NationalVOLUME 15 ISSUE # 10

Economic challenges and opportunities in 2020

According to the State Bank, during FY19 there was a decline in revenue collection and steep rise in current expenditures which led to deterioration in all major fiscal indicators. The overall budget deficit during the year stood at a historic high of 8.9 percent of GDP, which was also in excess of the 4.9 percent target set in the budget 2018- 19.

Needless to say, the two most challenging areas of our economy are debt servicing and high government expenditure. In 2018 and 2019, expenditure amounted to over 21 percent of GDP. On account of debt servicing in FY 2018, actual expenditure was Rs 1,987 billion against the budgeted figure of Rs 1,620 billion. The allocation for the current fiscal year is Rs 2,891 billion, 78% higher than the last year. Even if the Federal Board of Revenue (FBR) collects Rs 5,000 billion against the originally fixed target of Rs 5,503 billion, after the share of provinces under the 7th National Finance Commission (NFC) Award, net tax collection available to the federal government will be around Rs 2,400 billion, that would be short by Rs 491 billion for debt servicing of Rs 2,891 billion alone.

To recall, the high fiscal deficit of 8.9% of GDP for fiscal year 2018-19 posed a serious challenge for the PTI government on assumption of power. It also inherited record public debt, trade and current account deficits. The short-sighted economic policies of the PM-N left the PTI government with no choice but to seek yet another bailout from the International Monetary Fund (IMF) and resort to massive rupee devaluation along with a high interest rate to counter riding inflation.

Driven by the IMF, the trade deficit fell from $11.7 billion from July-October of FY18-19 to $7.8 billion during the same period of this year and the current account deficit declined to $1 billion a month (in FY19) compared to $2 billion a month last year. But despite the high interest rate, inflation remained in double-digit and hit 12.28% in November 2019, from 11.08% in October and public debt rose to Rs 36 trillion.

The tragedy is that the FBR has failed to perform as per needs. In 2018-19, it was assigned the target of Rs 4,435 billion that was later reduced to Rs 4013 billion and then to Rs 3,935 billion. But it collected only Rs 3,828.5 billion which was 0.4% lower than the collection of 2017-18. This year, the target of Rs 5,503 billion is unlikely to be achieved.

It is an undisputed fact that the FBR has not only miserably failed to tap the real tax potential despite imposing all kinds of oppressive taxes, it has impeded Pakistan’s growth by anti-business actions during 2013-18. The previous government gave a free hand to tax officials to block bona fide refunds. Exporters and other taxpayers, still waiting for refunds, have been denied their lawful right of payments/compensation within the stipulated time. Had we concentrated on growth above 6%, as done by China, India and even Bangladesh in the region, we could have avoided the present fiscal and economic mess. Higher growth yields higher taxes and harsh taxation only hampers business expansion.

One problem is that in Pakistan the privileged classes pay no or meagre taxes on their colossal incomes and wealth but the poor are subjected to all kinds of oppressive taxes. Adding insult to injury, they get nothing in return – basic facilities of health, education, transport and housing.

We need a new economic policy aimed at attracting investment, encouraging savings and facilitating capital formation in the private sector for job creations, innovations and rapid economic development. Our policymakers have failed to achieve these goals, for them taxation means raising more money and nothing else. Overemphasis on regressive taxation by the successive governments could not avert record fiscal, trade and current account deficits.

For achieving fiscal stabilization/consolidation in Pakistan, it is imperative that the right to levy tax on income, including agricultural income, should be given to the parliament. There should be a single tax agency to collect all taxes for the federation and federating units. The share will be distributed as per the Constitution and provinces are wrongly opposing it as centralisation of taxation. It is, in fact, the federalisation of tax collection in the wake of the 18th Constitutional Amendment.

The flawed economic policies of the past included reckless borrowing, wasteful expenses, heavy taxation on imports, no measures for export-led growth, rather anti-export actions, especially blocking of refunds of exporters, and regressive taxation. As a result, we witnessed record trade and current account deficits coupled with a fiscal deficit of 8.9% of GDP in 2018-19. The last fiscal year was a disaster as highlighted by the State Bank in the annual report 2018-19. One hopes this trend will be reversed in 2020, as positive signs on all macro-economic fronts are now emerging.

We need to put the country back to a higher growth path in the coming years after achieving stabilisation and overcoming the chronic challenges on the external front. Let us all pray and work for a prosperous Pakistan in 2020 and beyond.