Fiscalpolicystatement 2010 11

PA K I S TA N
2010-11
FISCAL POLICY STATEMENT 2 0 1 0 - 1 1
Debt Policy Coordination Office

Ministry of Finance

FISCALPOLICYSTATEMENT
201011
DEBTPOLICYCOORDINATIONOFFICE
MINISTRYOFFINANCE
PAKISTAN
Thispageisleftintentionallyblank.
FISCALPOLICYSTATEMENT201011
TableofContents
TableofContents...........................................................................................................................................i
Acknowledgements......................................................................................................................................iii
ListofAcronyms...........................................................................................................................................iv
I.
Introduction......................................................................................................................................1
II.
FiscalPolicyStatement.....................................................................................................................3
III. PrinciplesofTaxandExpenditurePolicy..........................................................................................4
III.i.
PrinciplesofTaxPolicy..............................................................................................................4
III.ii.
PrinciplesofExpenditurePolicy................................................................................................5
IV. HistoricalPerspectiveonFiscalDevelopments................................................................................6
V. RecentFiscalPolicyDevelopments...................................................................................................8
VI. FiscalPerformance200910............................................................................................................13
VI.i.
Revenue..................................................................................................................................13
Vi.ii.
Expenditure.............................................................................................................................22
VI.iii. FiscalDeficit............................................................................................................................27
VI.iv. FinancingofFiscalDeficit........................................................................................................27
VI.v. RevenueDeficit.......................................................................................................................28
VI.vi. PrimaryDeficit........................................................................................................................29
VII. FiscalProjections201011..............................................................................................................30
VII.i. FBRTargets.............................................................................................................................32
VII.ii. ReformedGeneralSalesTax(RGST).......................................................................................32
VII.iii. 7thNFCAward........................................................................................................................33
VII.iv. 18thAmendment....................................................................................................................35
VII.v. ProvincialBudgets...................................................................................................................36
VIII. FiscalPerformanceJulySeptember201011.................................................................................37
VIII.i. TaxRevenue............................................................................................................................38
VIII.ii. NonTaxRevenue....................................................................................................................39
VIII.iii. Expenditure.............................................................................................................................40
VIII.iv. Fiscal,RevenueandPrimaryDeficit........................................................................................40
VIII.v. FinancingofFiscalDeficit........................................................................................................41
IX. ReviewofPublicDebt.....................................................................................................................41
i
X.
ServicingofPublicDebt..................................................................................................................44
XI. MediumTermBudgetaryFramework(MTBF)...............................................................................45
XI.i.
BudgetStrategyPaper............................................................................................................45
XI.ii.
MediumtermBudgetEstimatesforServiceDelivery............................................................46
XII. EconomicReforms..........................................................................................................................46
XII.i.
Austerity(ExpenditureReform)Plan......................................................................................47
XII.ii. RestructuringOfPublicSectorEnterprises.............................................................................47
XII.iii. PowerSectorReform..............................................................................................................48
XIII. ReportonCompliancewithFRDLAct2005....................................................................................48
XIV. ConcludingRemarks........................................................................................................................50
ii
Acknowledgements
ThisPolicyStatementhasbeenpreparedtofulfilltherequirementlaidoutunderSection6oftheFiscal
ResponsibilityandDebtLimitationAct2005.IwouldliketoacknowledgetheinputofvariousMinistries,
Departments, Divisions and Agencies, particularly, timely data provision by Budget Wing (MoF),
CorporateFinanceWing(MoF),EconomicReformUnit(MoF),MTBFSecretariat(MoF)andtheFederal
Board of Revenue. I would like to recognize the effort put in by Mehwish Ashraf, Financial Analyst
(DPCO)intherealizationofthiscomprehensivedocument.
MasroorAhmedQureshi
DirectorGeneral
DebtPolicyCoordinationOffice
MinistryofFinance
iii
ListofAcronyms
AJ&K
BODs
BoP
BSP
CCOR
CDNS
CFAO
COD
CSF
CVT
DISCOs
DPCO
ENDA
FATA
FBR
FED
FELs
FODP
FPS
FRDLAct
FY
GDP
GoP
GST
IDPs
IMF
IRS
KESC
MTBF
NEPRA
NFC
NTDC
OGDCL
OZT
PATA
PEPCO
PSDP
PSEs
PSO
PTA
PTCL
RGST
SBA
SBP
SDR
SED
TPD
USAS
VAT
VP
WAPDA
WHT
iv
AzadJammu&Kashmir
BoardofDirectors
BalanceofPayments
BudgetStrategyPaper
CabinetCommitteeonRestructuring
CentralDirectorateofNationalSavings
ChiefFinance&AccountingOfficer
CollectiononDemand
CoalitionSupportFund
CapitalValueTax
DistributionCompanies
DebtPolicyCoordinationOffice
EmergencyNaturalDisasterAssistance
FederallyAdministeredTribalAreas
FederalBoardofRevenue
FederalExciseDuties
ForeignExchangeLiabilities
FriendsofDemocraticPakistan
FiscalPolicyStatement
FiscalResponsibilityandDebtLimitationAct
FiscalYear
GrossDomesticProduct
GovernmentofPakistan
GeneralSalesTax
InternallyDisplacedPersons
InternationalMonetaryFund
InlandRevenueService
KarachiElectricSupplyCompany
MediumTermBudgetFramework
NationalElectricPowerRegulatoryAuthority
NationFinanceCommission
NationalTransmission&DespatchCompany
Oil&GasDevelopmentCompanyLtd.
Octroi&ZillaTax
ProvinciallyAdministeredTribalAreas
PakistanElectricPowerCompany
PublicSectorDevelopmentProgramme
PublicSectorEnterprises
PakistanStateOil
PakistanTelecommunicationAuthority
PakistanTelecommunicationCompanyLtd.
ReformedGeneralSalesTax
StandbyAgreement
StateBankofPakistan
SpecialDrawingRights
SpecialExciseDuty
TotalPublicDebt
UniversalSelfAssessmentScheme
ValueAddedTax
VoluntaryPayments
WaterandPowerDevelopmentAuthority
WithholdingTaxes
I.
Introduction
Theimportanceoffiscalpolicyinpursuanceofagovernmentsprincipaleconomicobjectiveofseeking
rising levels of prosperity for all members of the society by achieving high, sustainable and equitable
economicgrowthcannotbeoveremphasized.However,formulationandimplementationoffiscalpolicy
isacomplexsubjectwitheventualoutcomesofpolicymeasuresattimesbeingmarkedlydifferentfrom
theirshorttermeffectsandevencontrarytotheveryobjectivesthatfiscalpolicyseekstoachieve.
In response to the worst worldwide economic and financial crisis since the Great Depression,
government budgets and central banks around the world have provided substantial support. Fiscal
deficitswidenedsignificantlyin2009,withadvancedeconomiesexperiencingalargerandlikelylong
lastingdeterioration.Withfiscaldeficitsabove9percentofGDPin2009,thescaleoftheproblemin
advancedG20countriesisunprecedented.Emergingeconomiesalsoexperiencedlargedeficitsin2009,
buttheimpactofthecrisiswasonaveragelessseverethanintheadvancedG20economies.
Lookingbackoverthepastdecade,PakistansfiscalperformancewasrelativelysoundduringFY200106.
Thefiscalbalancewasindeficitaveragingaround3.9percentintermsofGDPandtheprimarybalance
remainedinpositiveforthefirstfourconsecutivefiscalyears,approximatingto1.2percentofGDP.
However, in recent years, Pakistans fiscal performance has remained very weak. While the reported
fiscaldeficit persehasconsistently breachedthetargets,itdoesnotfullyreflect the costsassociated
with quasi fiscal activities such as commodity operations and unrecognized portions of subsidies
especiallyrelatingtothepowersectorfundeddirectlybyPublicSectorEntities(PSE)borrowingsfrom
banks.
The origin of current fiscal predicament can be traced back to FY200607 when fiscal policy became
subservienttopoliticalexigenciesasgovernmentextendedwholesalesubsidiesonoil,electricity,food
and fertilizer products in an apparent effort to protect the economy (especially the more vulnerable
segments of the society) from the effects of global commodity price shock. However, such measures
actuallyresultedinpressureonbalanceofpayments,fiscalaccount(inshapestartofcirculardebtbuild
up) and banking system liquidity. The economy finally paid the cost in shape of currency devaluation
withrupeelosingmorethanathirdofitsvalue,inflationreachingmultidecadehighsof25percentin
2ndquarterofFY2008,benchmarkinterestratesbeinghikedto15percentandGDPgrowthfallingto
3.7 percent in FY2008 and further to 1.2 percent in FY2009 from an average of 6.8 percent during
1
FY200307.Unlikemostpartsoftheworld,Pakistanremainedrelativelyunhurtbytheglobaleconomic
crisis that unfolded in 2008. If anything, post crisis collapse of commodity prices helped in reducing
burdens on external and fiscal accounts. Nevertheless, post FY2006 events taught a very expensive
lesson on the need to maintain fiscal discipline as measures haphazardly designed to provide relief
eventuallycausedmorepainforthepublicingeneral.
The deteriorating external position on account of diminishing foreign exchange reserves forced the
Government of Pakistan to access International Monetary Fund (IMF) and enter into a Standby
Arrangement (SBA). In November 2008, Pakistan signed a 23month SBA program with the IMF
amounting to US$ 7.61 billion, which was later augmented to US$ 11.33 billion in August 2009 and
subsequentlyextendedtoSeptember2011.
ThemacroeconomicstabilizationagendapursuedunderthisfacilitybenefittedthecountrysBalanceof
Payments position. However, fiscal slippages continued on account of current expenditure and lower
revenue collection. Security spending, including IDP related expenditures, coupled with electricity
subsidies were the highlighting factors in FY2009 and FY2010 while efforts to reform the existing
revenuestructurebyincreasingtaxnet,reducingexemptionsandeliminatingzero/specialratingshave
meant a compromise on fiscal management. Such temporary constraints stress the importance of
maintaining sufficient fiscal space by undertaking timely adjustments during periods of reasonable
economicgrowth.
Economic growth remained subdued in FY2010 owing to a multitude of factors like widening of fiscal
deficit,doubledigitinflation,highinterestrates,lowlevelsofnondebtcreatingforeignexchangeflows,
and a rising debt burden. The hard earned fiscal consolidation achieved during FY2009 could not be
sustainedinFY2010duetoreducedtaxrevenuegrowthof22.3percentagainstatargetof29.8percent.
Nontaxrevenue,althoughhealthy,wasnotabletomitigatethetaxshortfall.Onthespendingside,the
major cause of slippage was increased expenditure on security related expenses and subsidies. Total
expenditure was up by 18.8 percent against a budgeted growth of 13.7 percent. The government
curtailed development spending in order to dilute the impact of higher than budgeted current
expenditure. In spite of this interexpenditure adjustment, fiscal deficit increased from 5.3 percent of
GDPinFY2009to6.3percentinFY2010.
ThisFiscalPolicyStatement(FPS)willreviewtheoverallfiscaldevelopmentsduringfiscalyear200910
inordertofulfillthelegalrequirementofSection6oftheFRDLAct2005.Furthermore,theActrequires
theFPStoanalyzetheperformanceofsomekeyfiscalindicatorssuchasthetotalrevenues,overallfiscal
deficit,primaryandrevenuedeficits,aswellasthepublicdebtburden.TheActalsorequiresthatthe
FPSanalyzewhethertherewasanydeviationfromthefiscaltargetsandiffederalgovernmentpolicies
haveremainedinconformitywiththeprinciplesofsoundfiscalanddebtmanagement,andthetargets
setforthinthemediumtermbudgetarystatementinSection5oftheAct.
II.
FiscalPolicyStatement
TheFiscalPolicyStatementispresentedtofulfilltherequirementinSection6oftheFiscalResponsibility
andDebtLimitation(FRDL)Act2005.Thestatementprovidesanoverviewofgovernmentrevenuesand
expenditures during the course of the fiscal year and explains the changes in key macroeconomic
indicatorsduring200910.Section6oftheFRDLAct2005requiresthat:
1) The Federal Government shall cause to be laid before the National Assembly the Fiscal Policy
StatementbytheendofJanuaryeachyear.
2) TheFiscalPolicyStatementshall,interalia,analyzethefollowingkeymacroeconomicindicators,
namely:
a) Totalexpenditures;
b) Totalrevenues;
c) Totalfiscaldeficit;
d) Revenuedeficit;and
e) Totalpublicdebt
3) TheFederalGovernmentshallexplainhowfiscalindicatorsaccordwiththeprinciplesofsound
fiscalanddebtmanagement.
4) TheFiscalPolicyStatementshallalsocontain:
a) Thekeymeasuresandrationaleforanymajordeviationinfiscalmeasurespertainingto
taxation,subsidy,expenditure,administratedpricingandborrowing;
b) Anupdateonkeyinformationregardingmacroeconomicindicators;
c) The strategic priorities of the Federal Government for the financial year in the fiscal
area;
d) The analysis to the fullest extent possible of all policy decisions made by the Federal
Governmentandallothercircumstancesthatmayhaveamaterialeffectonmeetingthe
targets for economic indicators for that fiscal year as specified in the MediumTerm
BudgetaryStatement;and
e) An evaluation as to how the current policies of the Federal Government are in
conformitywiththeprincipleofsoundfiscalanddebtmanagementandthetargetsset
forthintheMediumTermBudgetaryStatement.
III.
PrinciplesofTaxandExpenditurePolicy1
III.i.
PrinciplesofTaxPolicy
Tax reform must be considered as a package, but in light of common lessons and challenges on key
instruments.Whatmattersforthefairnessofataxsystem,forinstance,isnotthedistributionalimpact
ofanytaxconsideredinisolation,butthatofalltaxescombined.Whiletaxbytaxpolicydesignisthus
tobeavoided,effectivereformdoesrequirerecognizingthelimitsandpotentialofeachinstrument.The
ValueAddedTax(VAT)isamainstayofthetaxsystemsofalmostalladvancedandemergingcountries.
It has proved a relatively efficient source of revenue. Reducing exemptions and eliminating reduced
rates is generally the best way to increase VAT revenue, unless low efficiency is caused by weak
administration.
Improvingthemediumtermfiscalpositionrequiresreshapingrevenueadministration.Therearethree
priorities:developingsoundriskbasedcompliancestrategies;strengtheninglegalframeworks,including
the powers of revenue agencies (e.g., in accessing information and conducting audits); and exploiting
new information technology to better align tax compliance management with businesses lifecycles.
Fundamental strengthening of compliance improvement strategies is crucial. Tackling endemic tax
abuses to enhance the taxpaying culture requires significant capacity building in core systems of
revenue administration (including in compliancerelated areas of risk management, audit, collection
enforcement,taxpayerservices,anddisputeresolution).
Through comprehensive reform efforts, revenue agencies (in Pakistan, the Federal Board of Revenue)
canplayanimportantroleinfosteringformalization,byhelpingnewentrepreneursand takingvisible
enforcement action against the shadow economy to establish tax discipline. These compliance risks
FromStimulustoConsolidation:RevenueandExpenditurePoliciesinAdvancedandEmergingEconomies(IMF,2010)
require novel approaches, like the recent Universal Self Assessment Scheme (USAS) aimed at bringing
taxpayersintovoluntarycompliance.AnotherinitiativeentailsInlandRevenueService(IRS)thatincludes
a harmonized tax management structure and an integrated database that will improve efficiency and
help increase the taxtoGDP ratio in the medium term. These programs are an integral part of wider
strategiestoachieveenduringtaxcompliance.
Legal frameworks need to be enhanced to address compliance risks and pervasive tax abuse.
Intensifying the use of modern information technology in delivering revenue administration will
significantly improve compliance management and reduce compliance costs. Besides basic internet
based services (e.g. tax information and efiling), FBR should intensify the adoption of electronic
solutionstoautomateandaligneconomicagentstaxcomplianceandbusinesscycles.
III.ii.
PrinciplesofExpenditurePolicy
Expenditure reviews help guide the design of specific strategies. These reviews can provide valuable
inputto guidelongtermreformbyaddressingfundamentalquestionsontheroleofgovernmentand
thecosteffectivenessofdifferentpolicyinterventions.Thesereviewsshouldalsoidentifyexpenditure
inefficienciesandbeintegratedwithperformancebasedbudgeting.
Expenditurereformsshouldbeguidedbytwoobjectives:
Improvingtheefficiencyofspending:Governmentsshouldseektoreducethecostofproducingexisting
public sector outputs. In addition, spending should be allocated to activities that provide the greatest
marginalbenefitstosocietyasawhole;and
Ensuringequity:Growthwithoutequityislessdurable.Expenditurepolicymustreflecttheneedforboth
intraandintergenerationalequity.Greatertargetingofsocialspendingmayalsobenecessarytoensure
thatthepoorareprotectedasspendinglevelsarereduced.
Mediumtermexpenditurereformswillneedtoimprovethecompositionandefficiencyofexpenditure.
The freeze in real spending is an overall policy goal, not a tool. Targeted structural reforms would be
needed to achieve this goal. Reductions in general public services, economic affairs, and defense
spending comprise an important element of adjustments. Better targeting of social welfare spending,
including social benefits, could provide substantial fiscal savings. Sizable savings are also possible in
spending on subsidies. This spending should be reexamined and replaced, where possible, with more
targetedinstrumentstoprovideincomesupport.Inparticular,priorityshouldbegiventophasingout
energy subsidies. Coordination with provincial government will be crucial for ensuring successful
expenditurereform.
IV.
HistoricalPerspectiveonFiscalDevelopments
Areviewoflongtermfiscalperformancespanningoverthepasttwodecadesi.e.,19912010providesa
goodperspectiveonhowdifferentvariablesinthefiscalequationmovedandyieldedresults.Suchan
analysis is more meaningful when fiscal numbers are expressed as percentage of GDP as opposed to
absoluteamounts.However,asGDPrebasinginFY2000increasedthesizeofnominalGDPforthatyear
by 21.6 percent, the preFY2000 GDP series was also adjusted to achieve data consistency, which is
imperativeforanaccurateanalysis.
Table1:FiscalPerformance,19912010(inpercentofGDP)
Period1 Period2 Period3 Period4
Period5
Improve Stability V.improve
Poor
Consolidation
5years
3years
6years
4years
2years
19911995 19961998 19992004 20052008 20092010
TOTALREVENUES
TaxRevenues
NonTaxRevenues
TOTALEXPENDITURE
CurrentExpenditure
Defence
DebtServicing
CurrentSubsidies
GeneralAdministration
DevelopmentExpenditure
FISCALDEFICIT
15.6%
11.8%
3.4%
21.6%
16.7%
5.3%
4.8%
0.5%
1.4%
4.8%
6.0%
14.0%
11.6%
2.3%
19.9%
16.5%
4.5%
5.8%
0.4%
1.8%
3.3%
5.8%
13.9%
10.9%
3.0%
18.1%
15.5%
3.4%
5.5%
0.8%
2.2%
2.6%
4.2%
14.5%
10.6%
3.8%
20.5%
16.0%
3.0%
4.1%
2.0%
2.7%
4.5%
5.1%
14.3%
10.1%
4.2%
20.3%
16.2%
2.6%
4.8%
1.7%
2.8%
4.0%
5.9%
Pakistans fiscal performance during 19912010 period exhibited periodic swings between stints of
relativeimprovementanddeteriorationalthoughsometrendsremainedfairlypersistent.Basedonthe
overall direction of change in fiscal deficit, the 20year period could be divided into 5 intervals of
unequaldurations.Theseare:19911995(improvement),19961998(stability),199904(improvement),
20052008(poor)and20092010(consolidation).
Themostnoticeablebutundesirabletrendpersistingthroughthese5periods(exceptPeriod4)hasbeen
adeclineintotalfiscalrevenuesaspercentageofGDP,whichdecreasedfrom15.6percentduring1991
1995 to 14.3 percent during 20092010. An even more unwelcoming steady slide in taxtoGDP ratio
(from11.8percentto10.1percent)hasbeentheprimereasonbehindthisdecliningtrendoverthe20
yearperiod.Evenduring19992004,whichwitnessedthelowestaveragefiscaldeficitofthe5periods,
thereductionindeficitcameaboutonaccountoflowerfiscalexpenditureandnothigherrevenues.
WhiletaxtoGDPratioshowedasteadydeclineduring19912010,nontaxrevenuestoGDPregistered
a modest increase during this period. However, the trend would have been quite different in recent
periods, had it not been for large SBP profit transfers and hefty external receipts for military services
thatboostednontaxrevenues.
Fig1:FiscalDeficit(aspercentageofGDP), 19912010
10%
9%
8%
7%
6%
5%
4%
3%
2%
1%
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
0%
TotalexpenditureaspercentageofGDPshowedarelativelyfavourabletrendoverthepast20years.It
decreased from a high of 21.6 percent during 19911995 to a low of 18.1 percent during 19992004
before rising moderately to over 20 percent in the recent periods. Even more positive had been the
decliningtrendinexpenditureondefenceanddebtservicingaspercentageofGDP,althoughthelatter
hasstartedtocreepupagaininrecentyears.Defenceexpendituredeclinedsteadilyfrom5.3percentin
19911995to2.6percentin20092010.Debtservicingwhichpeakedat5.8percentduring19961998
hitalowof4.1percentduring20052008beforeincreasingto4.8percentin200910.
Themostundesirabletrendsincurrentexpenditureshavebeentherisingcostsofcurrentsubsidiesand
general administration. Spending on general administration showed a hefty increase from only 1.4
percentduring19911995to2.8percentduring20092010.Likewise,currentsubsidiesincreasedfroma
lowof0.4percentduring19961998toapeakof2.0percentduring20052008andremainedfairlyhigh
at1.7percentduring20092010.
Developmentexpenditureshowedanoteworthydeclinefromapeakof4.8percentin19911995to4.0
percentin20092010reflectingthelackoffiscalspaceonaccountofdecliningrevenuesandincreased
spendingonsubsidiesandgeneraladministration.
V.
RecentFiscalPolicyDevelopments
Pakistans public finances are primarily dominated by a stagnant taxtoGDP ratio while rigid
government spending patterns have furthered the fiscal delinquencies. These structural weaknesses
have lead to sizable, and at times unsustainable, budget deficits posing risks to fiscal solvency.
Availabilityoffiscalspaceisvitaltofosterdevelopmentandtoembarkuponpropoorexpenditureina
developing country like Pakistan. A compromise on development spending for the sake of meeting
temporary and urgent demands is indeed a compromise on better living standards for future
generations.
Table2:ConsolidatedRevenue&ExpenditureoftheGovernment(Rs.Billion)
Prov.Actual
JulyJune
200809
A.TotalRevenue
a)TaxRevenue
b)NonTaxRevenue
B.TotalExpenditure
a)CurrentExpenditure
b)DevelopmentExpenditure
c)NetLending
d)UnidentifiedExpenditure
C.OverallFiscalBalance
As%ofGDP
1,851
1,205
646
2,531
2,042
449
7
34
680
5.3
Budget Prov.Actual
Estimate
JulyJune
200910
200910
2,155
1,564
592
2,877
2,104
763
11
0
722
4.9
2,078
1,473
605
3,007
2,386
613
39
32
929
6.3
Budget
Estimate
201011
2,574
1,859
716
3,259
2,519
734
7
0
685
4.0
Source:BudgetWing,MinistryofFinance
Historically,revenueshavebeenflatandnomajorimprovementintaxrevenuesovertheyearshasbeen
the dampening factor on this front. Total revenue witnessed a massive turnaround in the fiscal year
200708asitregisteredanegativegrowthinrealterms(doubledigitinflationalsocontributedtothis
downfall). The economy was decelerating and this plunge was very well communicated through the
fiscalaccountintheformofdismalrevenuecollection.Taxrevenuealsosufferedfromthesamehitch
but managed to remain above the line by achieving a real growth of 1.6 percent. However, it went
negative by a large margin the next fiscal year whereas more than budgeted collection on account of
nontaxrevenuesassistedinattainingapositive2.6percentinflationadjustedgrowthintotalrevenue
in200809.
Table3:SelectedFiscalIndicators(inpercent)
RealGrowthofPublicDebt
RealGrowthofRevenues
FY06
FY07
FY08
FY09
FY10
3.0
2.3
8.3
4.9
5.9
8.3
11.9
0.6
2.6
2.0
RealGrowthofTaxRevenue
10.3
2.8
1.6
4.7
11.1
RealGrowthinNoninterestExp.
14.9
6.2
7.7
12.1
13.5
5.8
6.8
3.7
1.2
4.1
RealGrowthofGDP
SavingInvestmentGap
4.4
5.1
8.7
5.8
2.8
PrimaryBalance
2.3
1.5
2.8
0.3
2.0
RevenueBalance
0.6
0.9
3.5
1.5
2.1
PublicDebt/GDP
57.2
55.4
59.0
59.9
60.6
PublicDebt/Revenue
405
370
403
412
428
DebtService/Revenue
29.6
33.8
37.2
46.6
40.4
Source:BudgetWing,MoFandDPCOStaffCalculations
Theeconomyshowedaslightrecoveryinthepreviousfiscalyear200910andrecordedamodestGDP
growthof4.1percentwithinflationsubsidingto11.7percent(asagainst20.8percentinFY200809).
Consequently, tax revenue, although short of the target, recorded a healthy increase of 11.1 percent
(after adjusting for inflation). However, nontax revenues were not enough to compensate for the
shortfall and observed lesser collection in absolute terms over FY200809. Hence, the real growth in
totalrevenuesdroppedto2.0percent.
Since the advent of this decade, the taxtoGDP ratio has been hovering around at an average 10.4
percent.TheFBRtaxcollectionperformancehasbeenweak,evidencedbyalowFBRtaxtoGDPratioof
9.3percent(annualizedovertheyearsFY20012010).For200910,theFBRtaxtoGDPratiostoodat9.0
percentdownbya100bpsfromthe200809level.Theinabilityofeconomicgrowthtofullytranslate
9
into revenue, the persistence of a narrow tax base and undocumented informal sector are the
underlyingreasons.Equallyimportantisweakauditandenforcement,lowtaxcomplianceaswellastax
evasionprevalentinthesystem.
Table4:RealGrowthofTaxRevenue
TaxRevenue
(Rs.Billion)
RealGrowth
ofTax
Revenue(%)
RealGDP
Growth
(%)
Tax
GDP
(%)
200506
804
10.3
5.8
10.5
200607
890
2.8
6.8
10.2
200708
1,051
1.6
3.7
10.3
200809
1,205
4.7
1.2
9.5
200910
1,473
11.1
4.1
10.0
201011*
1,881
11.1
2.8
10.9
*Projections
Source:DPCOStaffCalculations
Fig2:TrendinRealRevenueCollectionvs.RealGDPGrowth
14
200506
200607
200708
200809
200910
201011*
11
RealTaxRevenueGrowth
RealGDPGrowth
TaxGDPRatio
Ontheotherhand,governmentexpenditureslackflexibility.Overtherecentpast,currentspendingon
account of subsidies has exposed the dearth of viable options available to government for managing
publicsectorenterprises/stateownedentities.Thepowersectorhasspecificallyemergedasaconstant
10
drag on limited budgetary resources as a substantial portion of revenues has been eaten away by
electricity subsidies, leaving behind less room for fiscal maneuvering. Particularly, 24.7 percent of
revenueswereusedupinprovidingsubsidiesintheFY200708whilethisratiostoodat10.3percent
(for 200910).This together with the security related and IDP outlays has raised the levels of current
expenditurebeyondacceptablethresholds.Currentspendingaveragedaround15.7percentofGDPover
FY2000FY2010 whereas a meager 3.2 percent of the countrys output is spent on development
programmes(averagedforthesameperiod).Thisisbynomeansasustainablesituation.
Table5:FiscalIndicatorsasPercentofGDP
RealGDP OverallFiscal
Growth
Deficit
FY92
FY93
FY94
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11(T)
7.6
2.1
4.4
5.1
6.6
1.7
3.5
4.2
3.9
2.0
3.1
4.7
7.5
9.0
5.8
6.8
3.7
1.2
4.1
2.8
7.5
8.1
5.9
5.6
6.5
6.4
7.7
6.1
5.4
4.3
5.5
3.6
2.3
3.3
4.3*
4.4*
7.6
5.3
6.3
4.7
Expenditure
Total
26.7
26.2
23.4
22.9
24.4
22.3
23.7
22.0
18.8
17.4
19.6
18.4
16.4
17.2
18.4
19.3
22.2
19.9
20.5
19.2
Revenue
Current Developme
19.1
20.5
18.8
18.5
20.0
18.8
19.8
18.6
16.4
15.3
16.2
16.0
13.8
14.5
14.7
15.9
18.1
16.0
16.3
17.0
7.6
5.7
4.6
4.4
4.4
3.5
3.9
3.4
2.4
2.1
3.4
2.4
2.6
2.7
3.7
3.3
4.1
3.8
4.2
2.2
Total
Tax
NonTax
19.2
18.1
17.5
17.3
17.9
15.8
16.0
15.9
13.4
13.1
14.2
14.8
14.1
13.8
14.1
15.0
14.6
14.5
14.2
14.5
13.7
13.4
13.4
13.8
14.4
13.4
13.2
13.3
10.6
10.5
10.7
11.4
10.8
10.1
10.5
10.3
10.3
9.5
10.0
10.9
5.5
4.7
4.1
3.5
3.5
2.4
2.8
2.7
2.8
2.6
3.5
3.4
3.2
3.7
3.6
4.7
4.4
5.1
4.1
3.5
Note1:ThebaseofPakistansGDPhasbeenchangedfrom198081to19992000,therefore,whereverGDPappearsindenominator
thenumberspriorto19992000arenotcomparable.
Statisticaldiscrepancy(bothpositiveandnegative)hasbeenadjustedinarrivingatoverallfiscaldeficitnumbers.
*Includeearthquakerelatedexpenditureworth0.8and0.5percentofGDPfor200506and200607respectively.
Asaresultoftheserevenueexpendituregaps,fiscaldeficitshaveremainedhighlyvolatile.Forinstance,
inFY2008thedeficitballoonedto7.6percentofGDP.Majorcorrectionswereundertakenonthisfront
andfiscalconsolidationwasevidentbyalargereliefinthisratioforFY2009thatstoodat5.3percentin
termsofGDP.However,thispositivetendencyappearedtemporaryandthefiscaldeficittoGDPratio
inchedupto6.3percentinthesucceedingfiscalyear200910.
11
Fig3:TotalExpendituresandRevenuesas%ofGDP
28
26
TotalExpenditures
Inpercent
24
22
Budget
Deficit
20
18
16
14
TotalRevenues
12
FiscalDeficit
Fig4:TrendsinFiscalIndicators
As%ofGDP
RevenueBalance
9
8
7
6
5
4
3
2
1
0
1
2
3
4
5
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11(T)
Forthefiscalyear201011,thegovernmenthasreviseditsprojectionforthebudgetdeficitwhichisnow
expectedtobearound4.7percentoftheprojectednominaloutput.Nonetheless,theattainmentofthis
highly optimistic target especially in the aftermath of floods and the associated rehabilitation costs,
12
crucially hinges upon additional revenue generation measures, particularly the implementation of
ReformedGeneralSalesTax(RGST)intruespirit.
VI.
FiscalPerformance200910
Developmentsduring200910haveunderminedthegainsrealizedintheprecedingyear.Ariseinfiscal
imbalancesthroughouttheyearhasbeenamajorfailingoftheeconomy.Strainsplacedonbudgetary
resources by subsidies, defence related spending, and debt servicing increased, whereas envisaged
increases in revenue collection failed to materialize. The resulting high fiscal deficit, inspite of
adjustments to development expenditure, has put at risk the fiscal sustainability of the country. The
followingisananalysisofrevenuesandexpenditureduring200910:
VI.i.
Revenue
The government in the Federal Budget 200910 focused primarily on improving the tax culture in the
countryandannouncedafirmcommitmenttoincreaserevenues.Thehardearnedfiscalconsolidation
of200809wentmissingintheensuingfiscalyearowingtoadismalrevenuegrowth.
TotalrevenueforFY200910summedtoRs.2,078.2billion,upby12.3percentoverthefiscalyear2008
09. A shortfall of Rs. 77.2 billion was seen against the budgeted estimates. Tax revenue registered a
growthof22.3percent,adding Rs.1,472.8billiontotherevenuesidein200910.However,thishead
diverged from the original budget by 5.8 percent. FBR was not able to meet the target of Rs. 1,380
billionandfellshortbyRs.52.6billion.
Nontax revenue exhibited noticeable performance primarily owing to SBP profits by attaining above
budget inflows during the fiscal year 200910. Rs. 605.4 was collected which is lower by 6.3 percent
against the 200809 receipts. However, this healthy growth of 2.3 percent over original projections
mitigatedtheimpactoftaxrevenueshortfalltosomeextentinthecontextofmeetingbudgettargets.
ProvincialperformanceinmobilizingrevenueswasnotuptothemarkastheycollectedRs.122.7billion
thatwasshortbyRs.42.3billionagainsttheestimatedrevenue.Majorheadsofrevenuearediscussed
indetailbelow:
13
VI.i.a. FBRTaxCollectionandRefunds200910
FBR revenue target for the fiscal year 200910 was fixed at Rs. 1,380 billion at the time of
announcement of Federal Budget. The target was linked with expected growth in GDP, the rate of
inflation, tax buoyancy and other key economic indicators such as growth in the Large Scale
Manufacturing sector and imports. To reach the target, 18.9 percent growth was required over the
actualcollectionofaroundRs.1,161billionduring200809.
Table6:FBRTaxCollection(Rs.Billion)
RevenueHeads
Collection
FY10
FY09
DirectTaxes
IndirectTaxes
SalesTax(GST)
FederalExcise
CustomsDuties
TotalTaxes
As%ageofGDP
529
799
516
121
162
1,327
9.0
444
718
452
118
148
1,161
9.1
Difference
Absolute
Percent
85
81
64
4
13
166
19.2
11.3
14.3
3.1
8.8
14.3
Source:FederalBoardofRevenue
The fiscal year 200910 was a difficult and challenging year for the government and FBR. Despite
economicslowdownanddecliningimports,powercrisisandlawandordersituation,FBRhasmanaged
tocollectasumofaroundRs.1,327.4billionwhichwasRs.166.2billionor14.3percenthigherthanthe
collectionofpreviousyear;although22.4percenthigherrefundswerepaidbackduring200910.Itmay
alsobehighlightedthatduringtheperiodofhighandstableeconomicgrowth(200304to200607),FBR
wasneverabletogenerateanadditionalrevenueofthismagnitudeinasingleyear.Theoveralltarget
hasbeenachievedtotheextentof96.2percent.Reasonsofshortfallarehighlightedbelow:
General economic slowdown during the first half of the year has hampered resource
mobilization.
Negative growth in the manufacturing sector during the first half of the year has impacted
revenue collection on account of FED. However, gradual increase in the manufacturing sector
waswitnessedduringthesecondhalfoftheyear.
Energy crises throughout the year have badly affected the production process and ultimately
revenuerealization.
14
Negativegrowthinimportsduringthefirsthalfoftheyearresultedinlessrevenuerealization
onaccountofsalestaxonimports.However,importsdidpickupduringsecondhalfoftheyear,
butdidnotgeneratesufficientrevenuetomakeupthelosses.
CVT generated negligible additional amount of Rs. 1.1 billion against the projected amount of
Rs.15billionduetoincreaseintheCVTratefrom2percentto4percent.
GST on sugar was reduced from 16 percent to 8 percent from August, 2009, which negatively
affectedrevenuerealizationbyaboutRs.10billionduringfiscalyear200910.
Reduction of GST rate on telecommunication from 21 percent to 19.5 percent negatively

affectedrevenuerealizationby11percent.
1. DirectTaxes
Thedirecttaxhascontributed40percentoftotaltaxreceiptsduringFY200910.Thenetcollectionhas
beenRs.528.6billionduring200910againstthetargetofRs.540.4billion.AnamountofRs.54.2billion
refundshasbeenpaidbacktotheclaimantsasagainstRs.38.8billionduringFY200809.
Theimprovedtaxeffortandrelativelyeffectiveimplementationoftaxpolicyandadministrativereforms
has geared up the collection over the years. The share of direct taxes in total federal tax receipts has
increasedfromaround15percentinearly1990sto32percentinFY200001.Ithastouchednewheights
of40percentinFY200910.Similarly,thegrowthpatternwhichwasunevenbutontheriseduringthe
past few years, has also declined from 48.3 percent in FY200607 to 19.2 percent in FY200910. A
number of reasons contribute to this slowdown in revenue realization. Apart from general economic
slowdownandenergycrisisduringtheperiodunderreview,CVTwasprojectedtogenerateadditional
revenueofRs.15billiononaccountofincreaseintheCVTratefrom2percentto4percent.However,it
hasyieldedinsignificantamountattheendoftheyearmainlyduetoslumpinthepropertybusinessand
alsofragmentationinthesizeofpropertybythepropertydealerstoavoidCVTetc.
15
GrowthRate
Fig5:TrendsinDirectTaxes
Share%
50
42.0
39.0
GrowthRate(%)
40
35
36.0
30
25
33.0
20
30.0
15
10
ShareinTotalTaxes (%)
45
27.0
5
0
24.0
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
Table7:HeadwisePerformanceofDirectTaxes(Rs.Billion)
200910
VoluntaryPayments
CollectiononDemand
DeductionsatSource(WHT)
Miscellaneous
GrossIncomeTaxReceipts
Refunds
OtherDT
NetDirectTaxes
166
98
298
0.1
563
54
20
529
200809
142
77
242
0.3
461
39
21
444
Change(%)
17.0
27.5
23.2
53.7
22.0
39.7
5.7
19.1
Source:FBRDataBank
It may be recalled that the collection of direct taxes includes income tax and other direct taxes i.e.
capitalvaluetax,workerwelfarefundandworkerprofitparticipatoryfund.Thecontributionofincome
taxintotaldirecttaxeshasbeen95.6percent.Thestructureofincometaxisbasedonwithholdingtaxes
(WHT), voluntary payments (VP) and collection on demand (COD). The collection during FY200910
showsthattheshareofWHT,VPandCODingrosscollectionhasbeen53percent,29.5percentand17.5
percentrespectively.DetailsofthesecomponentsofincometaxarepresentedinTable7.
a. VoluntaryPayments
Thiscomponentincludespaymentswithreturnandadvances.Innetterms,Rs.165.8billionhavebeen
generatedduringFY200910ascomparedtoRs.141.7billioninthecorrespondingperiodlastyear,17
16
percentgrowthhasbeenwitnessedincollectionfromthisimportantcomponent.Itmayberecalledthat
thebasicobjectivebehindimplementationofUSASwastominimizeinterfacebetweenthetaxpayerand
taxadministration,reposeconfidenceinthesystemandeliminatetheelementofcorruption.Nodoubt,
theUSAShasbeensuccessfulsinceitsimplementationinachievingtheseobjectives.TillFY200607,VP
had emerged as a leading source of revenue. However, since FY200708 this important source of
revenueisonthedecliningtrend.AsumofRs.156.3billionadvancetaxeshasbeencollectedinFY2009
10 against Rs. 127.2 billion in FY200809, and consequently, its share in total VP has jumped to 94.3
percent from 89.8 percent. The second component of VP is payment with returns which has declined
significantlyduringtheperiodunderreview.DuringFY200910,Rs.9.5billionwerecollectedagainstRs.
14.5billioninFY200809,indicatingadeclineof34.4percent.Sincepaymentwithreturnscontributes
around 6 percent in total voluntary payments, the decrease has little impact on the overall voluntary
payments.
b. WithholdingTax
WHTcontinuestobetheleadingsourceofdirecttaxreceiptsinviewofthelargeundocumentedsector
oftheeconomy.However,despiteitslargecontribution,thereisamplescopetofurtherenhancethis
collection. The WHT collection during FY200910 has been Rs. 298.4 billion against Rs. 242.1 billion
during FY200809, indicating a healthy growth of 23.2 percent. The nine major withholding taxes
contributedaround92percentoftotalWHTcollection.Theseare:contracts,imports,salary,telephone,
export, bank interest/securities, electricity, cash withdrawal and dividends. The performance of each
categoryisgiveninTable8.
Table8:WithholdingTaxCollection(Rs.Billion)
200910
Contracts
Imports
Salary
Exports
TelephoneBills
BankInterest/Securities
ElectricityBills
Dividends
CashWithdrawal
SubTotal
OtherWHT
TotalWHT
95
50
34
17
23
18
15
9
13
274
24
298
200809
Change(%)
84
30
27
14
22
14
13
7
11
222
20
242
13.0
66.8
26.1
16.0
6.4
24.9
21.7
41.3
13.5
23.6
19.9
23.2
Source:FBRDataBank
17
On the other hand, the highest growth in WHT collection has been from imports (66.8 percent),
dividends (41.3 percent), salary (26.1 percent), bank interest (24.9 percent), electricity (21.7 percent),
cashwithdrawal(13.5percent),contracts(13percent),export(16percent)andtelecommunication(6.4
percent).ThehighestgrowthregisteredincollectionfromimportisduetorationalizationofWHTrate
from2percentto4percentduringFY200910.Similarly,thereasonofmorethan40percentgrowthin
collectionfromdividendisduetoincreaseintheprofitabilityofcompanies.Likewise,growthof26.1
percentfromsalaryismainlyonaccountofincreaseinthesalaryofemployees.
2. IndirectTaxes
a. SalesTax
Sales tax has been the second major revenue generation source of the country during 200910. It
constitutesaround65percentand39percentofthecollectionofindirecttaxesandtotalfederaltaxes
respectivelyduring200910.Agrowthofaround14.3percenthasbeenrecordedinthenetcollectionof
sales tax. The collection is realized from two components i.e. sales tax on imports and sales tax on
domesticsector.
Table9:CollectionandGrowthofSalesTax:FiscalYear200910(Rs.Billion)
SourcesofGST
ImportStage
DomesticStage
Total
Collection/Refunds
Gross Refund
Net
247
298
545
0
29
29
247
269
516
Growth(%)
Gross Refund
Net
21.3
9.2
14.3
57.1
11.3
11.2
21.3
8.9
14.5
Source:FBRDataBank
Comparatively better performance by sales tax on imports against domestic sector has improved its
shareinthetotalcollectionofsalestaxfrom45percentin200809to47.8percentin200910.Thetax
collectionofsalestaxbycomponentsispresentedinTable9.
Sales Tax Domestic Collection: The collection of sales tax has been highly concentrated in some
commodities.Thisisconfirmedbythefactthatonlypetroleumproductsandtelecomsectorcontribute
morethanthreefifthofthetotalsalestaxdomestic.Majortencommoditiescontribute87.9percentof
the total net sales tax from domestic. The major revenue spinners of sales tax domestic include
petroleum products, telecom services, natural gas, other services, cigarettes, sugar, electrical energy,
beverages,teaandcement.
18
Table10:ComparisonofSalesTaxDomestic(Net)CollectionbyMajorCommodity(Rs.Billion)
MajorCommodities
200910
POLProducts
ServicesbyTelecomSector
NaturalGas
Sugar
Cigarettes
ElectricalEnergy
Services
Cement
Beverages
Tea
SubTotal
Others
NetCollection
Growth
Realized(%)
200809
114
45
19
17
11
9
7
7
5
4
237
32
269
107
50
19
6
10
12
8
5
4
5
226
23
248
Share(%)
200910
7.1
10.8
1.2
158.0
11.1
22.4
8.0
37.2
24.4
15.1
5.3
40.9
8.5
Share(%)
200809
42.5
16.6
6.9
6.2
4.0
3.5
2.8
2.6
1.7
1.5
88.2
11.8
100
43.1
20.2
7.6
2.6
3.9
4.9
3.3
2.1
1.5
1.9
90.9
9.1
100
Source:FBRDataBank
Sales Tax atImportStage:Salestaxonimportsisasignificantcomponentoffederaltaxreceipts.The

collection of sales tax has posted an increase of 21.6 percent during 200910 mainly due to higher
collectionfrompetroleumproductsandautomobile.Likesalestaxdomestic,thereceiptsofsalestaxon
importshavealsoconcentratedmainlyinfewsectors.Petroleumproductsalonecontributedaround40
percent of overall collection of sales tax on imports during 200910. Similarly, ten major spinners
includingpetroleumconstitute82.4percentofthesalestaximport.
Table11:CollectionofSalesTax(Import)MajorItems(Rs.Billion)
Description
POLProducts(27)
EdibleOil(15)
Plastic(39)
VehiclesandParts(87)
IronandSteel(72)
MechanicalMachinery(84)
ElectricalMachinery(85)
OrganicChemicals(29)
Paper&P.Board(48)
DyesandPaints(32)
SubTotal
Other
Gross
Refund/Rebate
Net
Realized Share Share

(%)
200910 200809 Growth (%)
200910 200809
(%)
100
19
19
16
18
8
7
7
5
6
204
43
247
0.0
247
76
18
17
11
15
7
6
6
6
4
165
39
203
0.1
203
30.8
5.0
14.5
49.9
16.3
19.9
11.1
14.6
15.8
70.6
23.8
12.1
21.6
57.1
21.6
40.3
7.6
7.7
6.5
7.1
3.3
2.6
2.7
2.0
2.6
82.4
17.6
100.0
37.4
8.8
8.2
5.3
7.4
3.4
2.9
2.9
2.9
1.9
80.9
19.1
100.0
Source:FBRDataBank
19
b. CustomDuty
Despitelargescaletariffrationalization2inthelasttwodecades,thecustomsdutyisstillanimportant
componentoffederaltaxreceipts.Itcontributedaround20.2percentand12.2percentofindirecttaxes
andtotalfederaltaxreceiptsrespectivelyduring200910.Thegrossandnetcollectionofcustomsduty
hasbeenRs.167.3billionandRs.161.5billionrespectivelyduring200910.Thegrossandnetcollection
grewby7.2percentand8.8percentrespectivelyduring200910.Thedifferencebetweenthegrowthof
grossandnetcollectionisthelesserpaymentsofrefunds/rebatesbyaroundRs.1.9billion.Thetargetof
customs duty was Rs.164.9 billion against which collection of Rs. 161.5 billion has been realized. The
shortfallismainlyduetodeclineof0.3percentinthedutiableimports.
Table12:CollectionofCustomsDutiesduring200910(Rs.Billion)
Description
1.POLProducts(27)
2.VehiclesandParts(87)
3.EdibleOil(15)
4.MechanicalMachinery(84)
5.ElectricalMachinery(85)
6.IronandSteel(72)
7.Plastic(39)
8.Paper&P.Board(48)
9.OrganicChemicals(29)
10.ArticlesofIron&Steel(73)
11.DyesandPaints(32)
12.Coffee,Tea,andSpices(9)
13.MiscChemicalsProducts(38)
14.CosmeticandPerfumery(33)
15.SoapandArtificialWaxes(34)
SubTotal
Other
Gross
Refund/Rebate
Net
Realized Share Share

Collection Collection
Growth (%)
(%)
200910
200809
(%)
200910 200809
25
19
16
10
9
8
7
5
4
3
3
2
2
2
2
118
49
167
6
161
18
19
17
14
13
8
7
5
4
2
3
2
2
2
2
118
38
156
8
148
43.8
1.8
9.5
24.1
29.2
6.1
6.4
5.1
1.4
24.8
12.0
8.0
1.9
5.5
1.1
0.3
30.8
7.2
24.4
8.8
15.1
11.4
9.3
6.3
5.6
5.0
4.3
2.9
2.3
1.6
1.5
1.4
1.3
1.4
1.2
70.6
29.4
100
11.2
12.4
11.0
8.8
8.5
5.1
4.3
3.3
2.4
1.4
1.9
1.4
1.4
1.4
1.3
75.9
24.1
100
Source:FBRDataBank
See for more details Tariff and Trade in Pakistan A Preliminary Assessment, published in FBR Quarterly Review Vol.10.No.3.
JanuaryMarch2010andisalsoavailableatwww.fbr.gov.pk
20
c. FederalExciseDuties
Federal excise duty is levied on imports and domestic stages. The major portion of the receipts
emanatesfromdomesticsector.Thebaseofthefederalexcisedutyisquitenarrowandislimitedtofew
commodities. Despite narrow base, federal excise duty has been an important revenue generation
source of federal taxes. Federal excise duty has contributed 9.1 percent of total tax collection during
200910. The tax collection realized has been Rs. 121.2 billion in 200910 against Rs. 117.5 billion in
200809yieldingagrowthof3.2percent.
FollowingaresomeofthemeasurestakenintheBudget200910whicharealsoresponsibleforthislow
growth:
i)
Transferofbanking&insuranceservicesfromFEDtosalestaxnet.
ii)
ExemptionofmotorvehiclesfromFED.
iii)
ThedownwardrevisionofFEDratesforcement.
As far as 1 percent SED is concerned, a double digit growth has been recorded. Its share has also
improvedfrom12.1percentin200809to13.3percentduring200910.
Table13:FEDCollectionfromMajorCommodities(Rs.Billion)
Commodities
Cigarettes
Cement
Services
Beverages
NaturalGas
POLProducts
1%SED
SubTotal
Other
Total
200910 200809
45
16
15
11
6
5
16
114
7
121
37
18
17
11
6
4
14
107
11
117
Difference
Share(%) Share(%)
Absolute Percent 200910 200809
8
2
2
1
0
1
2
8
4
4
21.2
10.5
12.5
7.4
8.7
14.6
13.6
7.1
35.4
3.2
36.9
13.0
12.6
9.4
5.1
3.9
13.3
94.2
5.8
100
31.4
15.0
14.9
9.0
4.9
3.5
12.1
90.7
9.3
100
Source:FBRDataBank
VI.i.b. NonTaxRevenue
NontaxrevenueinFY200910reachedRs.605.3billionexceedingthebudgettargetbyRs.13.5billion,
largely helped by transfer of SBP profit which stayed Rs. 83 billion above the budget target. Receipts
under the head of defence were budgeted at Rs. 128.2 billion during FY2010 originating mainly from
21
logistic support services provided to the coalition forces. However, Rs. 115.6 billion could be realized
underthisheadleavingthereceiptsundertheheadofdefensebelowthetargetbyRs.12.6billion.The
dividendsreceiptsfromfinancialandnonfinancialinstitutionsremainedbelowthebudgettargetbyRs.
22.4billion.ManystateownedenterpriseshavelaunchedtheBenazirEmployeesStockOptionScheme
in the outgoing fiscal year wherein GoP shares are transferred to employees in order to enhance
employee participation in corporate decisionmaking. The dividend income was partly diverted to the
publicowingtothisinitiativeandthisalongwiththepowersectorcirculardebthasprincipallybeenat
thebackofaslumpindividendreceipts.Majornonfinancialinstitutionswhichprovideddividendbelow
the target include OGDCL, Pak Arab Refinery Ltd., PTCL, PSO and Pakistan Steel Mill. Of the total
dividend receipts during FY2010, OGDCL contributed 39 percent followed by Government Holding
Private Ltd. with 13 percent while dividends receipts from financial institutions having government
equityamountedtoonepercentofthetotal.
Vi.ii.
Expenditure
AsoriginallyenvisagedinbudgetarytargetsforFY200910,enhancedrevenuegenerationwouldbeused
tofueladditionaloutlaysonsocioeconomicdevelopmentandsocialprotection.Containmentofcurrent
expenditure was targeted in order to keep the fiscal deficit at sustainable level. However, the
governmentwitnessedmassiveslippagesagainstthebudgetedcurrentexpendituretargets,makingan
adjustmenttodevelopmentspendinggoalsnecessaryforthethirdconsecutiveyear.
Totalexpenditurefor200910approximatedtoRs.3,007.2billion;Rs.129.8billionabovethespending
targetswhilethegrowthoverthepreviousfiscalyearremained18.8percent.A13.4percentslippageon
account of current expenditure has been the main culprit. The outgoing fiscal year underwent a
significant downward adjustment of 19.6 percent in respect of development expenditure, although
growthinthisheadhasencouraginglybeen36.7percentover200809.
22
Table14:ConsolidatedBudgetaryPositionoftheGovernment(Rs.Billion)
Prov.Actual
JulyJune
200809
A.TotalRevenue
a)TaxRevenue
Federal
ofwhichFBRRevenue
Provincial
b)NonTaxRevenue
Federal
Provincial
B.TotalExpenditure
Federal
ofwhich: InterestPayments
Domestic
Foreign
DefenseExpenditure
Provincial
PSDP
Federal
ERRA
Provincial
OtherDevelopmentExpenditure
c)NetLending
As%ofGDP
D.FinancingofFiscalBalance
a)ExternalSources
b)Domestic
Bank
NonBank
c)PrivatizationProceeds
E.GDPatMarketPrices
MemoItems
RevenueBalance
As%ofGDP
PrimaryBalance
As%ofGDP
Budget Prov.Actual
Estimate
JulyJune
200910
200910
2,078
1,473
1,418
1,327
55
605
538
68
3,007
2,386
1,759
642
578
64
375
627
613
518
260
258
96
39
32
929
6.3
929
189
740
305
436
Budget
Estimate
201011
1,851
1,205
1,159
1,157
46
646
562
84
2,531
2,042
1,496
638
559
79
330
546
449
398
196
202
51
7
34
680
5.3
680
150
529
306
224
1
12,739
2,155
1,564
1,494
1,380
70
592
497
95
2,877
2,104
1,514
647
577
70
343
590
763
606
381
25
200
157
11
0
722
4.9
722
312
391
144
246
19
14,824
14,668
2,574
1,859
1,779
1,667
80
716
616
100
3,259
2,519
1,769
699
622
77
442
750
734
610
280
10
320
124
7
0
685
4.0
685
186
499
167
333
0
16,975
191
1.5
42.6
0.3
52
0.3
74.9
0.5
308
2.1
286.7
2.0
55
0.3
13.7
0.1
Detailsofgovernmentexpenditurearegivenbelow:
23
VI.ii.a.CurrentExpenditure
Forthefiscalyear200910,currentexpenditureoverrunreachedanalarmingmagnitudeofRs.282.2
billionor13.4percent.AboutRs.2,386billionwereconsumedoncurrentspending,almost19percent
morethanthepreviousyear.Majorheadsareexplainedasfollows:
Table15:ConsolidatedExpenditure,200910(Rs.Billion)
Prov.Actual Budget Revised
JulyJune Estimate Estimate
Federal
GeneralPublicService
ServingofDomesticDebt
ServingofForeignDebt
SuperannuationAllowances&Pension
GrantstoOthers
OthersGeneralPublicServices
DefenceAffairsandServices
PublicOrderandSafetyAffairs
EconomicAffairs
Others
Provincial
CurrentExpenditure
PSDP
Federal
Provincial
NetLending
TotalExpenditure
1,758.8
1,200.4
578.3
64.0
74.7
250.5
232.9
375.0
49.5
83.6
50.2
627.2
2,386.0
517.9
259.5
258.4
95.5
613.4
39.4
3,038.9
1,513.8
1,003.7
576.8
70.3
69.8
168.7
118.1
342.9
34.6
84.9
47.6
590.0
2,103.8
606.0
406.0
200.0
157.1
763.1
10.5
2,877.4
1,787.2
1,241.7
595.8
70.8
85.1
259.1
231.0
378.1
37.4
80.6
49.4
560.0
2,347.2
450.0
250.0
200.0
118.3
568.3
27.2
2,942.8
1. GeneralPublicService
Originally, expenses with regards to general public service were budgeted at Rs. 1,003.7 billion for
FY200910.However,thiscategoryendedupwithanescalationtothetuneofRs.196.7billionmainlyon
accountofpoorlytargetedsubsidiesandgrowingsecurityexpenditures.
a. InterestPayments
AmajorchunkofPakistansscarceresourcesarededicatedtomakingheftypaymentsinrespectofdebt
obligations. For FY200910, nearly 31 percent of total revenues have been consumed in servicing of
domestic and foreign debt against a ratio of 34.5 percent and 32.7 percent in 200809 and 200708
24
respectively. Even though this indicator has improved in the fiscal year 200910, an increasing
concentrationoffinancingmixtowardsinternalsourcesandhigherdomesticinterestratesonaccount
of tight monetary policy indicate a persistent burden of servicing expense on the governments
budgetaryposition.
b. Grants
During the fiscal year 200910, transfer by the federal government to provinces in the form of grants
aggregated to Rs. 82 billion. When analyzing the breakup of grants provided to other institutions
amounting to Rs. 250.5 billion, it becomes clear that security related expenses in the wake of
deterioratingsecuritysituationcontributedahugeportiontotheexpenditurebottomline.
c. Subsidies
During200910,governmentsubsidizedthepowersectorbyalargeamount.Outofatotalsubsidyof
Rs. 213.5 billion, Rs. 178.8 billion or 83.8 percent were granted to WAPDA/PEPCO and KESC against a
budgetedtargetofRs.66.7billionforthefiscalyear200910.Awhoppingslippageof168percentinthis
respect underlines the absence of prominent reforms in the power sector during the previous fiscal
year.
Table16:Subsidies,200910(Rs.Billion)
Last year, the government
decided
to
Organization
implement
PowerSector
efficiencymeasuresandcost Food&Agriculture
recovery tariff for power OilRefineries
Others
sector.
The
government Total
transferred the bank loans

179
22
11
1
213
67
37
15
2
120
180
37
11
2
229
ofPEPCO/NTDC/WAPDA,obtainedagainstthenonpaymentoftariffdifferentialoveraperiodofyears,
toaspecialpurposevehiclenamedPowerHoldingPvt.Limitedwithaviewtodeleveragethebalance
sheet of these organisations, and issued NEPRA ordinance to automatically adjust monthly fuel price
similartothatofoilsector.However,thereformswerenotfullyimplementedandasaresult,thepower
sectorcontinuestostrainfiscalposition.
25
Restoring fiscal sustainability will require addressing with greater vigor existing challenges in the
resourcestricken power sector to reduce unnecessary and unproductive burden on government
budgets.Table16showsabreakupofsubsidiesfor200910.
2. OtherCurrentExpenditure
Defenceaffairsaccountedfor15.7percentofcurrentexpenditureforthefiscalyear200910.Rs.49.5
billion were spent on public order and safety affairs against a budgeted estimate of Rs. 34.6 billion.
Economic affairs registered Rs. 83.6 billion, a decline of 1.5 percent in comparison to budget. On the
contrary, government spending on
Table17:SocialSpending,200910(Rs.Billion)
EnvironmentProtection
Health
EducationAffairsandServices
Total
As%ofGDP
0.3
7
33
40
0.3
0.4
6
32
38
0.3
social safety nets had been abysmally

lowandaccesstosocialservicesbythe
0.4
7
32
39
0.3
combined total of only Rs. 40.2 billion
environment sector (See Table 17).
vulnerable remains a challenge. A
wasincurredoneducation,healthand
Thisspendingtranslatedintoonly0.3percentofGDPforFY200910,indicatingthegovernmentslackof
attention towards targeted social transfers. Government must ensure intergenerational equity and an
adequatesocialsafetynet,andprovisionofpublicservicesthatallowalevelplayingfield,regardlessof
conditionsatbirth.
VI.ii.b.DevelopmentExpenditure
Development spending was contained for the fiscal year 200910 in relation to budgetary targets to
mitigatethedamagedonetothefiscalaccountintheformofhigherthanprojectednondevelopment
outlays. However, this head registered a healthy expansion of 36.7 percent in absolute terms when
comparedtothe200809level.
Rs. 613.4 billion was spent for development purposes in FY200910 in comparison to Rs. 448.8 billion
during200809.Outofit,PublicSectorDevelopmentProgramme(PSDP)wasslashedtoRs.518billion
against a budgeted estimate of Rs. 606 billion, while other development expenditures summed to Rs.
95.5billionandwitnessedacutof39.2percent(incomparisontobudgetestimates)inthefiscalyear
200910. Among PSDP, provincial share increased by 29.2 percent in comparison to budgeted outlay
whereasfederalportionwascurtailedbyamassiveRs.146.5billionintheperiodunderreview.
26
Itisworthnotingherethatsuchafiscaladjustmentlargelycompromisesonthedevelopmentprospects
forfuturegenerationinacountrylikePakistanthatneedstobuilduponitsexistingsocialsector.
VI.iii.
FiscalDeficit
Developmentsinthefiscalsectorduringthefiscalyear200910finallyculminatedtoabudgetdeficitof
Rs.929billionor6.3percentofGDPthatwas1percenthigherthanthelastfiscalyearsdeficitand1.5
percentmorethanthebudgetestimatefor200910.
This performance has come at a time when the country is pursuing a macroeconomic stabilization
agendasupportedbytheIMF.Notwithstanding,thefiscalconsolidationwitnessedin200809appeared
to be vanishing in 200910. Unless serious corrective measures to induce flexibility in government
expenditureespeciallysubsidiesaretaken,thefiscaloutlookisboundtoremainfragileinthenearterm.
Similarly,enhancedrevenuegenerationeffortsneedtobethetopmostprioritygoingforward.
The current trajectory of fiscaldeficit willcontinuetoexertpressureonthe externalaccountand will
fuel inflationary expectations in the economy as it creates demand in the system. Simultaneously,
meetingthefinancingrequirementplacedbythehigherdeficitwilllimittheprospectsofprivatesector
growthandtheeconomicbenefitsitbrings.
VI.iv.
FinancingofFiscalDeficit
External inflows were budgeted at Rs. 312.3 billion for 200910. However, only 60.5 percent of the
projected amount was realized in the course of the fiscal year 200910. Nonmaterialization of Tokyo
pledgeshadbeentheunderlyingthemeasonlyRs.25.3billionwerereceivedagainstaprojectionofRs.
145.1 billion made in the federal budget (revised down to Rs. 66.1 billion later). A widening fiscal
balance, was, therefore, mainly financed through domestic sources in the absence of any proceeds
accruingfromprivatization.Thisavenueiscostlyasthisborrowingisconducivetoinflationarypressures
andatthesametime,translatesintohigherdebtservicinginviewofhigherdomesticinterestrates.
Inthecourseofthefiscalyear200910,Rs.740billionwasmobilizedthroughdomesticsourcesagainsta
budgeted target of Rs. 390.5 billion. Of this, much came from nonbank sources (58.8 percent of
domestic financing). Interestingly, the bank deficit financing was frozen to almost the same level of
200809 (in absolute terms) nearing Rs. 305 billion. Despite this, government relied on central bank
27
borrowing and was not able to comply with the net zero quarterly borrowing limits policy during
FY200910. This trend is undesirable and needs to be reversed as deficit monetization (printing of
money)isoneofthefactorsinfluencinginflationaryexpectationsintheeconomy.
ThenonbankinflowsamountedtoRs.435.6billion,76.9percenthigherthantheestimatedmagnitude.
ThissegmentofdeficitfinancingunderwentanincreaseofnearlyRs.212billionascomparedtoFY2008
09.HigheraccrualsinretailinstrumentsofferedbytheCentralDirectorateofNationalSavings(CDNS)
coupledwitharesurgenceofnonbankingfinancialinstitutionsinterestingovernmentpaperswerethe
primereasonsbehindthisstronggrowth.
VI.v.
RevenueDeficit
Revenue balance is the total revenue adjusted for current expenditure. Governments require fiscal
space to spur development activities in the economy. For development spending, however,
governmentsneedtogeneratearevenuesurplusoratleastmaintainrevenuebalance.InPakistan,the
governmenthasnotbeenabletoachieveazerorevenuebalancebyJune30,2008,acriticalprovisionof
FRDLAct2005.Infact,therevenuedeficitmushroomedtoRs.358.2billionor3.5percentofGDPduring
200708.
Whilethesameindicatorimprovedsharplyby200bpsin200809over200708,thefiscalyear200910
sawareversalofthisdecliningtendencyandrecordedarevenuedeficitof307.8billionapproximating
to2.1percentofGDP.Thisimpliesthattherevenuebalanceworsenedby61.4percentincomparisonto
FY200809.Governmenthasnotbeenabletoachieveasurplusof0.3percentofGDPasenvisionedin
theFederalBudget200910.Thisisanalarmingsituationandbynomeans,asustainablescenario.
The existence of a high and persistent revenue deficit points out the governments inability in
maintaining fiscal discipline and instilling austerity measures in order to curtail increasing current
expenditures.Highersubsidiesintheabsenceoffiscalspacehavemeantthatgovernmentiscreating
debt obligations for financing inefficiency in the economy3. So far, government has not been able to
bringcurrentexpendituresinlinewiththerevenues.Onthecontrary,persistentrevenuedeficitimplies
thattheborrowedmoneyismostlybeingspentoncurrentoutlaysthatotherwiseshouldbeavailable
solely for development purposes. This trend needs to be arrested by undertaking an aggressive
PublicFinanceandFiscalPolicy,StateBankofPakistanAnnualReportFY10
28
expenditure reform action plan. At the same time, it calls for greater emphasis on exploiting other
avenuesintermsofresourcemobilization.
Revenue balance is critically important for intergenerational shift of burden. Revenue deficit implies
borrowingforcurrentconsumptionorshiftingburdenofcurrentconsumptiononfuturegenerations.If
weborrowfordevelopment,itmeanscreationofassetsforfuturegeneration.
Fig6:TrendsinRevenueandPrimaryBalances
RevenueBalance
2.4
PrimaryBalance
1.4
0.4
FY01
0.6
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
1.6
2.6
3.6
VI.vi.
PrimaryDeficit
Primary balance is the total revenue adjusted for noninterest expenditure. In line with the revenue
deficit, the primary deficit aggregated to Rs. 286.7 billion or 2 percent of GDP in FY200910 against a
budgetedtargetof Rs.74.9billionor0.5percentofGDP. Thisindicator haserodedbyalargemargin
when compared to the FY200809 position of 0.3 percent of GDP. Although the primary deficit in the
29
fiscalyear200910isslightlylowerfromtheprecariouslevelof2.8percentofGDPwitnessedin2007
08,thecomebackoftherisingpatternisnotatallfavorable.
Anegativeprimarybalanceessentiallymeansthatthegovernmentisborrowingmoniestopayinterest
paymentonthedebtstock,debttrap.Actiontoarrestsuchatrendispoliticallydifficult,buttheeffects
oftheneededmeasurescouldbephasedinovertime.Indeed, totheextentthatlongtermspending
trendsareamelioratedbystructuralreforms,asmallerimprovementintheprimarybalancecouldthen
betargeted.
VII.
FiscalProjections201011
TheFederalBudget201011paintedaportraitoffiscalconsolidationforthecurrentfiscalyearbutthat
washarshlywashedawayasdevastatingfloodshitthecountryearlyintothefiscalyear.Evenbeforethis
catastrophe,theannouncementofafiscaldeficitof4percent(intermsofGDP)lostitssignificanceat
theveryonsetowingtodeficitbudgetsannouncedbytwooftheprovinces.
Budget201011encompassedvariousrevenuegenerationandfiscalausteritymeasures.Anincreaseof
1percentagepointintheGSTratewasproposedandafreezingofnonwagecurrentexpenditureatthe
FY200910 level was propagated. Nontax revenue was estimated at Rs. 715.6 billion, almost Rs. 110
billionmorethantheactualcollectionin200910.Outoftheincrease,Rs.50billionweretocomefrom
PTAproceedsinrespectofissuing3GLicencetocellularcompaniesinPakistan.Totaloutlayasperthe
budgetwasRs.3,259.3billionequalto19.2percentoftheprojectedGDP.Areduction of1.4percent
wasenvisagedinthecategoryofcurrentexpenditures,whiledevelopmentspendingwasenhancedto
Rs. 733.5 billion, up by 19.6 percent from the actual outlay in 200910. These numbers hold no more
importanceassharpadjustmentswereneededtodivertasizableportionofthePSDPtothereliefand
rehabilitationtasksinthepostfloodscenario.Resultantly,budgettargetswererevisedandanewfiscal
deficitof4.7percentwasagreeduponrecently.
Aspertherevisedprojections,thesizeofthebudgethasexpandedtoRs.3,297billion.Totalrevenue
collection is projected at Rs. 2,485 billion (14.5 percent of revised nominal GDP) for the current fiscal
year. The government is mulling over the imposition of flood surcharge of 10 percent on the salaried
class with annual incomes exceeding Rs. 300,000 for a period of JanuaryJuly 2011. This temporary
measurewillcertainlyboosttherevenuesintheshortterm.However,giventheseverityofthecrisis,a
more rigorous approach to taxation was needed. The time was opportune to undertake fundamental
30
changesinthetaxstructurebybringingintothetaxnet,sectorsthathaveenjoyedtaxfreedomsofaror
areundertaxed.
Table18:ConsolidatedGovernmentBudget,201011(Rs.Billion)
Items
TotalRevenue
TaxRevenue
FBRRevenue
NonTaxRevenue
TotalExpenditure
Current
Development
FiscalDeficit
as%ofGDP
201011
Projections
201011
RevisedProjections
2574
15.2
1859
10.9
1667
9.8
716
4.2
3259
19.2
2519
14.8
740
4.4
685
4.0
2485
14.5
1881
10.9
1655
9.6
605
3.5
3297
19.2
2910
16.9
387
2.3
811
4.7
Note:FiguresinitalicsareaspercentageofGDP
Source:BudgetWing,FinanceDivision
Public expenditure is kept at the same level of 19.2 percent of revised output as planned out in the
originalbudget201011.Howevertoadapttosocietalpreferencesandneedsforgreaterfloodrelated
spending,thegovernmenthasnooptionbuttogoforadrasticcutondevelopmentoutlaysinorderto
free up the scarce resources for rehabilitation and reconstruction costs. Consequently, development
expenditure is slashed by 48 percent, meaning thereby a fourth consecutive year of cut in social
spending. Current expenditure is augmented by 15.5 percent over the original target and is now
projected to attain 16.9 percent of revised GDP, up from a budgeted 14.8 percent of GDP, whereas
developmentexpenditureisdownto2.3percentofGDP.Itisworthmentioningherethatthiscuthas
beendoneinbudgetarytargetsandwithaknownhistoryofslippageonthisfront,theactualrealization
of social spending will be too low. This tendency is detrimental to the everincreasing development
needs of the country. Furthermore, continued power tariff differential will raise the current spending
levels.
31
VII.i.
FBRTargets
TheFBRrevenueisfixedatRs.1,667billionagainstanactualrealizationofRs.1,327.4billionin200910.
This target appears optimistic as a growth of 25.6 percent far outweighs the average growth of 18.3
percentoverthelastfiveyearsandarelativelyanaemicgrowthof12.3percentinthefiscalyear2009
10.Asaresultofrevisioninthebudgettargets,thisheadhasbeenscaleddowntoRs.1,655billiondue
toageneralslowdowninproductionandaggregatedemandafterthefloods.
Table19:ComparisonofRevenue(Rs.Billion)
TotalRevenue
TaxRevenue
FBRRevenue
a)DirectTaxes
b)IndirectTaxes
SalesTax
FederalExcise
CustomsDuty
200910
Revised
Estimates
201011
Budget
Estimates
201011
Revised
Projections
Growth
(%)
1,851
1,538
1,380
540
840
540
134
165
2,574
1,859
1,667
658
1,009
675
154
181
2,485
1,881
1,655
702
953
639
141
173
34.3
22.3
19.9
29.9
13.5
18.2
4.9
5.1
Source:BudgetWing,FinanceDivision
Directtaxesareprojectedtoincreaseby29.9percentwhileindirecttaxeshavebeenestimatedatRs.
953 billion. Sales tax has been revised down to Rs. 639 billion, federal excise to Rs. 141 billion, and
customsdutytoRs.173billionowingtopostfloodbudgetadjustments.
VII.ii.
ReformedGeneralSalesTax(RGST)
It was pledged at the time of budget presentation that a reformed and broadbased GST will be
implemented from October 2010 following the consensus of provinces on the subject as well as
completionofitsimplementationmechanism.However,theGeneralSalesTaxBill2010toreformthe
sales tax regime by introducing and implementing a broadbased and integrated tax regime on
consumption in Pakistan has only recently been submitted to the Federal parliament. This bill will
replacetheexistingSalesTaxAct,1990.
ProvincialgovernmentshaveyettodeliveronthisreformbysubmittingbillswithregardstoRGSTon
services in their respective assemblies. Taxation of services remains the subject matter of provincial
autonomyafterpassageofthe18thConstitutionalAmendment.
32
Box1:SalientFeaturesofRGST
GSTwillreplacetheexistingregimesofsalestaxandexcisesonservices.
GSTwillapplyonbothatimportandlocalsupplystages.
Standardrateof15%hasbeenproposedinsteadofthepresentrateof17%ormultipleotherrates
goingupto25%.
Thereshallbenofixedtax,reducedtax,enhancedtax,retailpricebasedtaxorspecialtaxscheme
underthenewGSTsystem.
AuniformenhancedannualexemptionthresholdofRs.7.5million(whichispresentlyRs.5million)
shall be applied to keep small businesses including small traders/retailers/cottage industry out of
mandatorytaxcompliance.
Allexportsshallbezerorated.
Input tax adjustment of both direct and indirect constituents shall be allowed on totals basis
(excludingentertainmentandnonbusinessusepassengervehicles).
SalestaxongoodsandserviceswheresoauthorizedbytheProvincesshallbemutuallyadjustable
sothatdoubletaxationdoesnotoccur.
No general zerorating shall be admissible on any commercial form of domestic supply or on any
localconsumption.
TheGSTsystemwillworkpurelyonselfassessmentandselfpolicingbasis.
Cash flow of businesses shall be facilitated through expeditious centralized (Electronic) refund
paymentsystem.
Taxcomplianceshallbeencouragedthroughtransparentandfairauditsystemwithincreaseduseof
moderninformationtechnology.
Adjudication, appeal and alternative dispute resolution (ADR) systems have been provided as
before.
FBRwillissuesimplifiedrulestoregulatetheGSTproceduresandprocesses.
TheGSTBill2010shalltakeeffectfromsuchdateasmaybenotifiedbytheFederalgovernment.
ThenewGSTsystemwillbeappliedinFATA/PATA,theProvinceofGilgitBaltistanandAJ&Kindue
course.
Source:FederalBoardofRevenue
VII.iii.
7thNFCAward
Aremarkabledevelopmentinthefiscalyear200910wastheannouncementof7thNFCawardaftera
gap of 19 years. This award lays the basis for resource distribution between the Center and the
33
Provinces(verticaldistribution),andbetweentheProvinces(horizontaldistribution).The7thNFCAward
marks a watershed since it has adopted by consensus a set of multiple criteria for determining
horizontal distribution of resources against a historical trend of using a single criterion of Population
(see Box 2). Resultantly, the transfer to provinces has been projected to rise to Rs. 1,077 billion, an
increaseby69.8percentinthefiscalyear201011overtheactualtransferofRs.634.2billioninFY2009
10.Apartfromawardingmorefiscalautonomytotheprovinces,theNFCisalsoexpectedtorationalize
intergovernmentalfiscalrelationsandencouragetheprocessofnationalreconciliationinthecountry.
Table20:TransferstoProvinces(Rs.Billion)
200405 200506 200607 200708 200809 200910
DivisiblePool
StraightTransfer
SpecialGrants/GrantinAid
DisttSupportGrant
TotalTransferstoProvinces
InterestPayment
LoanRepayment
TransferstoProvinces(Net)
215
42
10
21
289
24
29
236
244
56
10
28
339
22
15
302
326
75
28
428
18
40
370
390
68
32
490
20
25
445
458
67
38
563
19
21
524
201011
(BE)
565
68
43
677
19
24
634
866
168
86
1,120
17
26
1,077
Source:PFWing,MinistryofFinance
Box2:SalientFeaturesof7thNFCAward
1.
Thedistributionofresourceshasbeenmadeonmultiplecriteriainsteadofsinglecriteriaofpopulation.
2.
Theagreedsharingofthedivisiblepoolwillnowtakeplaceonthebasisofthefollowing:
3.
Population
82.0%
Povertyandbackwardness
10.3%
Revenuecollection/generation
5.0%
Inversepopulationdensity
2.7%
FederalTransferstotheprovincialgovernmentsonthebasisofthepercentagespecifiedagainsteach:
34
Existing
7thNFCAward
Balochistan
7.17%
9.09%
KhyberPakhtunkhwa
14.88%
14.62%
Punjab
53.01%
51.74%
Sindh
24.94%
24.55%
Total
100.00%
100%
Source:ProvincialFinanceWing,FinanceDivision.
4.
InverticaldistributionFederalgovernmenthasallowedanincreaseintheshareoftheprovinceswith56
percentforfirstyearand57.5percentfortheremainingyears.TheshareoftheFederalGovernmentin
thenetproceedsofdivisiblepoolshallbe44percentduringthefinancialyear201011and42.5percent
fromthefinancialyear201112onwards.
5.
Inaddition,theFederalgovernmentagreedtoareductionofcollectionchargesfrom5%to1%,increasing
thepoolfordistributionby4%.
6.
Baluchistanwillreceive9.1percentinsteadof5.1percentandwillreceivetotalRs.83billionforthefirst
year.AnyshortfallinthisamountshallbemadeupbytheFederalGovernmentfromitsownresources.
7.
One percent of the net proceeds of divisible pool taxes shall be assigned to government of Khyber
PakhtunKhwatomeettheexpensesonwaronterror.
8.
Eachprovinceshallbepaidineachfinancialyearasashareinthenetproceedsofthetotalroyaltieson
crude oil an amount which bears to the total net proceeds the same proportion as the production of
crudeoilintheprovinceinthatyearbearstothetotalproductionofcrudeoil.
9.
EachProvinceshallbepaidineachfinancialyearasashareinthenetproceedstobeworkedoutbased
onaveragerateperMMBTUoftherespectiveprovince.
10. ThereshallbechargedupontheFederalConsolidatedFundeachyear,asgrantsinaidoftherevenuesof
the province of Sindh an amount equivalent to 0.66 % of the provincial share in the net proceeds of
divisiblepoolasacompensationforthelossesonaccountofabolitionofoctroiandzillatax(OZT).
11. It has also been recommended in NFC award that the Federal government and Provincial governments
shouldstreamlinetheirtaxcollectionsystemtoincreasetheirrevenuesinordertoachieve15percenttax
toGDPratiobytheterminalyeari.e.201415.
12. Similarly Federal Government and Provincial governments would develop and enforce mechanism for
maintaining fiscal discipline at the Federal and Provincial levels through legislative and administrative
measures.
Source:EconomicSurveyofPakistan200910
VII.iv.
18thAmendment
The 18th Amendment recommended abolition of the concurrent list. However, the concurrent list is
proposedtobeabolishedupto1stJuly2011.ThishasresultedinincreasedfiscaldeficitfortheFederal
Government that has transferred revenues to provinces under the 7th NFC award in the current fiscal
year but has to bear the expenditure on the provincial subjects for this year. On the other hand,
provincialgovernmentswillhaveanincreasedamountofrevenuesattheirdisposalwithnofunctional
35
transfer.Thiswillinclinetheprovincialgovernmentstoincreaseexpenditureontheexistingfunctions.
There is, accordingly, a disparity for the fiscal year 201011, and this inconsistency can be a potential
threattofiscalprudenceandtheabilityofthefederalgovernmenttomaintainalevelofconsolidated
fiscaldeficitwhichisconsistentwithfiscalsustainabilityandeconomicstability.
VII.v.
ProvincialBudgets
Thegoaloffiscaldecentralizationenvisionedunderthe7thNFCawardcannotbeachievedintruespirits
unless the provinces exercise fiscal discipline and maturity in their economic management. Without
effectivemanagementoftheresources,therequisitefiscalspacecannotbereachedthatisnecessary
forinvestmentsinsocial,economic,andindustrialsectors.Inthiscontext,theprovincialgovernmentsin
Pakistan are required to employ additional resources in an efficient and optimal way. The provincial
governmentsarealsoexpectedtoreducetheirexcessivedependenceonfederaltransfersandmobilize
theirownresourcesasthereisawideroomavailabletothemtorevisethetaxlistsandenhancetheir
revenuebase.4
Table 21 shows a comparison of the provincial budgets 200910 and 201011. It can be seen that
provinceshaveprojectedmorethan50percentincreaseinrevenuefromownsourcesforthecurrent
fiscalyear.Rs.215.3billionhasbeenbudgetedforFY200910againstRs.142.8billionestimateandRs.
112 billion actual in 200809. The budgets of Balochistan and Khyber Paktunkhwa hinge mainly on
massive revenue generation that has been at the back of a healthy overall increase. For 201011,
provincial expenditures have been budgeted at Rs. 1,290.7 billion, 42.1 percent more than the actual
provincial spending in 200809. Emphasis has been placed at development outlays that have been
approximatedtobe60.4percenthigherthantheprecedingfiscalyear.
PublicFinanceandFiscalPolicy,StateBankofPakistanAnnualReportFY10
36
Table21:ProvincialOwnReceiptsandExpenditure,200910and201011(Rs.Billion)
Provinces(comb Balochistan
KhyberPaktunk
Sindh
Punjab
Budget
Estimate
200910
Prov.OwnReceipts
TaxReceipts
NonTaxReceipts
Prov.Expenditure
CurrentExpenditure
Prov.OwnReceipts
TaxReceipts
NonTaxReceipts
Prov.Expenditure
CurrentExpenditure
Prov.OwnReceipts
TaxReceipts
NonTaxReceipts
Prov.Expenditure
CurrentExpenditure
Prov.OwnReceipts
TaxReceipts
NonTaxReceipts
Prov.Expenditure
CurrentExpenditure
Prov.OwnReceipts
TaxReceipts
NonTaxReceipts
Prov.Expenditure
CurrentExpenditure
87
50
37
490
315
175
43
27
15
311
213
98
10
6
4
131
80
51
4
1
3
72
53
19
143
84
59
1,004
661
343
Prov.Actual
Budget
Variations
JulJun
Estimate
200910
(II)(I)
201011
66
33
33
435
301
134
36
23
13
245
179
67
7
3
4
145
104
40
3
1
2
83
60
23
112
59
53
908
644
264
21
17
4
55
14
41
7
5
2
66
35
31
3
3
0
14
24
11
0
0
0
12
7
5
31
25
6
95
17
78
119
90
29
580
387
194
69
50
19
403
268
135
19
16
3
197
128
69
9
6
3
110
83
26
215
162
54
1,291
866
424
Prov.Actual
JulSep
201011
11
8
3
73
65
8
6
5
1
49
46
3
1
1
1
29
26
3
3
0
2
16
15
1
22
14
7
168
152
16
Source:PFWing,MinistryofFinance
VIII. FiscalPerformanceJulySeptember201011
AtotalofRs.400.2billionwascollectedintermsofrevenuewhileRs.676.4billionwastheaggregate
governmentspendingtillSeptember2010.ArevenueshortfallofRs.27billionandanexpenditureover
runbyRs.25billionoverJulySeptember2009wasobserved.Thefirstquarterofthecurrentfiscalyear
observed a budget deficit of 1.6 percent of GDP. A welcome development in this quarter was a 0.3
percent(ofGDP)budgetsurplusgeneratedbyprovincialgovernments.However,thespillovereffectsof
floodspendingaretobepainfullyfeltinthecomingquarters.
37
Table22:ConsolidatedGovernmentBudget,JulySept2010(Rs.Billion)
A.TotalRevenue
a)TaxRevenue
Federal
ofwhichFBRRevenue
Provincial
b)NonTaxRevenue
Federal
Provincial
B.TotalExpenditure
Federal
ofwhich: InterestPayments
Domestic
Foreign
DefenseExpenditure
Provincial
PSDP
Federal
ERRA
Provincial
c)NetLending
As%ofGDP
D.FinancingofFiscalBalance
a)ExternalSources
b)Domestic
Bank
NonBank
c)PrivatizationProceeds
E.GDPatMarketPrices
MemoItems
RevenueBalance
As%ofGDP
PrimaryBalance
As%ofGDP
Prov.Actual
JulySept
200910
Prov.Actual
JulySept
201011
427
299
288
263
11
129
119
10
651
521
381
142
129
12
86
140
109
86
46
39
23
7
14
224
1.5
224
77
147
39
108
400
317
303
287
14
83
74
9
676
567
419
162
147
15
93
148
59
43
27
16
16
3
47
276
1.6
276
57
219
121
98
14,837
17,106
94
0.6
82
0.6
167
1.0
115
0.7
VIII.i.
TaxRevenue
TaxrevenueaccruedtoRs.317.3billionduringthefirstthreemonthsoftheongoingfiscalyear201011.
Petroleum Development Levy witnessed Rs. 15.3 billion, 36.4 percent lower in comparison to July
September 2009. On the other hand, provinces collected tax revenue of Rs. 14.4 billion which is 28.4
percenthigherthanthecorrespondingperiodofFY200910.
38
Table23:FBRTaxCollection,JulySeptember2010(Rs.Billion)
RevenueHead
Target
201011
DirectTax
SalesTax
FederalExcise
CustomsDuty
TotalCollection
702
639
141
173
1,655
JulySept
200910
84
117
28
33
263
%Change
201011
94
133
24
37
287
12.2
13.2
16.5
10.3
9.3
Source:FBR
TheFBRwasabletoreachRs.287.1billioninJulySeptember2010,anincreaseof9.3percentoverthe
same period last year against the annual budget target of 24.7 percent. Proceeds from Sales Tax
contributedheavilytothebottomlineasRs.132.5billionwascollectedagainstaweakcollectionofRs.
117.1billioninJulySeptember2009.CustomDutiesexhibitedagrowthof10.3percentwhereasFederal
ExciseDutiesweredownby16.5percentincomparisontoQ1FY200910.Rs.94.4billionwascollected
undertheheadofDirectTaxes,whichis12.2percentmorethanthefirstquartercollectioninFY200910
inthiscategory.
VIII.ii.
NonTaxRevenue
Thissubheadofrevenueportrayed
Table24:NonTaxRevenue,JulySept2010(Rs.Billion)
Prov.Actual Prov.Actual
JulySept
JulySept
200910
201011
a slow progress in JulySeptember

2010 as only Rs. 82.9 billion was
receivedagainstahealthycollection
ofRs.128.5billioninQ1FY200910.
Acloserlookofthisfalltothetune
of 35.5 percent shows lower SBP
profitsandfewerreceiptsinrespect
NonTaxRevenue
Interest(PSEs&Others)
Dividend
SBPProfit
Defence
Citizenship,Naturalization&PassportFee
DevelopmentSurchargeonGas
DiscountRetainedonCrudeOil
RoyaltyonOil/Gas
Others
128
0
19
70
2
3
6
0
9
20
83
0
0
40
1
2
5
3
20
11
of Coalition Support Fund. A

negligible dividend income was received, partly owing to lower corporate profitability and mostly on
account of a diminishing share of government in stateowned enterprises (due to Benazir Employee
StockOptionSchemeadoptedrecently).AhealthycollectionofRs.19.6billiononaccountofroyaltyon
gas/oilistheonlypositiveaspectofnontaxrevenueduringQ1FY201011.However,nothinghasbeen
donesofarwithregardstonewmeasureslaidoutintheFederalBudget201011,mainlytheissuanceof
3GlicensetoPakistanitelecomsector.
39
VIII.iii. Expenditure
CurrentspendingwasRs.566.8billioninJulySeptember2010.Interestpaymentsonpublicdebtstock
werehigherthaninthesameperiodoftheprecedingfiscalyearby14.1percentwhiledefenceoutlays
consumed Rs. 93.1 billion. Subsidies took away Rs. 65.8 billion with the bulk of it (Rs. 40.4 billion)
incurring on power sector, while grants made up 6.7 percent of current expenditure. The share of
provincialoutlaysincurrentexpenditureaggregatedto26percentandthisheadwitnessedanincrease
of5.8percentoverQ1FY200910.Thismodestsurgenullified,tosomeextent,worriesarisingoutofa
mismatch due to a combined effect of 7th NFC Award and 18th Amendment (discussed in the relevant
sectionsbefore).
Ontheotherhand,publicinvestmentlevelshavedeclinedsharplyasonlyRs.43.1billionwasspenton
PublicSectorDevelopmentProgramme(PSDP)againstRs.85.5billioninJulySeptember2009.Thishuge
reductionreflectsthegovernmentsplantodivertasignificantpartofPSDPtoreliefandrehabilitation
activities. Despite international assistance and largescale public mobilization, government is left with
inadequate resources to meet increasing needs on this front. Hence, the government has initiated a
tightening of development expenditure to effectively manage this mammoth task. Although limited
policy options are available to the government to adjust to oneoff and urgent needs on budgetary
resources,theshrinkageinsocialsectoroutlaysisnotatalladesirablecourseofaction.Incontrastto
thisfiscaltrend,fundamentalstructuralchangesarenecessarytoinstillflexibilityinpublicspendingso
astocreatespacefortemporarydemandsongovernmentssparsefunds.
VIII.iv. Fiscal,RevenueandPrimaryDeficit
Theoverallfiscalbalancehasobserveda23.5percentincreaseinthefirstquarterofFY201011when
compared to JulySeptember 2009. A budget deficit of Rs. 276.2 billion was registered that
approximated to 1.6 percent of GDP. It must be noted that spending on account of flood and related
activitieshasyettoshowitseffectonthefiscalbottomline.
A revenue deficit of Rs. 166.6 billion or 1.0 percent of projected GDP was recorded in the first three
monthsofFY201011.Inthesamespell,primarybalancewasinnegativeRs.114.7billionor0.7percent
ofestimatedGDPforFY201011.Asustaineddeteriorationofthesefiscalindicatorsovertheyearscalls
forincreasedrevenuemobilizationeffortswhileundertakingreformstogovernmentspendingpatterns
at the same time. To improve these fiscal indicators, it is imperative to tap additional sectors such as
40
agriculture,stockmarket,realestate,etc.forbroadeningthetaxnetaswellastorationalizeandmore
importantly,reprioritizeitsspendingareas.
VIII.v.
FinancingofFiscalDeficit
The government is increasingly relying on domestic avenues for budgetary financing owing to a slow
pace of materialization of FODP pledges and a general drying up of foreign funding sources. US$ 451
million received under the IMF Emergency Natural Disaster Assistance (ENDA) for floodrelated
immediate outlays dominated the external sources of budgetary financing in the first quarter. More
importantly, a greater dependence on banking sector may lead to fears of possible crowdingout of
private sector credit. Banks contributed Rs. 121 billion to the financing of budgetary gap during July
September 2010, while nonbanking sector provided Rs. 98.4 billion. Of the banking proceeds, much
camethroughcentralbankborrowing.Thisisinsharpcontrasttoa27/73banknonbankfinancingmix
duringJulySeptember2009.Inanenvironmentofhighdomesticinterestrates,thistilttowardsbanking
industryisanexpensiveact.ThegovernmentwasabletogetjustRs.56.9billionfromexternalsources.
IX.
ReviewofPublicDebt
Publicdebthasimportantinfluenceovertheeconomybothintheshortandthelongrun.Higherpublic
debtraisessolvencyrisks,constrainsthecapacitytousefiscalpolicyasacountercyclicaltool,andcan
increaseborrowingcostsforsovereigns.Ultimately,increaseinpublicdebtmayreduceoutputgrowth
and productivity. Pakistan managed to temporarily reverse the upward debt trend during FY2006 and
FY2007, but this reduction has been dwarfed by the surge in the debt ratio by nearly 5.3 percentage
points since. Out of this increase of 5.3 percent, borrowing for balance of payments (BoP) support
includingIMFcontributed3.0percentofGDPsinceFY2007.
ThetotalpublicdebtstoodatRs.8,894billionasofJune30,2010,anincreaseofRs.1,265billionor16.6
percenthigherthanthedebtstockattheendoflastfiscalyear(SeeTable25).Governmentborrowed
Rs. 798 billion from domestic sources and Rs. 189 billion from external sources to finance the fiscal
operations.Additionally,governmentborrowedSDR2,145millionorRs.271billionfromIMFforbalance
ofpaymentsupport(thatincludedbudgetsupportunderthebridgefinancingfacility)andincurredan
exchangelossofRs.200billionontheexternaldebtportfolioowingtorupeedepreciationagainstUS
dollar.ThePakRupeedepreciatedby5percentduringFY2010comparedto19.2percentinFY2009.
41
Table25:PublicDebt,FY06FY11*
FY06
FY07
FY08
FY09
FY10
DomesticCurrencyDebt
ForeignCurrencyDebt
TotalPublicDebt
2,320
2,038
4,357
ForeignCurrencyDebt
TotalPublicDebt
30.4
26.7
57.2
ForeignCurrencyDebt
TotalPublicDebt
215
189
405
ForeignCurrencyDebt
Memo:
ForeignCurrencyDebt(inUS$Billion)
ExchangeRate(Rs./US$,E.O.P)
GDP(inRs.Billion)
TotalRevenue(inRs.Billion)
53.2
46.8
(InbillionsofRs.)
2,600
3,266
3,853
4,651
2,201
2,778
3,776
4,243
4,802
6,044
7,629
8,894
(InpercentofGDP)
30.0
31.9
30.2
31.7
25.4
27.1
29.6
28.9
55.4
59.0
59.9
60.6
(InpercentofRevenue)
200
218
208
224
170
185
204
204
370
403
412
428
(InpercentofTotalDebt)
54.2
54.0
50.5
52.3
45.8
46.0
49.5
47.7
33.8
60.2
7,623
1,077
36.4
60.4
8,673
1,298
40.7
68.3
10,243
1,499
46.4
81.4
12,739
1,851
49.6
85.5
14,668
2,078
FY11*
4,956
4,517
9,473
28.8
26.3
55.1
199
182
381
52.3
47.7
52.4
86.3
17,182
2,485
*endSeptember2010
Source:EAD,SBP,BudgetWing,MoFandDPCOstaffcalculations
FiscalconsolidationwitnessedduringFY2009wasreversedinFY2010duetolowergrowthofrevenue
compared to budgeted growth, higher subsidies and security related expenditures; the fiscal deficit
increasedfrom5.3percentofGDPinFY2009to6.3percentinFY2010.Thecurrentaccountdeficitwas
2.3 percent of GDP compared to 5.7 percent of last fiscal year. Fall in international commodity prices
coupledwithimportcompressionmeasuresresultedinrestrainedgrowthofimports,whereasexports
grewby2.9percentthatresultedinsignificantlyreducedcurrentaccountdeficit.Howeverfasterglobal
economic recovery and increase in international commodity prices will limit or reverse the gains
achievedthisyear,goingforward.
NonmaterializationofTokyopledgesforcedthegovernmenttorequestIMFforbridgefinancetocover
the financing shortfall. This facility was made available in FY2010 on the pretext that the budget will
drawonthisaccounttofinanceitspriorityneedsuntilTokyorelatedpledgesaredisbursedandthatthe
budgetwillreplenish the dedicatedaccount tothe amount borrowedfromtheFundasTokyorelated
pledgesaredisbursed.
Theprimarysourceofincreaseinpublicdebtduring200910hasbeenarapidincreaseinlocalcurrency
componentthataccountedfor63.1percentofthetotalincreaseinTPD.Themainreasonsforthisshift
42
inborrowingwerethenonmaterializationofTokyopledges,slowdisbursementfrommultilateraland
bilateraldonorsandhigherthanbudgetedfiscaldeficit.
The external debt component grew by Rs. 467 billion or 12.4 percent due to increased foreign public
debt inflows on the one hand, and depreciation of the Rupee on the other hand. Rupee lost
approximately5percentofitsvalueagainsttheUSdollarduring200910.AnincreaseofaroundRs.200
billion,approximately16percentofthetotalincreaseinTPD,wasduetotheexchangeratemovement.
AppreciationoftheUSDollaragainstothermajorcurrenciescausedtheforeigncurrencycomponentof
public debt to decrease by US $440 million. However, capital gain on foreign currency debt was
mitigatedby5percentdepreciationofPakRupeeagainstUSDollar.Thiscapitallossonforeigncurrency
debt, however, is mitigated by the strong concessionality element associated with Pakistans external
loans.Theimpactofanycurrencyshockshouldnotbelookedatinisolation,butratherbeanalyzedin
the context of interest rate differential. The increase in the foreign currency component of TPD also
includes IMF BoP support that is not used to fund budgetary operations, but to strengthen Pakistans
foreignexchangereserves.
TPDstoodatRs.9,473billionattheendoffirstquarterFY2011,registeringanincreaseofRs.579billion
or 6.5 percent in just three months of the current fiscal year. Depreciation of US dollar against other
currencies has added approximately US $2.4 billion to the external debt; US dollar depreciation
combinedwith1percentrupeedepreciationagainstUSdollarcausedtheforeigncurrencycomponent
ofTPDtoincreasebyapproximatelyRs.208billionor76percentofthetotalincreaseofRs.274billion.
TherupeecomponentoftotalpublicdebtincreasedbyRs.305billionor6.6percentinthefirstquarter
ofFY2011.
Therehasbeenamajorshiftinfiscaldeficitfinancingpatterns.SinceFY2008,almost80percentofthe
fiscaldeficithasbeenfinancedfromthedomesticsourceswhereasduringFY200207only47percentof
fiscal deficits were financed through local currency borrowing. This huge borrowing need of the
governmentinabsenceofliquiddebtcapitalmarketsandpolicyofnetzeroquarterlyborrowingfrom
SBP has increased the domestic interest rates. This along with borrowing from SBP has also
strengthenedthealreadystronginflationaryexpectationsintheeconomy;FY2011wouldbethefourth
consecutiveyearofdoubledigitinflation,unprecedentedinthehistoryofthecountry.Thereisaneed
to reduce fiscal deficit to avoid imbalance in the external account as excess demand created by large
43
fiscal deficits will put the current account under pressure and will trigger further monetary tightening
andcurrencydepreciationtosecuretheexternalaccount.
Fig7:TrendsinPublicDebt
GDP
90
650
TR
(As%ofGDP)
80
550
500
70
450
400
60
(As%ofRevenue)
600
350
50
FY01
300
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
X.
ServicingofPublicDebt
For the fiscal year 200910, public debt service aggregated to Rs. 839.1 billion against a budgeted
estimateofRs.779.6billion.InterestpaymentsondomesticdebtwereRs.578.3billion,whilethesame
forforeigndebtstoodatRs.64billion.AnexpenseofRs.196.8billionwasincurredtorepaymaturing
foreigndebtduringtheyearincomparisontoanestimatedRs.132.4billion.Thisslippagemainlyarises
onaccountofcurrencydepreciation.AsignificantdevelopmentwastherepaymentofUS$600million
InternationalSukukBondinJanuary2010.Theshareofpublicdebtserviceincurrentexpenditurewas
35.2percent,whereasabout40.4percentofgovernmentrevenueswereconsumedinthisregardduring
200910.
44
Even
though
these
Fig8:TrendsinDebtServicing
indicators have improved

incomparisontoprevious
70
years,
60
increasing
concentration
of
financing mix towards

internal
sources
and
higher domestic interest
as%ofTRandCE
an
rates on account of tight

monetary policy indicate
%ofCurrentExpenditure
%ofTotalRevenue
50
40
30
20
10
0
FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10
a persistent burden of
servicingexpenseonthegovernmentsbudgetaryposition.
XI.
MediumTermBudgetaryFramework(MTBF)
The Ministry of Finance has taken an important step to further enhance fiscal discipline through the
introduction of budgetary reform programme called the MediumTerm Budgetary Framework (MTBF).
The MTBF has received endorsement from the Cabinet in January 2009 and since then has been
implemented across the Federal Government. For the fiscal year 200910, the MTBF produced two
documents;thetwostagedBudgetStrategyPapers(201013),whichwereendorsedbytheCabinet,and
Mediumterm Budget Estimates for Service Delivery 201013, which was tabled at the Parliament
togetherwiththeBudget201011.
XI.i.
BudgetStrategyPaper
ThetwostagedBudgetStrategyPaperprocesshasbeenstartedwithaimstoenhancefiscaldiscipline
and link governments strategic priorities with the budget. The aim to enhance fiscal discipline is
achievedthroughcreationofMediumTermFiscalFramework,whichisa3yearforwardlookingfiscal
forecast of the Federal and Provincial Governments. The MediumTerm Fiscal Framework helps the
government in determining the fiscal deficit targets. While it is understood that the fiscal decisions
impact the macroeconomic situation in the country, the Finance Division has established a
macroeconomicworkinggrouptounderstandtheimplicationsoffiscaldecisionsonothersectorsofthe
economyandtoenhancecoordinationindecisionmakingbetweenvariousstakeholders.
45
The macroeconomic forecasts together with policies of the government and the reforms agenda are
presentedinshapeofBudgetStrategyPaper(BSP).ThisyeartheFinanceDivisionintendstodiscussthe
BSP with the provinces. While the 18th Amendment empowers the provinces to take fiscal decisions,
fiscal prudence can be achieved if the federal government and provincial governments collaborate on
decision making. Discussions with the provinces will help create a more realistic picture of the fiscal
deficit target and understanding the mechanisms required to achieve it. In addition, this year the
Finance Division intends to include the citizens of Pakistan in budget making process. They will be
encouragedtoprovidetheirinputsonthefiscaldecisionmakingandrecommendhowthegovernment
shouldprioritiesitsexpenditure.
XI.ii.
MediumtermBudgetEstimatesforServiceDelivery
Before the MTBF budget preparation system, the budget was prepared to present the resources
required for the upcoming year. While the budget thoroughly explained the budget required by each
organisationintheFederalGovernment,itdidnotpresenttheservicesthatwillbedeliveredbyusing
the resources. The MediumTerm Budgetary Framework (MTBF) initiative requires the Ministries to
prepareanoutputbasedbudget.TheoutputsaretheServicesdeliveredbytheMinistries.TheMTBF
outputbasedbudgetingalsorequirestheMinistriestopresenttheoutcomes.Theoutcomesarethe
effects of Services on the target population. The focus on Service delivery will be enhanced once the
budgetispreparedandappropriatedbyServicesandmonitoringoftheServicesdeliveryperformance
takesplaceonannualbasis.
XII.
EconomicReforms
Rigidity in government expenditure and losses suffered by many public sector enterprises has been
persistentimpedimentstoattainingfiscalsustainability.Withtheaimofcreatingfiscalspaceandeasing
pressureonbudgetaryresources,GovernmentofPakistanhasinitiatedanumberofeconomicreforms.
Successful implementation of these reforms will enhance resource mobilization while strengthening
principlesofprudentexpendituremanagementinpublicfinances.
46
XII.i.
Austerity(ExpenditureReform)Plan
To stem the growth in government expenditure, the government has formulated an Austerity Plan
which is under implementation. The key objective of the plan is to provide a road map to achieve
austereandcosteffectivegovernancebasedonthefollowingprinciples:
i)RationalizationofExpenditure;
ii)OptimizationofAvailableResources;
iii)ProcessReengineering;and
iv)EfficiencyofOperation
Rationalization of government size through a reduction in the number of Federal Ministries and
devolution of subjects to the provinces is being undertaken. The budgetary process is undergoing a
major improvement by increased parliamentary oversight, limit on appropriations and introduction of
professionalfinancialmanagement.TheprocessofPSDPistobeoverhauledbyintroducingbenchmarks
fortimelycompletionandprogramauditsamongotherinitiatives.AppointmentofprofessionalChief
Finance and Accounting Officers (CFAO) would be made in each Ministry/Division in place of existing
systemofFinancialAdvisorsorganizationofFinanceDivisioninordertoimprovefinancialmanagement
andplanning.
XII.ii.
RestructuringOfPublicSectorEnterprises
Acknowledging the severe burden placed by loss making PSEs on the government budget, a Cabinet
Committee on Restructuring (CCOR) has been constituted and given the mandate to formulate and
implementarestructuringplanforPSEs.TheplanenvisagesarestructuringofPublicSectorEnterprises
for value creation and ultimate divestment of strategic interest to the private sector. Restructuring of
PSEs may be viewed in terms of a roadmap for improved economic governance. An institutional
frameworkhasbeenputinplacetocarryforwardrestructuringeffort.
47
XII.iii.
PowerSectorReform
Implementationofthepowersectorplanisunderway.BoardsofDirectors(BODs)ofDISCOs,GENCOs
andNTDChavebeendissolvedinordertoreconstituteprofessionalandautonomousBODsasperthe
guidelines of CCOR. Auditing of power sector companies has been initiated to create financial
improvement.Twoconferencesforknowledgesharingandimprovingcommunicationamongthepower
sectorhavebeenheld.AtthesametimethedissolutionofPEPCOismovingaheadandhumanresource
transferplanofPEPCOemployeesisunderway.
WorkonNEPRAamendmenttoempowerNEPRAtonotifyalltariffsasdeterminedfromJuly2011isin
progress.Additionally,monthlytariffadjustmentstoreachcostrecoverylevelshavebeenundertaken.
ThiswillensurefinancialviabilityfortheDISCOs.Theaboveandotherrestructuringeffortsofthepower
sector are expected to contribute in improving financial, governance and business viability of power
sectorcompanies.Theeffortistodealwithregulatory,structuralaswellasfinancialissuesofthesector
toensurestabilizationtakingaholisticviewofthesector.These reformswillhavethedualbenefitof
increasing the efficiency of the countrys power sector, while limiting the drain placed on budgetary
resources.
XIII. ReportonCompliancewithFRDLAct2005
TheFiscalResponsibilityandDebtLimitation(FRDL)Act,2005wasapprovedon13June2005.TheFRDL
Act,2005requiresthatthefederalgovernmenttakemeasurestoreducetotalpublicdebtandmaintain
it within prudent limits thereof. The following sections identifies the various limits prescribed by the
FRDLAct2005andreportsonprogressthereof.
TheFRDLAct2005requiresthefollowing:
(1) Reducing the revenue deficit to nil not later than the thirtieth June, 2008 and thereafter
maintainingarevenuesurplus
AsofJune30,2010,therevenuedeficitapproximatedtoRs.308billionor2.1percentofGDP.
RevenueBalance
48
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
1.5%
0.3%
0.7%
0.6%
0.9%
3.5%
1.5%
2.1%
(2) Ensure that within a period of ten financial year, beginning from the first July, 2003 and
endingonthirtiethJune,2013,thetotalpublicdebtattheendofthetenthfinancialyeardoes
notexceedsixtypercentoftheestimatedgrossdomesticproductforthatyearandthereafter
maintainingthetotalpublicdebtbelowsixtypercentofgrossdomesticproductforanygiven
year.
Asof30thJune2010,thetotalpublicdebtstoodat60.6percentofGDP.Itmustbenotedherethatthe
limitof60percentoftotalpublicdebttoGDPisapplicablefromthefiscalyear201213onwards.
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
4,651
(Rs.Billion)
1,852
1,995
2,152
2,320
2,600
3,266
3,853
ForeignCurrencyDebt
1,771
1,816
1,913
2,038
2,201
2,778
3,776
4,243
TotalPublicDebt
3,623
3,810
4,065
4,357
4,802
6,044
7,629
8,894
GDP
4,876
5,641
6,500
7,623
8,673
10,243
12,739
14,668
TotalPublicDebt(as%ofGDP)
74.3
67.6
62.5
57.2
55.4
59.0
59.9
60.6
(3) Ensure that in every financial year, beginning from the first July, 2003, and ending on the
thirtiethJune2013,thetotalpublicdebtisreducedbynolessthantwoandahalfpercentof
the estimated gross domestic product for any given year, provided that social and poverty
alleviation related expenditures are not reduced below 4.5 percent of the estimated gross
domesticproductforanygivenyearandbudgetaryallocationtoeducationandhealth,willbe
doubled from the existing level in terms of percentage of gross domestic product during the
nexttenyears.
Duringthefiscalyear200910,0.7percentagepointofGDPwasaddedtothestockoftotalpublicdebt.
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
Socialsectorandpovertyrelatedexpenditure
(as%ofGDP)
3.6
3.9
4.2
4.9
4.9
9.3
6.9
6.7
Expenditureoneducation(as%ofGDP)
1.6
1.7
1.8
1.9
1.9
1.8
1.9
1.8
Expenditureonhealth(as%ofGDP)
0.5
0.5
0.5
0.5
0.6
0.6
0.7
0.8
Social and poverty alleviation related expenditure (as given by propoor budgetary expenditure
excluding nondevelopment outlays on law and order) remained at 6.72 percent of GDP in 200910.
Additionally, expenditure on health and education in 200910 amounted to 0.76 percent and 1.77
percentofGDPrespectively.
49
(4) Notissuenewguarantees,includingthoseforrupeelending,bonds,ratesofreturn,output
purchase agreements and all other claims and commitments that may be prescribed, from
timetotime,foranyamountexceedingtwopercentoftheestimatedgrossdomesticproduct
inanyfinancialyear:Providedthattherenewalofexistingguaranteesshallbeconsideredas
issuinganewguarantee.
New guarantees issued by the government in 200910 amounted to Rs. 224 billion or 1.53 percent of
GDP. Moreover, the government rolled over existing guarantees equal to 0.71 percent of GDP issued
against borrowing of different power sector entities to facilitate transfer of their loans into Power
HoldingPvt.Ltd.Thegovernmentalsoissuedletterofcomfortequivalentto0.52percentofGDPagainst
commodityfinance.
Since last few years, Pakistan is faced with serious challenges both at the domestic and international
fronts. Serious internal security situation, energy shortages, rehabilitation of IDPs, severe floods and
risinginflationcombinedwithglobaleconomic&creditcrisesandhighercommoditypriceshaveallput
enormouspressureongovernmentslimitedfiscalresources.Giventheseverityoftheseconstraints,the
government has been able to manage the fiscal deficits at reasonable levels though was unable to
totally comply with some provisions of FRDL Act 2005. However, the government remains fully
committedtoadheretoalltheprovisionsofFRDLAct2005infuture.
XIV. ConcludingRemarks
Pakistansfiscaldeficitincreasedto6.3percentofGDPinFY200910againstthebudgetedtargetof4.9
percentwhereasfiscaldeficitforFY200809was5.3percent.Lowerrevenuecollectionandhigherthan
budgetedexpenditureonsecurityandsubsidieswerethemainreasonsforthisundesirableincreasein
fiscaldeficit. DevelopmentsduringFY2010reversedthemacroeconomicconsolidationachievedinthe
lastfiscalyear.
Revenue collection remained weak throughout the year. Pakistans taxtoGDP ratio has slightly
improvedto10.0percentofGDPinFY200910comparedto9.5percentinFY200809,thoughstilllower
than desired. Growth in real revenues is a prerequisite to successful implementation of the
governments socioeconomic targets. The performance of Pakistans revenue collection in real terms
has been weak at best i.e. 2.0 percent in the fiscal year 200910. Furthermore, real growth of 7.9
percent in expenditure has been higher than the real growth of revenues which has had significant
50
consequencesforthefiscaldeficit.Persistentdivergencebetweengrowthofrevenuesandexpenditure
hasledtoescalatingrevenuedeficittothetuneof2.1percentofGDP.Theprimarybalancealsoremains
in deficit by 2.0 percent of GDP. Going forward, significant growth in real revenues is essential to
maintainfiscalsustainability,andtofinancethegovernmentseconomicplans.
InlastthreefiscalyearsPakistansfiscaldeficithasaveraged6.4percentofGDPwhichhasresultedin
declining national savings and investments in the economy, jeopardizing the economic and social
stability of the country. FY200910 was the third consecutive year of double digit inflation and higher
fiscal deficits have contributed towards this rise. The energy shortages and security concerns have
considerably reduced the nondebt creating external flows; fortunately a sharp narrowing of current
account deficit has deferred the pressure on balance of payment in the presence of higher deficits.
Increase in commodity prices in the wake of global economic recovery and drying external finance
account flows will pose serious risk to external account sustainability of the country. With the
internationalpriceofoilrising,itisimperativethatthegovernmentmaintainsitsmarketbasedpricing
policyforPOLproductsandavoidadditionalstrainsonlimitedbudgetaryresources.Governmentshould
takecorrectivemeasurestoaugmenttheforeigncurrencyinflows.
Thefiscalpolicymustbalancetheneedtosupportastillfragileeconomicrecoveryandthepotentialfor
financial stress, underscoring the criticality of firm dedication to credible strategies that lower fiscal
deficits over time and where funding pressures are present or seem imminent, supported by upfront
measures.
Fiscal policy should explore opportunities for augmenting the resource envelop rather than cutting
expenses.Atthesametime,expenditureshouldberationalisedandnonproductiveoutlaysshouldbe
curtailed that will bring improvement in the national investment climate, saving incentives and
opportunities, and competitiveness of the real economy. Institutionalization of policy coordination
cannot be overemphasized for growth and sustainability of national economy. The pool of national
savings must be enhanced, allowing for required investments to be made without putting the
governments fiscal position at risk. Positive real interest rates are essential as they will attract
substantial funds currently outside the purview of the official monetary system. Moreover, budgetary
borrowing options need to be revisited to ensure that financing of future deficits does not dilute
monetarypolicyseffortstokeepmoneysupplyincheckandtackleinflation.
51
Thereisaneedtoreorientpolicytowardsresourcemanagement.Successfulresourcemanagement,as
opposedtoadjustmentsmadeinresponsetocrises,willplayafundamentalroleinaddressingstructural
weaknessesoftheeconomy.Suchpolicyorientationwillalsolimittheneedforadjustmentsintimesof
distress as these adjustments pose serious implications for investmenthungry infrastructure
bottlenecks. Going forward, we need to strike a balance in development expenditure on account of
infrastructureandimprovementinsocialsectorindicatorstoalignexpenditurewithsocialresponsibility.
Aconsiderabledrainongovernmentresourceshasbeenanincreasingburdenofcontingentliabilitiesin
order to cover the losses incurred by public sector enterprises (PSEs). Accordingly, the contingent
responsibilityofthegovernmenthas,mostofthetimes,transformedtoarealityasthesebodieslacked
thecapacitytoservicetheirobligations.Inordertoallowefficientfiscaladjustments,therootcauseof
thesepublicsectorentitieslossesmustbetackledbycomprehensiverestructuringandintroductionof
corporatemanagementstructures,ratherthanabsorbingtheirliabilitiesintothegovernmentbudget.In
essence,encouragementtoexploreanddevelopalternatefinancingmechanismsisaviablesolutionto
this problem. Increasing the capacity for financial management as well as ensuring private sector
participationwillallowforcostefficientaccesstofundstocovertheobligationsofthePSEs,aswellas
tofinanceinfrastructureupgrades.
ForPakistan,adauntingfiscalchallengeliesahead,particularlyaftertherecentdevastatingfloodsthat
have left the policy makers with little options to undertake crucial fiscal adjustment measures. Put it
another way, a balancing act lies ahead for fiscal policy in creating fiscal space while meeting new
demands on the budget. The focus for creating fiscal space should be on revenue mobilization and
optimization of the composition of budgetary expenditure by reprioritizing public expenditure,
improvingtheefficiencyofspending,aswellasreformswhichcouldhelplimitfuturefiscalpressures.
52
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PA K I S TA N

FISCAL POLICY STATEMENT 2 0 1 0 - 1 1

Debt Policy Coordination Office

Reduction of GST rate on telecommunication from 21 percent to 19.5 percent negatively

Sales Tax atImportStage:Salestaxonimportsisasignificantcomponentoffederaltaxreceipts.The

Realized Share Share

Realized Share Share

transferred the bank loans

Prov.Actual Budget Revised

social safety nets had been abysmally

combined total of only Rs. 40.2 billion

environment sector (See Table 17).

vulnerable remains a challenge. A

a slow progress in JulySeptember

of Coalition Support Fund. A

indicators have improved

financing mix towards

higher domestic interest

rates on account of tight

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