Former Finance Minister Dr Hafeez Pasha said Pakistan foreign exchange reserves have started declining for the first time since the Sharif administration came to power with a decline of $730 million during November-December 2016.
Speaking at Aaj TV programme "Paisa Bolta Hai" with Anjum Ibrahim, Hafeez Pasha stated that with falling exports, remittances and foreign direct investment, foreign exchange reserves have started declining. The balance of payment position is deteriorating, Pasha added.
Hafeez Pasha further stated that State Bank of Pakistan (SBP) quarterly report on the state of the economy is relatively balanced and its bottom-line is that structural reforms are urgently required. The danger is of a further increase in the twin deficits - current account and fiscal deficit, he warned.
An increase of $850 million in the current account deficit in the month of November 2016 was witnessed as compared to $1.6 billion for the entire fiscal year 2015-16; and a 90 percent increase in current account deficit during the last five months.
Pasha said according to balance of payment and trade statistics produced by the SBP, increase in import was due to petroleum products and not on account of machinery. Up to 70 percent increase in imports during the last five months was due to petroleum imports, he said, adding that major consumption item in petroleum products was high speed diesel accounting for 60 percent of the sector.
Import of power generation machinery was around $350 million during the first five months of the year as per the SBP report and even lower, about $200 million, in the first quarter of the current year. Dr Pasha stated that low import of machinery was very strange because the country was informed that there is a rush towards power sector projects and investment is taking place on this account but it is not reflected in machinery imports. He pointed out that Chinese direct investment in Pakistan has fallen by 40 percent, which reflects that they are not financing CPEC imports and urged the government to synchronise inflow of Chinese investment under CPEC with machinery imports.
Additionally, he said, there was a sharp increase in non oil imports with 20 percent growth in November 2016. The increase in imports was hitting import substituting industries -petroleum refineries, fertilizer and iron and steel.
Pasha noted that fiscal deficit during the first quarter was 3.1 percent as reported in the SBP report. Low growth in tax revenue during the first quarter was the foremost factor for the increase in fiscal deficit. Pasha acknowledged that the performance of tax revenue was very good last fiscal year with 20 percent growth due to windfall from taxes on petroleum products which, at one time, had a rate three times higher than what is prevalent today. But growth in tax revenue of 4 percent in the current fiscal year was very low in relation to the target. This year, Pasha added, the government has not increased petroleum prices despite an increase in the international market for political expediency. Another factor that accounts for low growth in tax revenue was lack of growth in the economy.
Growth in manufacturing sector, which contributes 80 percent to revenue, remained at 2.2 percent. If the tax base - manufacturing sector - does not grow how can revenue increase, he queried? There are four factors behind the slow down in the manufacturing sector with the first and foremost being hardly any increase in exports. There was no growth in textile sector, which is one third of the manufacturing sector.
Growth in tax revenue was very low and shortfall in revenue could be between Rs 250-300 billion during the current fiscal year, he said, and added that there was a decline of 48 percent in non tax revenue during the first three months of the current fiscal year. He pointed out five contributing factors notably Rs 40 billion Coalition Support Fund (CSF) factor, decline in SBP profit, no receipts from privatisation proceeds, and low dividend from profitable institutions and decline in grants. Now the position is that overall federal net revenue has decreased by 8 percent after transfer to the provinces and this is not enough to cover debt servicing. He pointed out that the government has met defence, development expenditure and salaries through borrowing.
The government controlled current expenditure has been contained a little, however development expenditure of the federal government during the first quarter declined by 10 percent though provinces showed a healthy rise of 37.2 percent in comparison to the comparable period of the year before. Dr Pasha added that Punjab and Khyber Pakhtunkwah provinces are in deficit and if surplus is generated it would be from Sindh and some from Balochistan but there is no way the federal budgetary target of Rs 337 billion provincial surplus will be met.
When the country was on the International Monetary Fund (IMF) programme there was pressure for provinces to generate large surpluses but with election scheduled for next year no one should expect any significant saving from the provinces.
Pasha further stated that imposing withholding tax on banking transactions across the board was a wrong measure because those earning below Rs 400,000 per annum are genuinely exempted as well as pensioners, widows, students, housewives from filing tax returns. Non-filers rate on these categories is legally inappropriate and must be changed.
Former Finance Minister further stated that there was a serious impact of withholding tax on banking transactions last fiscal year, which was evident in significant increase in currency in circulation and almost insignificant increase in banks deposits. However, he maintained that there was some balance during the last five months (July-November 2016) but the impact of the withholding tax on banking transactions is still there.
Comments
Comments are closed.