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BUDGETS OF THE ECONOMY OF PAKISTAN

The Era of 1990s

What is Budget? Budget?   

The budget is the principal instrument for the implementation of economic and financial policies of the government. It is indicative of the resource mobilization effort of the government. On the expenditure side it reflects the aims and objectives of the State. As a matter of fact, no aspect of economic activity can be escaped from the budgetary policy. policy.

What is Budget? 

Hence budget is not only a statement of revenues and expenditure for any given period but also reveals the structure and priorities of the economy at a given time. The political credibility of a government is judged by its ability to manage its finances 

Salient Features of Budget in Historical Perspectives 

The relative shares of various heads of revenues and expenditures have undergone a change over a period of time. In the initial years of Pakistan history, a balance was maintained between total expenditure and total revenue. Fiscal deficit was targeted to meet through internal sources via imposing taxes.  

Salient Features of Budget in Historical Perspectives 

Initially, an overwhelming reliance was placed on indirect taxes, particularly on customs which was expected to yield Rs 2295 lakhs or 43.7% of the total revenues. In 2001-2002 about 27% percent of revenue receipts were 2001collected from this source. Pakistan seems to have made considerable headway in collecting indirect taxes from sales tax and excise duty. There had always been a need felt for allocating a huge amount on defence expenditure due to Pakistan¶s geographical position.   

Salient Features of Budget 

Another important change worth noticeable is the item of debt servicing. In 19481948-49 debt servicing was minor one, claiming only 3.8% of total expenditure. With the tendency of successive governments to spend more than resources, debt servicing in 2001-02 was 200153 percent of total expenditure 

FISCAL PERFORMANCE

THE ERA OF 1990s

Table 1: Fiscal Indicators as percent of GDP (MP) (MP)
Year GDP Real Growth % 5.4 7.6 2.1 4.4 5.1 6.6 1.7 3.5 4.2 3.9 2.4 3.6 Fiscal Deficit 8.8 7.5 8.1 5.9 5.6 6.5 6.4 7.7 6.1 6.5 5.3 5.7 Expenditure Revenue

19901990-91 19911991-92 19921992-93 19931993-94 19941994-95 19951995-96 19961996-97 19971997-98 19981998-99 19991999-00 20002000-01 20012001-02

25.7 26.7 26.2 23.4 22.9 24.4 22.3 23.7 22.0 23.6 21.3 22.5

16.9 19.2 18.1 17.5 17.3 17.9 15.8 16.0 15.9 17.1 16.0 16.8

Table 2: Structure of Federal Tax Revenue
% share in total taxes
Year Tax Revenue (As a% of GDP Direct Taxes Indirect Taxes

19901990-91 19911991-92 19921992-93 19931993-94 19941994-95 19951995-96 19961996-97 19971997-98 19981998-99 19991999-00 20002000-01 20012001-02

11.0 12.0 11.0 11.0 12.0 13.0 12.0 11.0 10.0 11.0 11.3 10.9

18.0 20.4 24.0 25.1 27.4 29.1 30.1 35.0 35.8 32.5 32.3 35.4

82.0 79.6 76.0 74.9 72.6 70.9 69.9 65.0 64.2 67.5 67.7 64.6

Fiscal performance in the 1990s 

Table 1 shows the serious macroeconomics imbalances in Pakistan caused primarily by the persistence of large fiscal deficit. During the 1990s, fiscal deficit averaged almost 7.0 percent of GDP despite cuts in development expenditure by almost 3.5 percentage points of GDP, causing public debt to reach unsustainable level by the end of the 1990s. The growing burden of debt servicing over the years not only made fiscal adjustment more difficult but crowded out private investment to decline.  

Fiscal performance in the 1990s    

The overall investment declined by 3.0 percent of GDP in the 1990s and caused growth to decelerate. The additional resource mobilization through improvements in tax structure and administration fell short of expectations in the country because of inherent weaknesses in tax structure. The composition of tax revenue has changed significantly. The share of direct taxes had doubled from 18% in 1990 to 35% in 2002, and the share of indirect taxes has correspondingly declined from 82% to 65%. (Table 2)

Consolidated Budgets 19901990-91, 1995-96, 2001-02 19952001- 

Three years have been selected, 19901990-91, 1995-96 and 2001-02 to 19952001compare the structure of the federal budget.

Budgets at Glance
B udget s at Gl ance ( i n bi l l i ons) 838 8 7 4 387 4 3 47 88

x e tu e nd ee e nu e ct

Y ear

Budgets at Glance
Structure of Expenditue % share

.

.

.

% Shar e . .

.

Y ear

u ent

end t u e

e elopment

pend t u e

Structure of Current Expenditure % share
19901990-91 1995-96 2001-02 19952001Defence Interest payments Current Subsidies Social, eco. community service General Admin. 34.6 26.8 5.6 19.3 6.8 6.9 100 (183.66) 28.9 31.6 1.7 18.9 8.4 10.5 100.0 (398.5) 22.6 38.9 7.9 15.9 100.0 (661.0)

All Others Total current Exp (Rs billion)

Analysis of Budgets Deficit: Mother of Evils   

Budget analysis is done keeping in view the constraint of budget planners. The focus of all budgets planners and fiscal measures was to achieve economic growth because it is the economic growth factor that helps to address other issues. Pakistan¶s economy faces a number of economic problems. But the most pressing out of them are twin deficits i.e. fiscal deficit and BOP deficit. Fiscal deficit has lot to do with the revenue receipts and BOP deficit has much to do with the trade deficit and obligations to be met on account of foreign debt payments.

Analysis of Budgets Deficit: Mother of Evils 

The magnitude of deficit was 5.8%, 5%, and 5.7% of GDP in 1990-91, 1995-96 19901995and 2001-02 respectively. Despite the 2001efforts by the government to reduce the deficit no success yet has been achieved. As a consequence, the government¶s debt and the associated debt servicing has grown at a phenomenal rate. 

Deficit Financing   

Deficit financing is met through borrowing from internal as well external sources. External borrowing has tremendously increased from 17.7 billion in 1995-96 to 1995148.0 billion in 2001-02 thus registering 2001about 8% growth over last six years. The present government envisages to dilute the debt trap in medium time frame of 3-4 years. 3-

Deficit Financing    

High debt servicing is squeezing all sorts of expenditure ranging from development programs to defence, health, and expenditure on education. Deficit financing is also met through internal borrowing. Domestic borrowing as a percentage of GDP has declined over a period of time. This declining trend may be due to success of the debt management policy evolved in 1991-92 and tight monetary 1991policy in the country.

Current Expenditure 

Total expenditure is composed of current expenditure and development expenditure. Current expenditure is mainly comprised of defence, interest payments, economic social and community services, general administration and current subsidies. It is evident from the figures that the ratio of current expenditure to GDP has increased over a period of time. The hike in current expenditure is mainly due to the increase in the % share of interest payments which have jumped from 26.8% in 1990-91 to 38.9% in 2001-02. 19902001-  

Development Expenditure 

The share of Development expenditure to total expenditure has shown a downward trend. It was 6.2% of GDP in 19901990-91 and declined to 3.4% in 2001-02. 2001These trends show that the loans incurred to maintain the ballooning governmental apparatus have reached a point where debt servicing on past loans consumes more than half the government revenue. At the same time, the ability of the government to fulfill its essential function of overcoming poverty have been severely undermined. Cut in development expenditure rules out the high claims of the government to eradicate poverty via poverty alleviation programs. Social sector has been ignored thus mounting the miseries of common men  

Tax Policy and Administration   

The percentage share of tax to GDP has almost remained constant throughout 1990s (almost 11%). In his budget speech of 2001-02, Finance 2001Minister, Mr Shaukat Aziz admitted that both tax policy and administration have failed to inspire legitimate tax regime, and consequently governments¶ income constantly lagging behind its expenditure needs. Some measures were taken to administer taxes effectively by the Military government.

Tax Policy    

For example, in 2001 (a) CBR was equipped with a massive database to enhance its effectiveness in tax assessment. (b) A survey was conducted in to collect data of tax payers. Hence: A profile of 600,00 taxpayers was prepared and was made available to assessing authorities. It was claimed that number of taxpayers increased by 7.4% in 2001. The government¶s efforts on raising tax revenue through greater compliance rather than imposing taxes, broadening tax base, removing anomalies and withholding taxes and implementation of GST are appreciable.

Public Debt (Rs in billion)
Debt as % of GDP
Debt payable in Rupees 1990 1999 2000 2001 2002

42.8

47.3

50.1

50.4

44.0

Debt payable in Foreign exchange

48.9

52.2

53.0

60.6

52.8

Debt Burden 

During the fiscal year 2001-02, the government 2001has not only succeeded in arresting the rising trend in external debt but exchange rate appreciation to the extent of 7 percent has also helped in reducing debt payable in foreign exchange by more than 100 billion. The effort of reducing public debt must continue on a sustainable basis so as to attain debt sustainability in the medium to-to-long run. The to-tokey element of the strategy must include the continuation of fiscal consolidation and reduction in real cost of borrowing. 

Debt Burden 
 

Pakistan public debt burden is much higher than many developed and developing countries. For example, Pakistan public debt as percentage of total revenue stood at more than 600 percent in 1999 as compared to 385 percent in India, 291 percent in Malaysia, 286 percent in Phillipines, and 22 percent in Mexico. The most worrisome aspect of Pakistan¶s growing debt burden is that its debt servicing consumes almost 60 percent of government¶s total revenues and constrained governments¶ ability to devote its resources to growth enhancing investment, such as infrastructure and social and human capital.

Poverty Alleviation and Investors¶ Confidence 

The objective of the government was to satisfy the expectations of various segments of society ranging from investors, businessmen, traders, middle and salaried class and teeming millions who languish in the abject poverty. Military government took some measures to eradicate poverty. For example, small public works schemes-Kushschemes-KushHall Pakistan for which Rs 11.5 billion were released in 20012001-02, better management of Zakat fund, establishment of the Khushhali Bank. All these measures might be well meaning but they are hardly effective to alleviate poverty keeping in view its quantum prevailing in the country.  

Poverty Alleviation and Investors¶ Confidence   

The poverty has increased over then past three years. Some of the estimates place the incidence of poverty between 35 to 40 percent. The previous budgets have failed to address the issue of poverty alleviation in a comprehensive manner. Emphasis on increasing employment, output and social justice are the areas to work out.

Investment      

One must keep in mind the IMF¶s dictates under Structural and Stabilization Programs which place constraints on real growth in public investment via tight monetary policy. Total investment as % of GDP declined from 15.9 % in 2000-01 2000to 13.9% in 2001-02. 2001The events of Septmeber 11 and their aftermath greatly clouded the investment climate and affected investment sentiment. While investment has declined, the national savings as percentage of GDP have increased from 15.0 percent in 200-01 to 15.4% in 20020012001-02. Measures were taken by the government to rebuild the investor¶s confidence. The American Business Council of Pakistan (ABC) has proposed slashing down of different duties and taxes to encourage investment in the economy.

Growth Performance of Real Sector
1980¶s 6.1 4.1 8.2 8.2 6.6 18.6 16.8 9.1 7.8 14.7 7.7 1990-95 19904.9 4.2 4.8 4.7 5.1 19.5 18.0 8.6 9.4 14.9 13.9 1995-2000 19954.0 4.9 3.2 2.4 4.0 17.1 15.3 6.4 8.9 12.7 13.8 2001-02 20013.6 1.4 4.4 4.0 5.1 13.9 12.3 4.7 7.6 15.4 14.7

ercentage Change

A.GDP Growth Rate Agriculture Manufacturing Large Scale Mfg Services . Total Investment (As a % of GDP) Fixed Investment Public Investment Private Investment . National Saving . Domestic Saving

External and Internal Factors  

Global economic downturn further aggravated by the events of September 11, the prolonged drought conditions, and heightened tension with India are some of the major shocks which have prevented Pakistan achieving higher economic growth. Despite many difficulties, the real GDP growth staged a modest recovery to 3.6 % in 2001-02. 2001This growth is supported by a 1.4 %, 4.4% and 5.2% growth in agriculture, manufacturing and services, respectively.

Concluding Remarks   

On the basis of the analysis of the previous budgets it could be concluded that: The budget planners had a difficult assignment to perform while preparing a budget that should have addressed fiscal management problems, satisfied the donors and people as well. The budget proposals provide certain incentives to address longstanding issues directly or indirectly related to revive economy and achieve a high growth target.

Concluding Remarks     

Fiscal situation still continues to be the area of concern Concerted efforts will have to be made on the revenue and expenditure side to curtail deficit. This would require enlarged tax base, reduced leakages and improved collection. Expenditure, in particular non development expenditure will have to be kept in control as to reduce the deficit and reliance on borrowing. Measures must be taken to increase the rate of investment in the economy.