum held here on Saturday underlined some very critical weaknesses in the country's fiscal budgetary framework as Federal Finance Minister Ishaq Dar is rolling up sleeves to unveil on June 5 the proposed estimates of his government's revenues and expenditures for financial year 2015-16.
"There is no co-ordination between the federal and provincial governments on budgetary policies," Dr Ishrat Hussain, former governor of State Bank of Pakistan (SBP), told reporters while highlighting ways to improve the resource-constrained country's tax collecting system at Budget Discussion Forum here at Karachi Press Club. Organised by KPC in collaboration with CocaCola Beverages Pakistan Limited, the pre-budget learning session was attended by a large number of economic journalists from both the print and electronic media. Another panelist at the forum was Syed Muhammad Shabbar Zaidi, a chartered accountant and taxation expert.
While Zaidi touched upon various budgetary allocations and discrepancies related thereto, Dr Ishrat, currently serving as dean of Institute of Business Administration (IBA), spoke to what he said enhance 'analytical power' of the journalists responsible for reporting on the federal and/or provincial budgets. Dr Ishrat said the receipt of 60 per cent funds from divisible pool under the NFC Award required the provinces to partake in social sector development in their respective federating units. "You (center) need to devise a framework that could make the provinces carry out certain development works in sectors like education, law and order, roads infrastructure etc," suggested the economist. Urging the need for improving provincial taxes, he noted that the federal government spends about Rs 1.3 trillion on debt servicing, Rs 700 billion on defence affairs and Rs 340bn on running of the government. "This amounts to around Rs 2300-2400bn. All you are left with is Rs 400bn to undertake Public Sector Development Program," said the academician.
Wishing that nationally significant agencies like the Council of Common Interest (CCI) could play a proactive role in addressing such issues, Dr Ishrat said the center and provinces should make their budget-making processes well-co-ordinated. An admirer of 18th Amendment, the former SBP governor lamented that power was not completely devolved to the provinces, especially on the local government level. "Having travelled from Ghana to Guatemala, I have observed that people love to pay taxes where the local government system is in place," he said. Dubbing private sector as an engine of economic growth, the IBA dean urged the government to make its budgetary policies private-sector-friendly.
In Pakistan, Dr Ishrat observed, privatisation had become a "dirty word" for the media was demonizing the very word taking a narrow perspective of it. Illustrating the success stories like K-Electric, Habib Bank and United Bank Limited, Dr Ishrat said privatisation of national assets, barring strategic ones, should be made in the presence of a strong regulator.
Shabbar Zaidi, a member of Karachi Stock Exchange's Board of Directors, was critical of the provinces which, he said, were crying for their due share under NFC Award, but had never been ready to activate the Provincial Finance Commissions (PFC), a constitutional body which provides for the distribution of provinces' financial resources on district level. Punjab and Sindh, he claimed, were sitting on their respective PFCs for the provincial rulers were running their governments like kingdoms.
Of the total Rs 1.720 trillion provincial share, he said, Sindh in FY15 got around Rs 700bn of which Rs 200bn went to "Sain" (chief minister) as his discretionary fund. "Sain got about Rs 2 trillion during last 10 years. But can you show me a single development project in Karachi that could justify the usage of that huge sum," Zaidi asked reporters. Talking about budget deficit, the expert said, the term itself did not make an economic negative. Its usage, rather, defines its character. "It is good if the deficit (money) is used for some productive purpose but is bad if spent under non-productive heads like debt servicing," he explained.
Zaidi was concerned that Pakistan was constantly failing to maintain the ratio between direct and indirect taxes. While the former is used to bridge gap between the rich and poor, the latter stands merely a means of revenue collection for the government. "Our thirst has very much been on indirect taxes that affect the rich and poor indiscriminately," he observed.
Dr Ishrat too was critical of the indirect taxes which, to him, were "regressive" in nature. "A direct tax is progressive tax compared to indirect ones that means the rich and poor are paying the same," he said. Dwelling on some economic misperceptions, the economist said Pakistan's domestic (Rs 13 trillion) and not external ($64bn) debts happened to be taking a heavier toll on the country's ailing economy. "You pay around Rs 1.325 trillion annually to service your debts, a great bulk of which is internal," Zaidi said, adding even the country's most-criticised yearly defence expenditure stood at Rs 700bn, far lesser than the interest Islamabad was paying on its foreign and domestic loans.
"The $64bn foreign debt stands normal for a developing country like Pakistan," he said. The economist said had global crude oil prices not reduced by more than half since June last year, the cash-strapped government would have to pay at least Rs 800bn power subsidies in FY16. "It actually is called circular debt or circular subsidy," he said while defining "subsidies" on the budget's expenditure's side.