Response to 'Election strategy and economy'

The article "Election strategy and economy" in Business Recorder on October 23rd highlighted the issues of rise in imports, procuring of over 4 billion dollars from foreign banks at a high rate of return with a very short amortization period, changes made in Fiscal Responsibility and Debt Limitation Act, 2005 and some other important matters.
With regard to rise in imports, the writer has claimed that the nature of imports noted on the SBP website do not justify the statement that rise in imports is due to capital imports which would translate into higher output in time. In this regard, it is to mention that during FY 2015, import bill for machinery group remained US $ 5,692 million which increased to US $ 7,910 million by 39 percent in 2017. The share of machinery in total imports increased from 13.8 percent in FY2015 to 17.2 percent in FY2017. There is also a significant rise in the sub components of machinery group like power generating machinery, textile machinery, construction and mining and electrical machinery etc which suggest increase in demand on account of increase in productivity coupled with low policy rate environment and stable macroeconomic condition.
The writer's opinion on the amendments made in FRDLA Act reflects political bias. The article made a false claim that amendments made by the government in the Fiscal Responsibility and Debt Limitation (FRDL) Act, 2005 do not conform to the international standards. On the contrary, the amendments were in fact made to bring the country's reporting of its Debt in-line with international standards. Total debt of the government also remains consistent with international reporting standards ie "IMF Public Sector Debt Statistics Guide for Compilers and Users" (2013) by correctly incorporating deposits of the federal and provincial governments with the banking system. Furthermore, these amendments were sanctioned after diligent scrutiny by the parliamentary review committee.
It must be also taken into account that most of the clauses of FRDL Act were outdated and the present government not only updated the clauses in accordance with the present economic realities but also defined the path with an objective to improve the fiscal and debt situation of the country along with formalizing the definition of public debt approved by the parliament. It is important to note that these amendments were made regardless of the tenure of any political government to clearly define a debt reduction path.
The government would like to highlight that government borrowing sustainability should be viewed in its entirety without resorting to selective bias. There have been relentless efforts by the present government to ensure that procurement of loans is on low rates and is subject to long maturity profile. The increased sustainability of external public debt is also evident from the fact that the "Share of external loans maturing within one year" has been reduced from 68.5 percent of official reserves at the end of June 2013 to 31.9 percent at the end of December 2016 showing an improvement in foreign exchange stability and repayment capacity. Furthermore, out of total public debt, external debt constitutes only 29 percent as of end-March 2017. Within total external debt, the largest component is multilateral and bilateral concessional debt, which constitutes 87 percent.
The debt risks indicators as defined in MTDS have improved during last four years and are well within the sustainability ranges defined under MTDS as per the following details:
· Refinancing risk of the domestic debt portfolio reduced through lengthening of the maturity profile as percentage of domestic debt maturing in one year was reduced to 52.7 percent at the end of December 2016 compared with 64.2 percent at the end of June 2013.
· Exposure to interest rate risk was also reduced as the percentage of debt re-fixing in one year decreased to 45.5 percent at the end of December 2016 compared to 52.4 percent at the end of June 2013.
· Similarly, share of external loans maturing within one year was equal to around 31.9 percent of official liquid reserves at the end of December 2016 as compared with around 68.5 percent at the end of June 2013 indicating improvement in foreign exchange stability and repayment capacity.
Further, it is important to mention that it is the 4th year in a row when the country has witnessed a higher growth momentum with an average growth rate of over 4 percent since FY2014, while fiscal deficit reduced to 5.8 percent of GDP. Hence the claim is not correct.
In regard to widening of tax net, FBR has taken several initiatives including use of third party data. Initially, the objective was to incorporate 300,000 new taxpayers in three years. The BTB drive has been successful. During the years 2013-14 to 2016-17 FBR issued 513,468 notices and enforced 203,701 income tax returns. As a result of these efforts the number of income tax return filers which was around 750,000 for the tax year 2012 has exceeded to 1.2 million in the tax year 2016 and would further increase in coming years.
The writer has also claimed that the share of withholding taxes is 70-75 percent, which is not correct. The claim of author is against the facts as the data indicates that during last several years the share of withholding taxes has not crossed 70 percent in a single year. Moreover, withholding taxes only represent a mode of collection of Income Tax and remains direct tax irrespective of the mode of collection. Most of the withholding taxes collected by FBR are adjustable towards the actual tax liability of the taxpayers to be determined at the end of accounting period. Withholding taxes also serve the purpose of documenting various economic transactions that would otherwise go unrecorded and this documentation helps in determining the actual tax liability of the taxpayers. Furthermore, the incidence of taxation of withholding tax is on all segments of society with the philosophy that pay as you earn.
The writer, while discussing the power sector, has mentioned issues that are not based on accurate or up to date information. In this regard, it is important to mention that the government has undertaken broad based power sector reforms under the framework of the National Power Policy 2013. Implementation of these reforms has resulted in distribution companies (DISCOs) showing improvement both in terms of reduction in line losses (from 18.7 percent in FY 2014-15 to 17.9 percent in FY 2015-16 and 17.2 percent in first half FY 2016-17) and collection from consumers (from 89.2 percent in FY 2014-15 to 94.6 percent in FY 2015-16). These improvements have been brought about by signing of performance contracts, setting of quarterly performance targets, strengthening of legislations to purse electricity thefts, upgradation of electricity transmission and distribution network, and introduction of net metering.
Since 2013, 6,672MWs of new generation capacity have been added to the national grid and by 2018, over 10,000MW will be brought online, and the transmission Capacity has been enhanced and can comfortably carry 20,000-22,000MW of power.
The government has also substantially brought down power subsidies and has significantly contained the accumulation of new payable arrears in the power sector by (i) improving Discos' performance, (ii) rationalizing tariffs, and (iii) reducing delays in tariff determination.
The figure of circular debt quoted in the article at Rs 800 billion is not correct; the actual amount stands around Rs 400 billion. Moreover, the amount outstanding against PHPL is fully funded through the tariff and thus cannot be classified as circular debt. Regular borrowing for capital expenditure takes place which is an ongoing process. A Circular Debt Capping Plan is in place to effectively manage the power sector financial flows, stocks and subsidy budget.
Tariffs around the region are comparable after taking into account the FPA passed every month by NEPRA. The New tariff determined by Nepra is expected to further consider the drop in fuel prices. Moreover, the industrial tariff has been reduced by Rs 3/kWh during the past one year.