This action might not be possible to undo. Are you sure you want to continue?
Syed Shabbar Zaidi The Institute of Chartered Accountants of Pakistan Karachi, December 18, 2012
• • • • • • • • • • International outlook-trends and effects on Pakistan’s economy General state of affairs Pakistan’s fiscal position-2012-2013 [June 30, 2013] Liquidity or going concern Issue Undocumented economy – Nexus and Support Shrinking Government – where required Receipt Side-Composition and Projections Expenditure Side - Choices and Options Expected horizon – Beyond 2013 What should be done ?
Their position will not directly affect us. ‘how’. – Exit from Afghanistan [by 2014] is relevant. Republicans and Pakistan had a different kind of partnership.International Outlook-Trends and Effects on Pakistan’s Economy • US and West: – ‘Fiscal Cliff’ will hit US economy. 3 . Tax increases and spending cuts. – US $ 30 to 40 billion support for Pakistan is not monetarily important. Now. – however ‘why’. ‘how long’ and for ‘whom’ [IMF=US] will assist? – Obama [till 2016] is a ‘Democrat’. it is a different world with different people. – Europe will remain in crises.
Will do the same. – Now. – China is not a lender of money. Trade will not open ‘by choice’ in near future. – China-our competitor in low value exports and supplier of cheap imports has direct relation with our industrial productivity and growth. cannot be ignored. China will be even a bigger economic player.International Outlook-Trends and Effects on Pakistan’s Economy • China and India: – Beyond 2013. in Sino-Indian economic equation. however their international economic significance does not contribute anything for us. – India: Notwithstanding our resistance. – The boat for pro-growth economic relations with China has already been missed [Ordnance Factory versus Trans-shipment port or Mass Transit for Karachi]. via Dubai. as we think. 4 . Pakistan is not as relevant.
International economic trends are predictable. They will not affect our economic outlook for 2013 and beyond. 5 .International Outlook-Trends and Effects on Pakistan’s Economy Conclusion: – No major political and economic change in international outlook is expected [2013 to 2016]. – International oil and commodity prices expected to remain stable [2013 to 2016].
– Dilution of Government’s writ in collecting taxes. – Manufacturing sector continuously shrinking as a percentage of GDP. underemployment and increasing burden of indirect taxes on lower income groups. – Continued demonstrations of luxurious lifestyle by people in power and persons not paying taxes. security and law and order. not reaping any benefit for common man due to unemployment. infrastructure. – Continued deterioration in quantity and quality of health. – Comparative stability of prices and lesser inflation [12% to 9%] (2011-2012 and 2012-2013). education. energy and expenditure for future generations for common man. – Widening gulf of income distribution between rich and poor. Size of government in such sectors is shrinking. 6 .General State of Affairs – Continued deterioration in law and order and security.
Pakistan’s Fiscal Position 2012-2013-Budget and Expected What we budgeted: Rupees in billion Total Receipts (Tax and Non-Tax): Less: Transfer to provinces Net Available Expenditures: » » » » » » Total Deficit Expenditure on Debt servicing 1142 Defence 545 Subsidies 521 Federal Government exp. 404 Federal Government PSDP 350 Other 304 3422 1459 1963 3266 (1303) 7 .
except a nominal amount of Rs 350 billion. is being locally financed essentially from banks and increase in currency in circulation. Whole amount. we will end up as: Rs in billion • • • • Revenue shortfall Increase in subsidies Decrease in PSDP Total increase in deficit 250 250  450 Total expected deficit will be around Rs 1.Pakistan’s Fiscal Position 2012-2013-Budget and Expected We projected Rs 1.800 billion. 8 .303 billion deficit.
Consumer and luxury items increasing in proportion to capital goods. Same will happen this year [2012–2013] and beyond. So each year there is deficit of US $ 5 to 8 billion. Over the last 30 years (1977 onwards).Pakistan’s Fiscal Position 2012-2013-Budget and Expected • Deficit is locally financed. US$ deficit on current account [around US $ 15 billion per annum] is a perpetual feature of Pakistan’s economy. [Exports US$ 25 to 29 billion : Imports US$ 45 to 48 billion] There is an offset of around US $ 10 to 12 billion of labour remittances. there is no effective improvement in quantity and quality of exports. Borrow or beg such US$ and after every five years have the same position as is today. Keeping in view the size of Pakistan’s economy and unexplored potential of tax collection this debt level is manageable. 9 • • • . However the problem is precarious with present level of revenue collection.000 trillion]. Import bill is continuously increasing and its composition is deteriorating [spoiling]. Each year around Rs 1800 billion is adding in the outstanding liabilities [Rs 11. so actually we are heading towards a public debt crises.
investments in consumer oriented industry [telecoms etc] and investments in real estates bring temporary stability. Filling the temporary gap [by US or IMF] again will be an ‘aspirin’ for a ‘cancer patient’. Temporary inflows in capital markets. however. This is a perpetual problem since inception. In fact. these do not resolve the primary issues of the country. The Going Concern issue is being handled as if it is a liquidity problem. such inflows disguise the main and fundamental need of identifying and correcting perpetual and reemerging US $ shortfall [Current Account deficit]. • • • • 10 .Pakistan’s Fiscal Position 2012-2013-Budget and Expected • Effectively the problem is not new. An analysis of taxes collection and expenditure will reveal that essentially the problem is in ‘Rupee’ account and composition and structure of economy of economy. [total deficit since 1947 US$ 275 billion].
in Rupee Account [and resultantly in US$] is a ‘Non-Going Concern’ as per past records (1947-2012). The problems are structural. • • • 11 . Stability Programme in 2008. Nevertheless.]. War on Terror. Afghan War. etc.Liquidity or going concern Issue • Pakistan’s economy in accounting terms. all economic policies at least in the last 30 years (post 1977) have been undertaken as if it is a liquidity issue. The past and the expected future reveal that it is not possible to keep the economy afloat unless there is an injection of capital after almost every decade [PK 480.
Present level is not sustainable. empirical evidences reveal that such transactions now exceed around 40 percent of all commercial transactions undertaken.Undocumented Economy – Nexus and Support • All estimates. There is a theory that such undocumented economy is actually a support to our economy. This has happened in Pakistan. 12 • • • • . properties of Pakistanis in and outside Pakistan etc. No government can balance its books unless level of undocumented sector is reduced to below 5 percent. Number of bank accounts in the country. are all empirical evidences of that part of economy. There are guesses for the scale of such sectors. That theory may have merits. however. projections and forecasts about Pakistan economy lose their significance on account of scale. nature. If this is supplemented by official perpetual whitening then there will be complete erosion of tax system. travels and personal expenses. their transactions. there is a limit for the same. penetration and effects of undocumented economy. however.
Shrinking Government – where required • The foremost point that is missed. This is what Manmohan Singh is saying by using the term ‘Inclusive Growth’ inspite of achieving / attaining over 8 percent growth in the last 15 years. is catesthropic. without incremental stress on governmental efficiency. is “Government’s” role and the responsibility in education. In such societies ‘Trickle Down Theory’ in any form. • • • 13 . health. in all equations. infrastructure and security for common man. All our efforts are there to support private sector [This is a necessity]. In this society over 80 percent of the population is ‘Disfranchised’. However. in this country the problem lies with government which is still the biggest player and will remain so for a long time.
2012 collection was around Rs 1. Extraordinary measures. Estimate was around 1. In fact. budgeted collection of revenue from taxes is around Rs 2351 billion. This is not unusual for what was expected. By December 1. 2013.100 billion. In the present inelastic tax system the revenue can not surpass Rs 2250 billion. Expected collection is Rs 2100 billion. Sliding US $ is also a blessing in disguise for Pakistan tax collection. 14 • • • • . around 25 to 30 percent of taxes have been collected on account of Rupee Depreciation.000 billion [tax and non-tax revenue]. like ‘whitening scheme’ will also not bear fruits in rupee terms. Shortfall of around Rs 200 to Rs 250 billion is expected. There is no reason to believe that this shortfall amount will be ‘reasonably’ collected. Value for imports in Rupee term increases the tax collection as a substantial portion of tax collection is import value based in Rupee.Receipt Side-Composition and Projections • • By June 30.
Out of total Rs 950 billion of direct taxes around Rs 350 billion are effectively disguised indirect taxes having no relation to income of the tax payers. Out of balance Rs 600 billion around Rs 450 billion is paid by less than 200 companies. gas etc. KPK is even half of Central Punjab. 15 • • .Receipt Side-Composition and Projections • • Out of the total collection of Rs 2. there is effectively no direct tax collection from all other people / businesses / activities in Pakistan. phone. Central Punjab. electricity. – There is no correlation of tax collection and industrial and commercial use of electricity [In other words. around Rs 1. A Pakistani common man bears the tax burden equally with a rich man on oil. mobile phones. then it transpires that tax collection per unit of energy consumption in Karachi is effectively 4 times higher than other areas. Disparities in tax collection has some startling dimensions: – Out of the total resources available say consumption of industrial and commercial energy in various geographical areas of Pakistan say Karachi. KPK etc.300 billion are indirect taxes. use of 16000 mgwtt produced.250 billion. In short. used and the places from where tax is collected].
imports. retail trade. Repeated policy errors have ended up in a paralysed administration. interest and dividend. – Sindh. (2) Agriculture and (3) Services each contributing around 25 percent of GDP i. the problem is fundamental and badly spoilt having political dimensions. KPK and Baluchistan contribute totally in different proportion in relation to their GDP contribution. all major sectors of economy pay direct taxes on Presumptive Basis [Not on net income basis] such as exports. In short.Receipt Side-Composition and Projections – Large scale manufacturing sector contributes 85 percent whereas (1) Wholesale and Retail trade. Resultantly there is no asset record. Effectively there is no system of taxing income. contribute in aggregate less than 15 percent of total taxes.e. Punjab. • In our system. 16 • • . house property.
establishment and lenders. Nevertheless. Only loser is the common man of Pakistan. 17 . 2013 [New Government]. there is no implementable plan with any major political party. – All the three parties are not concerned with the present un-equitable system.Receipt Side-Composition and Projections • Beyond 2013: – There will be pressure to improve tax collection ‘in theory’. – Fundamental correction is not expected in immediate future even after June 30.
This would gain be a liquidity solving ‘recipe’.Receipt Side-Composition and Projections • Beyond 2013: – There can be cosmetic improvements and change of faces however there is no sign of any substantial change or way towards change. – There will further erosion of writ of government in collecting taxes. 18 . – The biggest error will be to obtain another recipe from IMF that may be theoretically correct but practically and politically unimplementable.
Expenditure Side-Choices and Options • • The expense side is almost frigid. • • • 19 . health. These are effectively the only relevant concern for a common man. infrastructure. law and order. and security. The other big line item is Provincial Governments’ share. [These fixed expenditure eats up around Rs 1600 billion]. [Another Rs 1500 billion] Allocation to provinces has increased after NFC award. Interest Payments and defense are almost fixed. Pakistani banks are paying taxes on effectively unrealized interest income on government borrowings of account of repeated rollovers. It is the result not the problem itself or the cause of the problem. Nothing much can be done in the short run. Provinces are responsible for education. Default is not an option.
Expenditure Side-Choices and Options • Now that there is effectively no financial constraint for the provinces. health. infrastructure. district judiciary and law and order as people in power are not affected by deterioration. • 20 . we start our books with a substantial negative. however. Governments are not serious on subjects like education. There is no effective pressure on governments to improve. provincial governments are not ready to ‘devolve’ and ‘deliver’. After these two major heads.
With the production of around 60 percent of the capacity we have to spend around Rs 800. Bulk is subsidy for electricity for WAPDA / KESC. • • 21 .Expenditure Side-Choices and Options • The next item is ‘Subsidies and Grants’ which has been budgeted at around Rs 500 billion however in actual terms expenses would be around Rs 800 billion. Depreciating rupee increases the cost as almost all inputs are imported. No government will be able to resist the pressure of electricity shortage however that shortage is effectively the shortage of funds to produce electricity. This will be the biggest problem for economy in post 2013. At the moment. Actual expenditure will be around Rs 1000 billion if full capacity is produced. government is spending around Rs 40 to 50 million for each megawatt produced [Rs 800 billion ÷ 16000 megawatt]. This is the biggest unknown and unsettled issue that will haunt Pakistan for days to come.
We are actually preparing for more centralization. there will be consistent duplication [triplication] of governments without any delivery. This is not expected to be done beyond 2013. There is no reason for the size of government of that level after the 18th amendment. The next item of around Rs 700 to 800 billion is Federal Government expenses. This issue is not on agenda for any government or any political party in power or the ones looking for their role in future.Expenditure Side-Choices and Options • The other three real solutions being (1) reduction in line losses. Out of this around 350 billion represent ‘losses’ of PSE. It is almost impossible to reduce the size of government at Islamabad. (2) increase in prices and (3) correcting input for electricity production cannot be done in near future [2013-2017]. This issue is being politicized rather than being handled in its total perspective. Thus. • • • 22 .
No concrete measure for resolving Rupee Shortfall or Fiscal Deficit.The Expected Horizon – Post June 2013 • • • • A new arrangement with [IMF = US] for dealing with US$ shortfall [Inflow of around US$ 10 billion]. In this horizon. Budget collection for 2013-2014 in real terms to be Rs 2700 billion with a nominal increase of around 10 percent in Rupee terms. Temporary inflows in US$ to balance the US$ books and exchange parity [2013-2015] to demonstrate that the new government is better than the past. life for common man will further deteriorate that could result in bigger tragedy after the temporary (good) ‘phase’ that will be over by [2013-2015]. US$ 5 to 10 billion is enough to create that sentiment. • 23 . Rhetoric and politicized debate on ‘Energy subsidy’.
Devolution of administration of health. Open Book Study for Energy subsidy and effective Decentralization of WAPDA [Separation of Generation / Distribution / Transmission]. ‘Decentralization’ Localization and ‘Automation’. total cost of complete automation [cameras and control rooms with rapid squads] of only Karachi and Lahore is around Rs 50 billion (one time). PSDP to be devolved out of Islamabad.What should be done ? • Additional contribution of around Rs 800 billion(with 10% increase every following year) from taxes from untaxed sectors.g. Out of box Solutions – Revamping of Indirect / Direct Tax Structure – Devolution – Documentation – Asset Records – Automation – No Disguised Whitening. education and infrastructure and law and order to local bodies. [e. • • • 24 . Benefits atleast 200 billion plus 95% security].
Thank you 25 . Let us do ‘something’ for the better future of our generations.What should be done ? Land records. In this case the consequences are more tragic and painful. there is no apparent sign that ‘What should be done’ will happen. Better sense will prevail if there is correct and complete dissemination of information with an independent [non-politicized] analysis. income from land and land transfers to be ‘automated’ on emergency basis. However. Ultimate result of a prolonged non-going concern is not good for any operation. • Let us hope that things happen in this manner. Nevertheless ‘states’ do not operate like businesses.
This action might not be possible to undo. Are you sure you want to continue?