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Dr. Ikramul Haq
“Total debt servicing increased by around 57 percent during FY 2018-19 compared with last fiscal year which was driven by higher domestic interest payments (on account of rise in domestic interest rates) while external debt repayments increased significantly and recorded at Rs 974 billion during FY 2018-19 compared with Rs 450 billion during last fiscal year. The interest servicing grew by around 39 percent during FY 2018-19 compared with last fiscal year mainly due to increased borrowing on account of higher than budgeted fiscal deficit, increase in domestic interest rates as well as depreciation of Pak Rupee against main international currencies also contributed towards this rise”—Fiscal Policy Statement 2019-20, issued by Debt Policy Coordination Office of Ministry of Finance
Even a cursory look at Fiscal Policy Statement 2019-20, released by the Debt Policy Coordination Office of Ministry of Finance, to fulfil the requirement of section 6 of the Fiscal Responsibility and Debt Limitation Act 2005 [“the Act”] shows that the most daunting challenge faced by the country is rising debt and its servicing. The Act defines “total public debt” to mean the debt of the Federal Government and the Provincial Governments serviced out of the Consolidated Fund and debts owed to the International Monetary Fund, whereas, “total debt and liabilities” include “total public debt” as well as debt of other sectors.
The total debt and liabilities as on September 30, 2019 of Rs. 41.489 trillion constituted 94.3% of GDP and total public debt of Rs. 34.24 trillion 77.8% of GDP. On account of debt servicing in FY 2018-19, actual expenditure was Rs. 1987 billion against the budgeted target of Rs. 1620 billion. Allocation for the current fiscal year is Rs. 2891 billion, 78% higher than last year! The figure as on June 30, 2020 may touch Rs. 3000 billion. Thus, even if Federal Board of Revenue (FBR) collects Rs. 5000 billion [realistic projection is around Rs. 4.5 trillion] against revised target of Rs. 5.2 trillion [originally it was Rs. 5.5 trillion], after share of provinces under 7thNational Finance Commission (NFC) Award, net tax collection would not be enough to even meet debt servicing alone! This is the real dilemma on fiscal front that was not touched by Dr. Abdul Hafeez Shaikh, Advisor to Prime Minister on Finance and Revenue, or any Opposition party in speeches in National Assembly on February 12, 2020.
In FY 2018-19, the position of collection of taxes by FBR was Rs. 3829.5 billion against the original target of Rs. 4435 billion, showing negative growth as the previous year’s collection was Rs. 3842.2 billion. All the provinces managed to collect Rs. 401.8 billion in FY 2018-19 against the target of Rs. 454.1 billion. Total tax collection of the country was Rs. 4473.4 billion against the budget target of 5342.7 billion. Direct taxes declined by 6% (Rs. 1445.6 billion against previous year’s yield of Rs. 1536.6 billion). Indirect taxes (sales tax, federal excise duties and custom duties) were 62% of total collection of FBR during FY 2018-19.
The Federal Government also collected other taxes (indirect) of Rs. 242.1 billion against the budget target of Rs. 453.6 billion that included Petroleum Levy of Rs. 206.3 billion, Gas Infrastructure Development Cess of Rs. 21.4 billion, Natural Gas Development Surcharge of Rs. 5.3 billion and Islamabad Capital Territory (Tax on Services) of Rs. 9 billion. The non-tax revenue collection of Federal Government was Rs. 364 billion against a target of Rs 772 billion. The decline of 42% in non-tax revenue from the level of last year was largely attributable to considerable shrinkage in profits of State Bank of Pakistan (SBP) by around 95% and reduction in markup payments from Public Sector Enterprises by around 59%.
The consolidated government expenditure registered increase of 11% during FY 2018-19, stood at Rs 8345 billion, out of which debt servicing alone was Rs. 2091.1 billion (domestic Rs. 1820.8 billion and foreign Rs. 270.3 billion). The federal fiscal deficit (excluding grants) was recorded at Rs 3635 billion or 9.4% of GDP during FY 2018-19. It posed enormous challenge for the coalition Government of Pakistan Tehreek-i-Insaf (PTI) on assumption of power. Additionally it inherited record public debt, trade and current account deficits.
The imprudent policies of Pakistan Muslim League (Nawaz) [PMLN] left the PTI Government with no choice but to seek yet another bailout from the International Monetary Fund (IMF). Domestic debt registered an increase of Rs. 1918 billion during first quarter of FY 2019-20, while borrowing for financing of federal fiscal deficit from domestic sources was only Rs. 308 billion, rest of the increase in was on account of increase in cash balances of the government by around Rs. 1610 billion. The current expenditure was recorded at Rs. 7104 billion in FY 2018-19 and witnessed a growth of around 21%. All these facts are contained in Annual Report 2018-19—The State of Pakistan’s Economy’ of State Bank of Pakistan (SBP), Fiscal Policy Statement 2019-20 and Debt Policy Statement 2019-20.
The defective economic policies of PMLN, among others, reckless borrowing, huge wasteful expenses, higher collection figures through heavy taxation on imports, no measures for export-led growth, rather anti-export actions of Ishaq Dar, especially blocking of refunds of exporters, and regressive taxation damaged the economy. The last fiscal year of PMLN was a disaster as highlighted by SBP in Annual Report 2018-19—The State of Pakistan’s Economy.
The challenge before the PTI Government now is how to revive the economy. The Government is claiming to have taken the right steps/measures to put the country back to growth path in the coming years after achieving stabilisation. Critics say that they have yet not removed the major impediments in the way of local and foreign investment. This must be taken as national agenda for survival of the country, above party lines. The Government needs to seek cooperation from Opposition on this, open public debates—mere seeking inputs/advice from the bureaucrats/technocrats behind closed doors will not work. Devising of rational policies and pragmatic decisions/actions must emanate from research suggesting solutions and taking all the stakeholders on board. There is no dearth of either experts or worthwhile studies. The only shortcoming is that the governments at federal and provincial level are not inclined to implement the same after due consideration and meaningful consultation/debate with all the stakeholders.
Faced with grave challenges on the economic front, we need to incentivise/facilitate the private sector for investment leading to growth/jobs. Successive governments have miserably failed to achieve this goal—their sole emphasis has been on oppressive taxes and spending the same for debt servicing or unproductive expenditure. Overemphasis on taxation in the past could not avert record fiscal, trade and current account deficits. For achieving fiscal stabilisation/consolidation, it is imperative that federal government should levy low-rate, broad-based income tax, including on agriculture. In return, it should give provinces right to collect sales tax on goods in addition to services that should be 8% across the board. This alone can make both federation and its units self-reliant, and deliver social services to all citizens.
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The writers, Advocate Supreme Court, is Adjunct Faculty at Lahore University of Management Sciences (LUMS)