The tax base has broadened significantly in the first year of the Pakistan Tehreek-i-Insaf (PTI) government, though the country’s tax-to-GDP ratio shrank to 11.6pc in the last fiscal year from 13pc a year ago. The government suffered a record 8.9pc fiscal deficit in its first year in power, the highest in the country’s history. However, economic managers still claim the country has been put to the right path and results of their policies will start bearing fruit in few months.
Data released by the Finance Ministry recently says the overall tax-to-GDP ratio flattened out to 12.7pc in 2018-19, compared to 15.2pc in the last year of the PML-N government in 2017-18. Tax revenues remained unchanged and did not show any improvement in absolute terms and instead fell to 11.6pc of GDP in 2018-19, when compared to 13pc in 2017-18. Non-tax revenues last year amounted to Rs427b, almost 44pc lower than Rs760b in 2017-18. The non-tax revenue amounted to just 1.1pc of GDP, exactly half the 2.2pc of GDP in 2017-18, which has been the lowest since 2001-02. Total expenditure, on the other hand, reached 21.6pc of GDP in 2018-19, slightly lower than 21.8pc of GDP in 2017-18. In absolute numbers, the current expenditure amounted to Rs8.345 trillion compared to Rs7.488t of the previous year. Current expenditure was reported at 18.4pc of GDP for the year ending June 30, 2019, compared to 17pc of GDP in FY2018. In absolute numbers, the current expenditure was posted at Rs7.104t compared to Rs5.85t of the previous year, with an increase of 21.3pc. On the other hand, development expenditure and net lending amounted to 3.2pc of GDP – the lowest since 2008-09. A year earlier, development expenditure and net lending had stood at 4.7pc of GDP.
Despite the bad indicators, the government claims the economy is improving steadily. State Bank of Pakistan (SBP) Governor Reza Baqir told business leaders in Lahore recently that the reason behind the increasing trade deficit in recent years was the absence of a market-based exchange rate, and tried to reassure them that the economy was gradually improving. “In previous years, whenever the trade deficit increased, the exchange rate did not adjust as it was kept fixed, which led to increase in the deficit since there was an intervention in the system,” he claimed.
The government has brought the exchange rate in the market system by devising a policy that ensures monitoring of supply and demand movements. The country’s exports have increased by 10 to 20pc after a sustained policy focus and the economic condition is gradually improving after reforms were introduced. About six months ago, foreign exchange reserves of the country were not enough to meet its external debt service obligations, but the situation has changed after reforms and an agreement with the IMF.
The government’s claim of stability is also confirmed by the Standard & Poor’s rating agency, which affirmed Pakistan’s “B-” long-term and “B” short-term sovereign rating while maintaining the long-term outlook at “stable” rating. The New York-based rating agency also affirmed “B-” long-term issue rating on Pakistan’s senior unsecured debt and sukuk trust certificates. The S&P said its stable outlook reflected its expectations that funding from the IMF and other partners would be sufficient for Pakistan to meet its considerable external obligations over the next one to two years.
It said Pakistan’s rating remained constrained by a narrow tax base and domestic and external security risks, which continue to be high. It forecast Pakistan’s economic growth to slow down to 2.4pc of the GDP during the current fiscal year — a 12-year low. Taken together with the country’s relatively fast population growth of approximately 2pc per year, real per capita economic growth will fall to an anaemic 0.4pc. That will contribute to a decline in the country’s 10-year weighted average per capita growth to 1.8pc, below the global average of 2.3pc for economies at a similar level of income. The agency forecast GDP per capita to fall to just above $1,200 by the end of the current fiscal year, versus $1,565 in fiscal 2017-2018 owing to over 25pc exchange rate loss. Although the country’s security situation has gradually improved over the recent years, yet ongoing vulnerabilities weaken the government’s effectiveness and weigh on the business climate, it said, adding the policy choices had weakened support for sustainable public finances and balanced economic growth. “Corruption level is still very high and the sovereign (Pakistan) ranks poorly on Ease of Doing Business. The country faces a long-standing risk of conflict with neighbouring states or non-state groups,” it observed.
The government may have found some fiscal space on the external front, yet the situation for the common people is very difficult as inflation has jumped to 10.5pc for the month of August. According to the Pakistan Bureau of Statistics, Consumer Price Index (CPI) inflation increased by 10.5pc on year-on-year basis in August 2019, as compared to an increase of 8.4pc in the previous month and 6.2pc in August 2018. The data shows that the price hike from July to August has been led by chicken, onion, tomato and vegetables, all of which saw a double-digit price hike in percentage terms in urban as well as rural areas. The only item that saw a double-digit percentage decline was fresh fruits. But compared to August last year, the price increases are much sharper. Gas prices showed a 114pc increase in urban areas, followed by chicken at 75pc and onion at 61pc. Rural areas saw the biggest price surge in food items, like onions, chicken and pulses during the period.
The government claims it is paying the loans obtained by the previous governments and it is unfair to blame it for Pakistan’s economic woes. It may be right, but its policies have hit the common people hard, who find it hard to make both ends meet. The government can, at least, check an artificial price hike in the country. It will not cost a penny, but could provide huge relief to people.