Fiscal position of the country is deteriorating rapidly. While expenditures continue to increase due to government's profligacy in an election year, tax receipts are falling behind the target by a wide margin. According to latest information, Federal Board of Revenue was able to collect only Rs 546.7 billion during July-October, 2012 as against the target of Rs 598 billion, indicating a shortfall of more than Rs 51 billion during the period.
These provisional figures show a growth of only about 8 percent when compared to the tax collections of Rs 506 billion in the corresponding period of last year. In other words, tax collections in real terms (adjusted for inflation) have actually declined during July-October, 2012. The low level of tax revenues was due mainly to a fall in revenue collection from income tax and domestic sales tax though all other federal taxes were also way behind their respective targets excluding collection from customs duties. Obviously, with this kind of shortfall, the FBR is unlikely to achieve the collection target of Rs 2.381 trillion set for 2012-13. Last year too, revenue collection had remained short of the original target of Rs 1952 billion by about Rs 70 billion.
The lax tax mobilisation effort by the FBR would have been somewhat tolerable had expenditures been restrained to compensate for the shortfall. But all the indications give a different story. Allocations for PSDP, which generally used to serve as a cushion to contain the fiscal deficit in the past, is now seen as a vehicle to get political mileage and win votes. The BISP also falls into this category. The reported discussion in the recent Cabinet meeting about high inflation and mounting fiscal deficit in the country is ominous of the growing tussle within the government circles and the unwillingness of the authorities at the helm to accept responsibility and make amends. Responding to the criticism of various ministers, Finance Minister, Dr Hafeez Shaikh, is reported to have retorted that "we should collectively take responsibility for this failure." System losses in the power sector have gone up to 45 percent, the energy sector had not improved even after pouring a staggering sum of Rs 1.4 trillion, additional funds of Rs 800 billion were provided to the provinces and the energy sector needs another Rs 150 billion in the next five months (Water and Power Ministry is said to be engaged in arranging Rs 550 billion liquidity in the next six months to provide relief to electricity consumers with the objective of ensuring that loadshedding is not an issue during election). The circular debt continues to increase because cost of energy generation was Rs 12 per unit as against its sales price of Rs 8.80 per unit, leaving a gap of more than Rs 3 per unit. All these factors owe their origins mostly to political considerations for which Ministry of Finance was not solely responsible and continue to bleed the government exchequer. On the revenue side, the revenue mobilisation efforts were weak or half-hearted. For instance, the team working on the auction of telecom licences had not been able to appoint even a consultant for the exercise so far despite the lapse of over five months. The amnesty schemes proposed by the FBR for whitening of black money was estimated to yield over Rs 170 billion but has not so far taken off because it was not properly developed and still required a lot of homework. Of course, there were also legal, moral and practical ramifications which had to be analysed before launching the scheme.
The most unfortunate aspect of the unfolding fiscal situation is that there are no credible checks on the fiscal mismanagement of the country. While the government is not in a mood to observe fiscal prudence, the opposition parties are fully engaged in political bickering and find no time for proper economic analysis and sound policy advice. The appointment of FBR chairman has been challenged in the Supreme Court by a senior officer of the income tax group. This kind of development is not only confusing but also demoralising for the staff of the FBR and could only lead to lower tax receipts. State Bank which could play a crucial role by invoking its autonomous status has adopted a highly accommodative stance and is providing almost unlimited liquidity to the government through an indirect method to finance the widening fiscal gap. The most effective check in such a situation is a programme with the IMF, which the government has so far avoided in the hope that foreign exchange reserves were enough to last till the final days of its tenure. Last year, fiscal deficit of the country was calculated at 8.53 percent of GDP and there is every possibility of nearing or surpassing this level during the current year. The consequences of such an irresponsible fiscal behaviour are not difficult to visualise. The inflationary pressures could worsen making the lives of ordinary people much more miserable, the rupee could lose its value further in the currency market, balance of payments position could deteriorate and foreign exchange reserves of the country could decline to very low levels, forcing the country once again to request for another IMF loan with severe upfront conditionalities, especially in the fiscal area. One fails to understand why the government itself cannot mount a fiscal reform effort on its own at the right time, without involving the IMF and taking its dictation, when it is clear that a weakening fiscal position is the root cause of almost all the ills of the economy and there is no other way to get out of this dismal situation. The irony is that the position is going from bad to worse despite the FRDL Act, 2005 which was passed by the parliament with high hopes of maintaining fiscal discipline at all times irrespective of the party in power. The behaviour of provincial governments also suggests that the affliction is widespread and the country is probably doomed to a long period of financial instability. In a situation like this, one could only pray for a drastic change in the fiscal behaviour of the government and other stakeholders, allowing the country to revert to financial discipline, ensure solvency and revive growth on a sustainable basis.