Self praise by MoF

There has been much self praise by the Ministry of Finance (MoF) for its success in raising total tax revenue though its positive impact is continuing to be negated by the Federal Finance Minister Ishaq Dar's flawed, though some would say highly dangerous, policies with respect to a rise in non development expenditure that accounts for a massive rise in borrowing - external as well as domestic.
Domestic debt rose from 7638.1 billion rupees in 2012 to 14020.45 billion rupees in 2016 (nearly doubled) - the choice of 2012 based on the fact that on the second last day of 2013 Ishaq Dar borrowed a whopping 400 billion dollars to retire the circular debt which cannot be laid at the doorstep of the PPP-led coalition government or the caretakers. The recent issuance of one billion dollar sukuk by the government, accompanied by the usual back thumping by Dar, is more than the 79.125 million rupees budgeted for the year implying that the budgeted mark-up payable this year would be higher with its consequent impact on all other budgetary claims. Dar's recent claim that he has approved the issuance of sukuk at a rate of return of 5.5 percent, a market rate applicable for debt ridden Greece though one would have hoped too high for an economy that as per Dar is doing so well, was necessary given the decline in programme support by 191 billion rupees in the current year in relation to the year before. Foreign debt rose from 60.899 billion dollars in 2013 to 73 billion dollars in 2016 (an increase of 20 percent). As per the State Bank of Pakistan website Pakistan's external debt servicing for 2013 was 933 million dollars which rose to 1339 million dollars in 2016 or a rise of nearly 44 percent.
A report uploaded on the International Monetary Fund (IMF) website titled "unlocking Pakistan's Revenue Potential" dated August 2016 in footnote 1 states that "the tax to GDP ratio is estimated to increase further by about 1.2 percent to 12.2 percent in 2016. Nevertheless general government debt is still about 600 percent of tax revenue, and development spending remains significantly less than interest payments on government debt." The report was compiled by a department different from the one which managed the 6.64 billion dollar Extended Fund Facility (EFF), and its author thanked the mission leader of the EFF, amongst others, for "insightful comments and suggestions."
So how much has revenue generation increased during the Sharif administration relative to the tenure of the PPP-led coalition government and how much of the rise has been allocated to current expenditure instead of development expenditure.
Three observations with respect to the FBR collections are in order: (i) total tax collections are gross rather than net as they include advance tax collections and refunds which, according to industry sources, are around 200 billion rupees though the Prime Minister recently cleared 21 billion rupee refunds with the objective of reducing the liquidity issues facing exporters which in turn led to their procuring higher credit; (ii) a heavier reliance on withholding tax in the indirect tax mode or on services/consumer items - to the tune of 75 percent in the current year's budget - and deliberately mis-defining the bulk of withholding tax collections as direct rather than indirect tax which implies its incidence on the poor is greater relative to the rich; and (iii) illegally, in light of a Supreme Court verdict, shifting dedicated non-tax revenue under the heads gas infrastructure development cess and gas infrastructure development surcharge to other taxes since fiscal year 2014-15, amounting to 190 billion rupees in 2015-16.
With respect to current expenditure it is relevant to note that: (i) current expenditure rose from 2907 to 3599.8 billion rupees between 2012-13 to 2015-16 - a rise of 692 billion rupees while total tax revenue in the comparable period collected by FBR rose from 1946.4 billion rupees to 3103.7 billion rupees or a rise of 1157 billion rupees. Or in other words around 67 percent of additional claimed tax revenue generated by the Sharif administration was diverted to current expenditure; (ii) the single largest rise in the current expenditure as revealed in the Economic Surveys is debt servicing. In 2012-13 budget total interest payments (domestic and foreign debt) were 1,028,737 million rupees while in 2015-16 total payments were 1,315016 million rupees or a rise of nearly 29 percent; (iii) defence was allocated 507.15 billion rupees in 2011-12, the last full year in the tenure of the PPP led coalition government, which due to ongoing operation Zarb-e-Azb (launched) in 2014 received an allocation of 775.8 billion rupees last year - an increase of 53 percent which, given the reduction in the number of terror attacks is not likely to be challenged by the general public; and (iv) federal development expenditure allocations nearly doubled, which can be supported though there are concerns in provinces other than Punjab that the bulk of the federal development outlay has been earmarked for Punjab. What is relevant is to highlight the federal government's rising pressure on provincial governments to show a massive surplus each year, 339 billion rupees in the current year and 297 billion rupees last year, to enable it to achieve a lower deficit however this amount is debited from the provincial development budgets. Recent reports indicate that the provincial governments are no longer willing to generate such huge surpluses.
There is also a serious concern about blatant data manipulation. The element of employing finesse while manipulating data to show better than actual performance of key economic indicators is sadly lacking in the Dar-led Finance Ministry and there is no visible attempt to even bother to rationalise data that is compiled by different credible government institutions.
What, however, is perhaps the most disturbing element in the incumbent Sharif administration's policies is its sustained failure to be transparent (in deals signed bilaterally including Qatar Gas deal and China Pakistan Economic Corridor) or accountable, including resistance to allow debate in the Public Accounts Committee on circular debt retirement by Dar on 30 June 2013. Data manipulation has become almost routine and the Ministry of Finance's defence of data released by entities that are under its administrative control range from claims that the government redefined some key macro economic variables to accusing those challenging it of supporting its political adversaries.
Be that as it may, political parties other than PML-N, as well as economists, are convinced that the China Pakistan Economic Corridor would be a game changer in spite of controversies of which province gets how much of envisaged 46 billion dollar investment. This amount of funding is significant foreign direct investment at whatever rate of interest and need one add at whatever tariff agreed - an amount that even developed countries would love to get; however recent reports indicate that the 46 billion dollars inflows are envisaged over a 15-year period which gives an annual rate of around 3 billion dollars. Given our low absorption capacity the total annual amount maybe not more than 2 billion dollars per annum and thus the envisaged transformation is not likely to take place by 2018 elections but perhaps even later than 2031. Not even the most ardent PML-N supporters can envisage the PML-N government remaining power till that time other than perhaps Ahsan Iqbal with his vision well beyond a couple of contiguous tenures to put it facetiously.
To conclude, one can only hope that MoF abandons its policy of engaging in self aggrandizement and to prove its unrealistic claims by gross data manipulation because that way it is disabling itself from taking informed timely decisions.

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Year         Total FBR   Total tax      Direct Tax    Indirect Tax           Current       Develop

           collections     as % of   as percentage   as percentage       expenditure   expenditure

                               GDP        of total        of total             bn Rs       (bn Rs)

                                       collections     collections

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2011-12         1882.7         9.4            39.2            60.8   2631.9 (2314.8)   303.6 (300)

2012-13         1946.4         8.7            38.2            61.8     2907 (2611.9)     360 (388)

2013-14         2254.5           9              39            61.1     3198.5 (3196)     425 (540)

2014-15         2589.9         9.4            39.9            60.2     3480.7 (3463)     542 (525)

2015-16         3103.7        10.1            43.4            56.5     3599.8 (3482)     661 (700)

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