Talking about the fiscal deficit, we first need to look at the bigger picture ‘why are we in this situation and why the government is recurring fiscal deficits’. The previous government revised the fiscal deficit from 4.9% to 4.2%, but in real it stands at 7.2%. The problem with Pakistan is that like any other private entity, the revenues ideally should be greater than the expenses/cost.
While in our case, the fiscal deficit is a repetitive trait. For a developing country, deficit is not all bad, because only then a country grows. For an emerging market like Pakistan, a deficit of 3.5-4% is healthy, but we currently lie beyond that. As per the budget outline, the debt-to-GDP ratio is approximately 80%.
The revenue leakages, such as problems in WAPDA transmission lines and energy shortages require regulation.
Unfortunately, most of our expenditures are permanent in nature, 43% of the budget goes into interest payments of debt we have. In the last 5-10years, the financial debt on Pakistan has increased more than the total debt from the first 60years of independence. The accumulating financial debt also comes from developmental projects such as CPEC.
In 2007, the debt-to-GDP ratio was about 54%, which is no more possible. However, the government should try to bring the debt-to-GDP ratio down to 62-65% in the next 4-5years. This way, one problem will be taken care of. The expenditure also includes cost of running a government, defense expenditure and the Public Sector Development Programme (PSDP), which is about 8-10% of the total budget outline.
In the end, education, health and welfare is left with less than 3% of the total budget. Until and unless, this 3% is pulled up to a 10%, problems of lack of education, health care and poverty eradication cannot be dealt with. The PTI government needs to further decrease its expenses, while tax collection is the biggest of challenges in terms of revenue.
The tax-to-GDP ratio is about 10.5%, while for a break-even; a country like Pakistan requires approximately 16.5% of a tax-to-GDP ratio. There are no sacred cows anymore, and the government is moving in the right direction to increase revenue driven by taxation. The entire country has a total of 1.3million taxpayers, majority of which come under direct taxation.
Because of the previous government’s reduced taxation policy, and no taxes imposed on a 100,000 income/ salary, the total number of direct taxpayers w a s reduced from approximately 1.4 million to 0.5 million only. The tax base needs to be increased by imposing taxes on retail and agriculture, etc. The large informal sector and undocumented economy needs to be channeled into becoming taxpayers.
The banks only overlook 35% of the total currency circulation in Pakistan, putting the remaining 65% of the economy in the informal sector. Enlarging the tax net and providing tax incentives is what the country really needs. Pakistan has a GDP size of USD310 billion, making it the 47th largest economy in the world. Imagine the 65% of the informal sector added to the current GDP.
The accumulating financial debt also comes from developmental projects such as CPEC.
This will increase the country’s economy by many folds. The key is to revamp FBR and taxation infrastructure. The agricultural sector is currently contributing only 22%, while the industrial sector is way below that. Services sector is the one major contributor. Even so, Pakistan’s agricultural sector is ranked among the top 10 for wheat, cotton, rice and sugar cane.
This means we need to look into our growth drivers, and enable and incentivize each industry to contribute more to the GDP. Informal sector of livestock and dairy has great potential for Pakistan, being ranked as the 5th worldwide. Technological awareness and skilled labor can help maximize the potential of each sector. CPEC is deemed as the game-changer.
In the 2nd to 3rd phase of the project, the government should be able to futuristically calculate the self-liquidation of these investments. Gwadar port must be completed and become operational in 3 to 4years. Massive industrialization needs to take place in developing Special Economic Zone (SEZs).
Pakistan needs to bring in investments not just from China, but also from the Middle East, Central Asia and Europe to help the industrial sector develop. The revenue leakages, such as problems in WAPDA transmission lines and energy shortages require regulation.
State-owned enterprises are losing millions of rupees each year, increasing the deficit. The PTI government has some hefty challenges ahead of it, and the financial layout needs to address each of these loopholes by suggesting vigorous counter-measures.
Mr. Jawad Majid Khan, is currently the Group Head Emaan Islamic Banking at Silk Bank. From 2005 till 2011, he was the Country Head for Distribution & SME for Dubai Islamic Bank (2005-2011). He is also on the Board of Advisors for the Youth Economic Forum, MediaClicks and Centre of Discussions & Solutions (CDS).Mr. Khan is a graduate in Economics with specialization in Development Economics and International Monetary Policy from Quaid-e-Azam University, Islamabad.