This document summarizes the key economic challenges facing Pakistan's government as it prepares its first full-year budget for 2019-20. It notes that GDP growth is projected to fall below 5.2% from the previous year, inflation is expected to exceed 9%, and foreign exchange reserves have declined. The budget will need to balance stabilization goals like reducing the fiscal deficit with promoting inclusive growth. Key factors that will influence the budget include the IMF bailout agreement, which will set the medium-term economic framework, the 18th constitutional amendment which transferred some spending responsibilities to provinces, and overdue reforms to Pakistan's tax system which collects less than 10% of GDP in taxes.
This document summarizes the key economic challenges facing Pakistan's government as it prepares its first full-year budget for 2019-20. It notes that GDP growth is projected to fall below 5.2% from the previous year, inflation is expected to exceed 9%, and foreign exchange reserves have declined. The budget will need to balance stabilization goals like reducing the fiscal deficit with promoting inclusive growth. Key factors that will influence the budget include the IMF bailout agreement, which will set the medium-term economic framework, the 18th constitutional amendment which transferred some spending responsibilities to provinces, and overdue reforms to Pakistan's tax system which collects less than 10% of GDP in taxes.
This document summarizes the key economic challenges facing Pakistan's government as it prepares its first full-year budget for 2019-20. It notes that GDP growth is projected to fall below 5.2% from the previous year, inflation is expected to exceed 9%, and foreign exchange reserves have declined. The budget will need to balance stabilization goals like reducing the fiscal deficit with promoting inclusive growth. Key factors that will influence the budget include the IMF bailout agreement, which will set the medium-term economic framework, the 18th constitutional amendment which transferred some spending responsibilities to provinces, and overdue reforms to Pakistan's tax system which collects less than 10% of GDP in taxes.
This document summarizes the key economic challenges facing Pakistan's government as it prepares its first full-year budget for 2019-20. It notes that GDP growth is projected to fall below 5.2% from the previous year, inflation is expected to exceed 9%, and foreign exchange reserves have declined. The budget will need to balance stabilization goals like reducing the fiscal deficit with promoting inclusive growth. Key factors that will influence the budget include the IMF bailout agreement, which will set the medium-term economic framework, the 18th constitutional amendment which transferred some spending responsibilities to provinces, and overdue reforms to Pakistan's tax system which collects less than 10% of GDP in taxes.
This policy brief is contributed by an IPS team led by Fasih Uddin, former chief economist of the Planning
Commission of Pakistan and a veteran member of Institute of Policy Studies (IPS), Islamabad. He is also the author of Pakistan’s Economic Journey: Need for a new Paradigm and Pakistan under IMF’s Shadow. Asim Ehsan, research officer at IPS’ economy desk and Amanullah Khan, former president Rawalpindi Chamber of Commerce & Industry (RCCI) and Islamabad Stock Exchange (ISE) have also contributed in the preparation of this brief.
The PTI coalition government will present its first target. The fiscal deficit is likely to be above 7% of full-year budget 2019-20 in parliament in mid of next GDP which is mainly contributed by shortfall in tax month, i.e., June 2019. The current year’s budget was revenues, rise in debt servicing and defense related prepared by the previous government and expenditures. GDP growth is likely to be way less than subsequently subjected to minor changes proposed by 5.2% recorded in the previous year and feared to be at the current government when it assumed power. Thus, around 3% in 2018-19. The main area of concern, the forthcoming budget should be seen as an important however, relates to external economy and rising step towards PTI’s objectives including ‘building just prices. The inflation rate in 2018 was 3.9% and in and equitable society’, as enshrined in the Madinah 2019 it is leaping towards double figures i.e., 9.4% Charter and visualized by the father of the nation. This (March 2019) and projected to remain high in 2019- budget should also be seen in the backdrop of current 20. The foreign exchange came down to precarious year’s economic performance, chronic issues such as unemployment, poverty, public debt, poor social The GDP growth is likely to be way services, high level of corruption, poor governance, less than 5.2% recorded in the low rate of savings and investment, and water and energy crises. It should be appreciated, however, that earlier year (2017-18). while these issues need sustained and long-term level and external debt repayment liabilities efforts, the forthcoming budget could be used as compelled to seek funding from friendly countries and critical step for setting the direction. international institutions. Despite funding arrangements with Saudi Arabia, UAE and China, the The international institutions (e.g., IMF, World Bank, government had to negotiate a medium-term Asian Development Bank) as well as national arrangement with IMF. The rupee depreciated institutions (State Bank of Pakistan and Pakistan substantially while there is also stress owing to steady Bureau of Statistics) have assessed the state of the rise in international oil prices. These have adversely economy during the current year. The Economic impacted the economy; petroleum prices were Survey, Annual Plan and other documents that will be frequently raised resulting in energy and transport cost released with the Budget in a couple of weeks will rise. Depreciation also resulted in increase in cost of give updated position of the economy. Indications are external debt in rupee. The people suffered due to rise that, in general, the performance is below the planned
[1] in prices with inflation likely to exceed 9% during the Ports). Fourthly, NFC award and 18th constitutional fiscal year. This coupled with unemployment, amendment. Lastly, medium-term program finalized poverty, societal disparity in income and wealth and with the IMF. These are briefly discussed below: poor social and environmental conditions have made the life of common man difficult. The current Notwithstanding the criticism generally government has taken some initiatives in health, levelled against IMF, the most important education and housing sectors. Some more may be element in the budget will be the Pak-IMF forthcoming in the coming years. Mobilization of bailout arrangement. In fact, it will lay down resources for financing these programs and managing the medium-term framework (3-4years) for them in an effective way will be a real challenge. fiscal, monetary, exchange rate and balance of payments policies. The arrangement will be This government will have a heavy agenda for next closely monitored and periodic disbursement year and the main burden will fall on the budget. Many of funds will be subject to meeting set criteria tasks will have to be addressed. On economic front it and benchmarks. The focus of arrangements will be on stabilization as against accelerating The flawed approach and practices growth. It is feared that cost will largely fall of tax collection machinery of the on common man. The government has to government keeps burdening the remove this feeling by taking appropriate actions. In order to contain inflation, a existing tax payers with more taxes campaign of austerity, reliance on instead of bringing non-taxpayers local/national products and reduce imports into the tax-paying circles. will be required. Rationalization of taxes on local products is also a promising initiative. should attempt a balance between stabilization (fiscal deficit, public debt, monetary stability, foreign The 18th constitutional amendment and 7th exchange reserves, exchange rate, inflation etc.) and NFC Award have changed the fiscal structure. sustained and inclusive growth. Other areas of While most taxes are collected by the attention are human development and welfare, Federation, its share is now less than half. environment and climate change, national security, Many areas such as health, education and governance and clean society. The focus has to be on housing, about which present federal such repeatedly highlighted areas as, people’s welfare, government has ambitious plans, are now in equity, justice and equal opportunities for all. the domain of provinces. Thus, federal budget should be reviewed along with the provincial In order to have macroeconomic stability and fast budgets. economic growth, experts opine that, it is necessary to sustain GDP growth rate of 7 to 8% for at least 10 The 8th NFC Award is overdue by few years years without any interruption. To attain such a high and the next budget is based on the 7th NFC growth-rate it is inevitable to ensure increase in Award of 2010. It is high time to constitute investment over 20% of total GDP, along with raising the new commission and ensure that the facto productivity and efficient use of resources. Clear budget for 2020-21 is based on the new policy and confidence creating measures are the basic Award. parameters required for investment promotion.
The next year’s budget is being prepared under certain
compulsions. Firstly, commitments made in the PTI Manifesto as well as aspirations and expectations of the people. Secondly, security considerations and obligations arising out of past actions (such as debt servicing and CPEC commitments). Thirdly, mega projects planned or in the pipeline (such as Dams and
[2] It is said that tax system has been reformed yet restraints on public debt under the Fiscal collection has not improved. Pakistan’s tax to Responsibility and Debt Limitations Act GDP ratio is less than 10% which is amongst 2005. the lowest in the world. It is rightly believed that the country has potential of increasing tax Revival of agricultural sector is inevitable in revenues without increasing tax rates. This order to boost the economy of the country. In can be done by serious tax reforms and this regard, the government should ensure enhancement of progressive taxes, while availability of credit facilities to whole of the limiting tax exemptions only to targeted areas. sector in general and to small scale farmers in particular. Low input cost along with One budget cannot resolve all improved marketing and storage facilities for the problems. The budget should agriculture products is recommended in order be a part of a grand design and it to boost agriculture sector.
should at least be based on a The loss-making public sector enterprises
three to five years’ vision. (Pakistan Steel Mills, PIA, etc.) are a constant drain on the budget and banking system. Something innovative and drastic is required Indecisiveness and status quo are causing for tapping the potential, eliminating more harm and creating uncertainties. These corruption, reduction of tax evasion and should be either privatized or restructured and broadening the tax base. In this context, the made profitable. Value Added Tax (VAT) is a promising area which has not been introduced so far under the Pakistan’s national savings remains very low pressure of vested interests. This proposal (about 14-15% of GDP) and are one of the should be revived. A comprehensive scheme main causes of low economic growth and of increasing tax base is proposed by FPCCI dependence on external borrowing. Measures (Federation of Pakistan Chambers of should be taken to discourage conspicuous Commerce & Industry) which emphasizes on consumption and encourage savings. enhancement of people’s confidence in paying taxes. Tax reforms process should Factor productivity (Labor, capital, energy, involve industrialists and businessmen inputs) in the country is low and wastage of feedback and views. material and manpower is high. This neglected area needs special attention. We need higher tax coverage, lower tax rates, Increase in the level of technical education less reliance on indirect taxation and with more institutes and trainings on very progressive tax regime. FBR should move strict international standards and away from predatory taxation and serious methodology are needed. Cost benefit efforts are required to restore trust of people. analysis criteria should be used in PSDP mega Tax should be collected from people who do projects instead of political motivations. not pay taxes and existing tax payers should not be excessively burdened. Form and The government is planning mega procedures of tax on individuals, in particular, infrastructure projects such as dams, ports, need to be simplified and incentives provided highways, railways and tourism. Serious, to induce them to pay tax voluntarily. Strong integrated and consistent efforts are required institutional framework and initiatives are to mobilize internal and external resources for required to revive the system of Zakat and them. Ushr.
Fiscal discipline is a neglected area.
Successive governments have ignored the
[3] The lack of consistency and perseverance in governments to prefer soft options against the hard macroeconomic policies pose serious ones. They, for instance, opted for public borrowing concerns to the national economy. instead of attempting to raise tax revenue. Need of the hour is a movement for self-reliance and Governance and corruption issues are serious comprehensive austerity drive with focus on public concerns and the emphasis of current welfare and inclusive progress. government on mega corruption scandals is a good step. However, more attention is The flawed approach and poor practices of tax required on smaller segments like, health, collection machinery keeps burdening the existing tax education and housing etc. The involvement payers with more taxes instead of bringing new of government officials in hiring and posting taxpayers into the tax circles. Innovative approach is of people at high level seats without following required to broaden the tax base, monetize the criteria of competency and fitness for the job economy and encourage people to pay taxes. would not lead to good governance. These aspects are in contradiction with Election One budget cannot address all problems, but it should Manifesto 2018 of PTI which is currently at least set an effective base to achieve national ruling in center and two provinces. objectives within a medium and long-term framework. The practice of preparing five-year and perspective To sum up, the task ahead is difficult and challenging plans should continue so that all development efforts which requires tough decisions. One of the main are set out in an integrated framework with a long- causes of current malign is the tendency of the past term vision.
For queries: Syed Nadeem Farhat Senior Research Officer nadeem@ips.net.pk | www.ips.org.pk
