Pre Budget Seminar

State of Pakistans Economy and

Budget 2014-15

Report
1

Pakistans economy is consistently
operating (far) below its potential.
Consequently, its potential
outcome has declined.
Pre Budget Seminar
State of Pakistans Economy and Budget 2014-15
Report

The government of Pakistan would
announce the federal budget for year 2014-
15 in early June. With the announcement of
the budget, the government will also be
completing one full year of its tenure. While
one year may not be a very long period for
assessing the performance of government
on any count including the management of
an economy such as Pakistan, it still is a
reasonable time-frame to assess the
direction of the policy measures adopted
and their preliminary results. Therefore, an
objective look at state of Pakistans
economy and subsequent proposals for
policy measures are quite pertinent at this
point of time. The brief report below draws
from the proceedings of the seminar titled,
State of Pakistans Economy and Budget
2014-15 organized by the Institute of
Policy Studies (IPS) on May 14, 2014, in this
context.
1

The state of Pakistans economy can be
examined in two milieus, i.e.,


Macroeconomic Context and Fiscal Context.
At macroeconomic level, Pakistans
economy is consistently operating (far)
below its potential. Consequently, its
potential outcome has declined. Incentives
are being set for the informal economy. The
inabilities as well as unwillingness to raise
tax revenues lead to the rise of fiscal stress.
Private investment remains the lowest in
last forty years. Employment trends in
Pakistan are also discouraging and per
capita income has declined whereas
inflation has hiked at high speed. In the
context of international competitiveness,
Pakistan ranks at fifty. Inflation has fiscal
roots in Pakistan and monetary basis is not
coming from private credits, foreign flows
and rapid buildup of reserves, but from the
fiscal indiscipline of the government.
Fiscal framework is marked by structural
rigidities. The government relies heavily on
indirect taxes, low tax buoyancy and
elasticity. Not understanding the
institutional bases, the government is
tinkling around raising taxes, withdrawing
the exemptions and increasing the custom
duties etc. Federal Board of Revenue
captured only thirty percent of the increase
1
The session was chaired by Masud Daher, Former Federal Secretary, Government of Pakistan. Sakib Sherani,
Former Advisor Ministry of Finance, was the keynote speaker while the discussants included: Ms. Ameena Sohail
(Senior IPS Associate), Prof. Atiq uz Zafar (Senior IPS Associates), Dr. Murtaza Mughal (President, Pakistan
Economy Watch) and Mr. Raja Amer Iqbal (Ex. Senior Vice President RCCI).
2

The flawed approach and practices
of tax collection machinery of the
government keeps burdening the
existing tax payers with more taxes
instead of bringing non-taxpayers
into the tax-paying circles.
in GDP growth, last year. Debt servicing and
defense expenditure are rising and there
are untargeted subsidies over-burdening
the economy. The transfer of NFC Award
created disincentive for provinces to raise
fiscal revenues. As a result of weak fiscal
framework, government became borrower
from the state bank and inflation picked up
in the economy on immediate basis.
The flawed approach and practices of tax
collection machinery of the government
keeps burdening the existing tax payers
with more taxes instead of bringing non-
taxpayers into the tax-paying circles. In
2012, around 3.2 million qualifying citizens
according to NADRA databases were not
even existent in the tax registers, while
around 61 per cent of the parliament
reported no taxable income in their tax
returns.
And there are some specific issues at the
center of Pakistans economic quagmire.
The seminar also touched upon the
following amongst these specific issues.
In the absence of sustainable
solution to the crippling energy
crisis, the country cannot progress
economically. Performance in the
power sector is far from being
satisfactory. Most of the investment
is coming either in oil or gas sector
and that is even at low pace keeping
in view the potential in the sector.
Subsidies are even provided to those
who can afford. Due to lack of
institutional/ structural fixation, the
problem of increasing circular debt
is being faced again and again.
Another important issue that may
have wide-ranging implications for
Pakistan economy is economic
particularly trade cooperation with
India. This is not a budget-specific
issue though and has to do a lot with
overall approach regarding regional
integration. The government has
been in process of granting a non-
discriminatory market access
(NDMA) to India, in place of rather
controversial MFN. Indian
agricultural sector is about five-time
larger than that of Pakistan.
Industrial sector have also
reservations against the unfair
competition. It would have serious
implications for Pakistans economy,
if cost and benefits are not
calculated prudently.
In an Islamic model of economy, the
ratio of tax, investment and labor is
equally divided i.e. thirty three
percent; world has come to this
level but we are far below. Islamic
principles are fully applicable in the
finance sector. The first issue which
crops up is the prohibition of Ribah.
3

The collection of Zakat and Ushr is
near to nothing keeping in view the
huge potential. Corruption, lack of
documentation, and the increasing
size of black economy, all indicate
the de- Islamization of the economy.
However, an important point to
ponder over that if people give huge
amounts in charity; why do not they
contribute in the form of taxes and
why do they not pay Zakat to the
government kitty? The government
needs to establish confidence and
set some examples for
demonstration effect, in this
connection.
Towards the budget 2014-15
As far as the budget allocations are
concerned, the figures of past few years
indicate that some 80% of the expenditure
is going into debt servicing and current
expenditure and only 20% for everything
else. The pace, at which fiscal debt is
growing, is unsustainable. It is important to
know that all issues are not budgetary in
nature; in Pakistan, allocation doesnt lead
to spending in many cases and when it
leads to spending, it doesnt necessarily
lead to the outcome. Budget 2014-15,
therefore, has to be formulated keeping the
following few points in view:
One budget cannot resolve all the
problems. The budget should be a
part of a grand design and it should
at least be based on a three years
vision.
Parliament should have a pre-
budget session to evaluate the
previous budget and propose way
forward for the next.
Government should ensure
transparency and honesty in budget
making and targets and
expenditures should not be
overstated.
We need higher tax coverage, lower
tax rates, less reliance on indirect
taxation and Progressive regime.
And there should be less reliance on
indirect taxation.
FBR should be moved away from
Predatory Taxation which is
leading informal economy growing
at expense of formal economy. The
revenue should be collected from
the people who dont pay and tax
payers should not be burdened. The
government should make serious
efforts to restore the trust of the
people.
Stronger Institutional Framework
should be the priority, rather than
hankering after the projects. Once
the foundation is built, projects
would find the right time to
accelerate.
One budget cannot resolve all the
problems. The budget should be a
part of a grand design and it should
at least be based on a three years
vision.
4

Initiative should be taken to revive
the system of Zakat and Ushr
(introduced in early 80s) by
providing the structure free from
corruption and political
intervention.
The government should take
concrete steps in the areas of
energy and law and order/security.
To ensure the uninterrupted energy
supplies, structural/ institutional
fixation is required. A reasonable
allocation should be made for police
and law enforcing agencies in order
improve law and order situation.
Before granting NDMA,
Government should first
protect the sectors from
enormous Indian subsidies
and get significant market
access from India for
Pakistani goods, to ensure
the level playing field.
Industrial Sector should be
given appropriate time to
enhance the competence of
the sector to cope with the
Indian Market.





Government should reduce tax on
import of industrial machinery and
its parts which further help in
boosting economic activities and
also generate jobs.
Focus the $3 trillion world Halal
market and give incentives to local
producers.
The job market needs to be
expanded dynamically.
Tackling the deteriorating economy
requires comprehensive planning, proper
implementation, regular monitoring and
above all the will of the government to
move in the focused direction. While
budget proposals are being presented not
exhaustive in any sense it is an effort by
IPS to provide policy proposals to the
economic managers as well as the
parliament, which approve the budget.
Stronger Institutional Framework
should be the priority, rather than
hankering after the projects. Once
the foundation is built, projects
would find the right time to
accelerate.