BUDGETS OF THE BUDGETS OF THE ECONOMY OF PAKISTANECONOMY OF PAKISTAN

The Era of 1990sThe Era of 1990s

What is BudgetWhat is Budget??

The budget is the principal The budget is the principal instrument for the implementation of instrument for the implementation of economic and financial policies of the economic and financial policies of the government.government.

It is indicative of the resource It is indicative of the resource mobilization effort of the government. mobilization effort of the government. On the expenditure side it reflects the On the expenditure side it reflects the aims and objectives of the State.aims and objectives of the State.

As a matter of fact, no aspect of As a matter of fact, no aspect of economic activity can be escaped economic activity can be escaped from the budgetary policyfrom the budgetary policy..

What is Budget?What is Budget?

Hence budget is not only a statement Hence budget is not only a statement of revenues and expenditure for any of revenues and expenditure for any given period but also reveals the given period but also reveals the structure and priorities of the structure and priorities of the economy at a given time. economy at a given time.

The political credibility of a The political credibility of a government is judged by its ability to government is judged by its ability to manage its financesmanage its finances

Salient Features of Budget in Salient Features of Budget in Historical PerspectivesHistorical Perspectives

The relative shares of various heads of revenues The relative shares of various heads of revenues and expenditures have undergone a change over and expenditures have undergone a change over a period of time. a period of time.

In the initial years of Pakistan history, a balance In the initial years of Pakistan history, a balance was maintained between total expenditure and was maintained between total expenditure and total revenue. total revenue.

Fiscal deficit was targeted to meet through Fiscal deficit was targeted to meet through internal sources via imposing taxes.internal sources via imposing taxes.

Salient Features of Budget in Salient Features of Budget in Historical PerspectivesHistorical Perspectives

Initially, an overwhelming reliance was placed on indirect Initially, an overwhelming reliance was placed on indirect taxes, particularly on customs which was expected to yield taxes, particularly on customs which was expected to yield Rs 2295 lakhs or 43.7% of the total revenues. Rs 2295 lakhs or 43.7% of the total revenues.

In 2001-2002 about 27% percent of revenue receipts were In 2001-2002 about 27% percent of revenue receipts were collected from this source. collected from this source.

Pakistan seems to have made considerable headway in Pakistan seems to have made considerable headway in collecting indirect taxes from sales tax and excise duty.collecting indirect taxes from sales tax and excise duty.

There had always been a need felt for allocating a huge There had always been a need felt for allocating a huge amount on defence expenditure due to Pakistan’s amount on defence expenditure due to Pakistan’s geographical position. geographical position.

Salient Features of BudgetSalient Features of Budget

Another important change worth Another important change worth noticeable is the item of debt servicing. In noticeable is the item of debt servicing. In 1948-49 debt servicing was minor one, 1948-49 debt servicing was minor one, claiming only 3.8% of total expenditure. claiming only 3.8% of total expenditure.

With the tendency of successive With the tendency of successive governments to spend more than governments to spend more than resources, debt servicing in 2001-02 was resources, debt servicing in 2001-02 was 53 percent of total expenditure53 percent of total expenditure

FISCAL PERFORMANCEFISCAL PERFORMANCE

THE ERA OF 1990sTHE ERA OF 1990s

Table 1: Fiscal Indicators as percent of GDP Table 1: Fiscal Indicators as percent of GDP (MP(MP))

YearYear GDP Real GDP Real GrowthGrowth

%%

Fiscal Fiscal DeficitDeficit

ExpenditureExpenditure RevenueRevenue

1990-911990-91

1991-921991-92

1992-931992-93

1993-941993-94

1994-951994-95

1995-961995-96

1996-971996-97

1997-981997-98

1998-991998-99

1999-001999-00

2000-012000-01

2001-022001-02

5.45.4

7.67.6

2.12.1

4.44.4

5.15.1

6.66.6

1.71.7

3.53.5

4.24.2

3.93.9

2.42.4

3.63.6

8.88.8

7.57.5

8.18.1

5.95.9

5.65.6

6.56.5

6.46.4

7.77.7

6.16.1

6.56.5

5.35.3

5.75.7

25.725.7

26.726.7

26.226.2

23.423.4

22.922.9

24.424.4

22.322.3

23.723.7

22.022.0

23.623.6

21.321.3

22.522.5

16.916.9

19.219.2

18.118.1

17.517.5

17.317.3

17.917.9

15.815.8

16.016.0

15.915.9

17.117.1

16.016.0

16.816.8

Table 2: Structure of Federal Tax RevenueTable 2: Structure of Federal Tax Revenue

% share in total taxes% share in total taxes

YearYear Tax Revenue Tax Revenue

(As a% of GDP(As a% of GDPDirect TaxesDirect Taxes Indirect TaxesIndirect Taxes

1990-911990-91

1991-921991-92

1992-931992-93

1993-941993-94

1994-951994-95

1995-961995-96

1996-971996-97

1997-981997-98

1998-991998-99

1999-001999-00

2000-012000-01

2001-022001-02

11.011.0

12.012.0

11.011.0

11.011.0

12.012.0

13.013.0

12.012.0

11.011.0

10.010.0

11.011.0

11.311.3

10.910.9

18.018.0

20.420.4

24.024.0

25.125.1

27.427.4

29.129.1

30.130.1

35.035.0

35.835.8

32.532.5

32.332.3

35.435.4

82.082.0

79.679.6

76.076.0

74.974.9

72.672.6

70.970.9

69.969.9

65.065.0

64.264.2

67.567.5

67.767.7

64.664.6

Fiscal performance in the 1990sFiscal performance in the 1990s

Table 1 shows the serious macroeconomics Table 1 shows the serious macroeconomics imbalances in Pakistan caused primarily by the imbalances in Pakistan caused primarily by the persistence of large fiscal deficit.persistence of large fiscal deficit.

During the 1990s, fiscal deficit averaged almost During the 1990s, fiscal deficit averaged almost 7.0 percent of GDP despite cuts in development 7.0 percent of GDP despite cuts in development expenditure by almost 3.5 percentage points of expenditure by almost 3.5 percentage points of GDP, causing public debt to reach unsustainable GDP, causing public debt to reach unsustainable level by the end of the 1990s.level by the end of the 1990s.

The growing burden of debt servicing over the The growing burden of debt servicing over the years not only made fiscal adjustment more years not only made fiscal adjustment more difficult but crowded out private investment to difficult but crowded out private investment to decline.decline.

Fiscal performance in the 1990sFiscal performance in the 1990s

The overall investment declined by 3.0 percent of The overall investment declined by 3.0 percent of GDP in the 1990s and caused growth to GDP in the 1990s and caused growth to decelerate. decelerate.

The additional resource mobilization through The additional resource mobilization through improvements in tax structure and administration improvements in tax structure and administration fell short of expectations in the country because fell short of expectations in the country because of inherent weaknesses in tax structure. of inherent weaknesses in tax structure.

The composition of tax revenue has changed The composition of tax revenue has changed significantly.significantly.

The share of direct taxes had doubled from 18% The share of direct taxes had doubled from 18% in 1990 to 35% in 2002, and the share of indirect in 1990 to 35% in 2002, and the share of indirect taxes has correspondingly declined from 82% to taxes has correspondingly declined from 82% to 65%. (Table 2)65%. (Table 2)

Consolidated BudgetsConsolidated Budgets1990-91, 1995-96, 2001-021990-91, 1995-96, 2001-02

Three years have been selected, Three years have been selected, 1990-91, 1995-96 and 2001-02 to 1990-91, 1995-96 and 2001-02 to compare the structure of the federal compare the structure of the federal budget.budget.

Budgets at GlanceBudgets at Glance

B udgets at G l anc e ( i n bi l l i ons )

247

495

838

188

387

625

59

109

212

0

100

200

300

400

500

600

700

800

900

1990-91 1995-96 2001-02

Y ear

Expenditure

Revenue

Deficit

Budgets at GlanceBudgets at Glance

74.5

25.5

80.5

19.5

84.1

15.9

0

10

20

30

40

50

60

70

80

90

100

% Share

1990-91 1995-96 2001-02

Year

Structure of Expenditue % share

Current Expenditure Development Expenditure

Structure of Current ExpenditureStructure of Current Expenditure % share % share1990-911990-91 1995-961995-96 2001-022001-02

DefenceDefence

Interest paymentsInterest payments

Current SubsidiesCurrent Subsidies

Social, eco. Social, eco.

community servicecommunity service

General Admin.General Admin.

All OthersAll Others

Total current ExpTotal current Exp

(Rs billion)(Rs billion)

34.634.6

26.826.8

5.65.6

19.319.3

6.86.8

6.96.9

100100

(183.66)(183.66)

28.928.9

31.631.6

1.71.7

18.918.9

8.48.4

10.510.5

100.0100.0

(398.5)(398.5)

22.622.6

38.938.9

--

--

7.97.9

15.915.9

100.0100.0

(661.0)(661.0)

Analysis of BudgetsAnalysis of BudgetsDeficit: Mother of EvilsDeficit: Mother of Evils

Budget analysis is done keeping in view the constraint Budget analysis is done keeping in view the constraint of budget planners. The focus of all budgets planners of budget planners. The focus of all budgets planners and fiscal measures was to achieve economic growth and fiscal measures was to achieve economic growth because it is the economic growth factor that helps to because it is the economic growth factor that helps to address other issues. address other issues.

Pakistan’s economy faces a number of economic Pakistan’s economy faces a number of economic problems. But the most pressing out of them are twin problems. But the most pressing out of them are twin deficits i.e. fiscal deficit and BOP deficit.deficits i.e. fiscal deficit and BOP deficit.

Fiscal deficit has lot to do with the revenue receipts Fiscal deficit has lot to do with the revenue receipts and BOP deficit has much to do with the trade deficit and BOP deficit has much to do with the trade deficit and obligations to be met on account of foreign debt and obligations to be met on account of foreign debt payments.payments.

Analysis of BudgetsAnalysis of BudgetsDeficit: Mother of EvilsDeficit: Mother of Evils

The magnitude of deficit was 5.8%, 5%, The magnitude of deficit was 5.8%, 5%, and 5.7% of GDP in 1990-91, 1995-96 and and 5.7% of GDP in 1990-91, 1995-96 and 2001-02 respectively. Despite the efforts 2001-02 respectively. Despite the efforts by the government to reduce the deficit no by the government to reduce the deficit no success yet has been achieved. success yet has been achieved.

As a consequence, the government’s debt As a consequence, the government’s debt

and the associated debt servicing has and the associated debt servicing has grown at a phenomenal rate. grown at a phenomenal rate.

Deficit FinancingDeficit Financing

Deficit financing is met through borrowing Deficit financing is met through borrowing from internal as well external sources. from internal as well external sources.

External borrowing has tremendously External borrowing has tremendously increased from 17.7 billion in 1995-96 to increased from 17.7 billion in 1995-96 to 148.0 billion in 2001-02 thus registering 148.0 billion in 2001-02 thus registering about 8% growth over last six years.about 8% growth over last six years.

The present government envisages to The present government envisages to dilute the debt trap in medium time frame dilute the debt trap in medium time frame of 3-4 years.of 3-4 years.

Deficit FinancingDeficit Financing High debt servicing is squeezing all sorts High debt servicing is squeezing all sorts

of expenditure ranging from development of expenditure ranging from development programs to defence, health, and programs to defence, health, and expenditure on education. expenditure on education.

Deficit financing is also met through Deficit financing is also met through internal borrowing.internal borrowing.

Domestic borrowing as a percentage of Domestic borrowing as a percentage of GDP has declined over a period of time. GDP has declined over a period of time.

This declining trend may be due to This declining trend may be due to success of the debt management policy success of the debt management policy evolved in 1991-92 and tight monetary evolved in 1991-92 and tight monetary policy in the country.policy in the country.

Current ExpenditureCurrent Expenditure Total expenditure is composed of current expenditure Total expenditure is composed of current expenditure

and development expenditure.and development expenditure.

Current expenditure is mainly comprised of defence, Current expenditure is mainly comprised of defence, interest payments, economic social and community interest payments, economic social and community services, general administration and current subsidies.services, general administration and current subsidies.

It is evident from the figures that the ratio of current It is evident from the figures that the ratio of current expenditure to GDP has increased over a period of time. expenditure to GDP has increased over a period of time. The hike in current expenditure is mainly due to the The hike in current expenditure is mainly due to the increase in the % share of interest payments which have increase in the % share of interest payments which have jumped from 26.8% in 1990-91 to 38.9% in 2001-02.jumped from 26.8% in 1990-91 to 38.9% in 2001-02.

Development ExpenditureDevelopment Expenditure The share of Development expenditure to total expenditure The share of Development expenditure to total expenditure

has shown a downward trend. It was 6.2% of GDP in 1990-has shown a downward trend. It was 6.2% of GDP in 1990-91 and declined to 3.4% in 2001-02.91 and declined to 3.4% in 2001-02.

These trends show that the loans incurred to maintain the These trends show that the loans incurred to maintain the ballooning governmental apparatus have reached a point ballooning governmental apparatus have reached a point where debt servicing on past loans consumes more than where debt servicing on past loans consumes more than half the government revenue. At the same time, the ability half the government revenue. At the same time, the ability of the government to fulfill its essential function of of the government to fulfill its essential function of overcoming poverty have been severely undermined. overcoming poverty have been severely undermined.

Cut in development expenditure rules out the high claims of Cut in development expenditure rules out the high claims of the government to eradicate poverty via poverty alleviation the government to eradicate poverty via poverty alleviation programs. Social sector has been ignored thus mounting programs. Social sector has been ignored thus mounting the miseries of common menthe miseries of common men

Tax Policy and Administration Tax Policy and Administration

The percentage share of tax to GDP has almost The percentage share of tax to GDP has almost remained constant throughout 1990s (almost remained constant throughout 1990s (almost 11%). 11%).

In his budget speech of 2001-02, Finance In his budget speech of 2001-02, Finance Minister, Mr Shaukat Aziz admitted that both tax Minister, Mr Shaukat Aziz admitted that both tax policy and administration have failed to inspire policy and administration have failed to inspire legitimate tax regime, and consequently legitimate tax regime, and consequently governments’ income constantly lagging behind governments’ income constantly lagging behind its expenditure needs. its expenditure needs.

Some measures were taken to administer taxes Some measures were taken to administer taxes effectively by the Military government. effectively by the Military government.

Tax PolicyTax Policy For example, in 2001 (a) CBR was equipped with For example, in 2001 (a) CBR was equipped with

a massive database to enhance its effectiveness a massive database to enhance its effectiveness in tax assessment. (b) A survey was conducted in tax assessment. (b) A survey was conducted in to collect data of tax payers. Hence:in to collect data of tax payers. Hence:

A profile of 600,00 taxpayers was prepared and A profile of 600,00 taxpayers was prepared and was made available to assessing authorities. was made available to assessing authorities.

It was claimed that number of taxpayers It was claimed that number of taxpayers increased by 7.4% in 2001.increased by 7.4% in 2001.

The government’s efforts on raising tax revenue The government’s efforts on raising tax revenue through greater compliance rather than imposing through greater compliance rather than imposing taxes, broadening tax base, removing anomalies taxes, broadening tax base, removing anomalies and withholding taxes and implementation of GST and withholding taxes and implementation of GST are appreciable. are appreciable.

Public Debt (Rs in billion)Public Debt (Rs in billion)

Debt as % Debt as % of GDPof GDP

19901990 19991999 20002000 20012001 20022002

Debt payable Debt payable in Rupees in Rupees

42.842.8 47.347.3 50.150.1 50.450.4 44.044.0

Debt payable Debt payable in Foreign in Foreign exchange exchange 48.948.9 52.252.2 53.053.0 60.660.6 52.852.8

Debt BurdenDebt Burden During the fiscal year 2001-02, the government During the fiscal year 2001-02, the government

has not only succeeded in arresting the rising has not only succeeded in arresting the rising trend in external debt but exchange rate trend in external debt but exchange rate appreciation to the extent of 7 percent has also appreciation to the extent of 7 percent has also helped in reducing debt payable in foreign helped in reducing debt payable in foreign exchange by more than 100 billion. exchange by more than 100 billion.

The effort of reducing public debt must continue The effort of reducing public debt must continue on a sustainable basis so as to attain debt on a sustainable basis so as to attain debt sustainability in the medium to-to-long run. The sustainability in the medium to-to-long run. The key element of the strategy must include the key element of the strategy must include the continuation of fiscal consolidation and reduction continuation of fiscal consolidation and reduction in real cost of borrowing. in real cost of borrowing.

Debt BurdenDebt Burden Pakistan public debt burden is much higher than Pakistan public debt burden is much higher than

many developed and developing countries.many developed and developing countries. For example, Pakistan public debt as percentage For example, Pakistan public debt as percentage

of total revenue stood at more than 600 percent of total revenue stood at more than 600 percent in 1999 as compared to 385 percent in India, 291 in 1999 as compared to 385 percent in India, 291 percent in Malaysia, 286 percent in Phillipines, percent in Malaysia, 286 percent in Phillipines, and 22 percent in Mexico. and 22 percent in Mexico.

The most worrisome aspect of Pakistan’s growing The most worrisome aspect of Pakistan’s growing debt burden is that its debt servicing consumes debt burden is that its debt servicing consumes almost 60 percent of government’s total revenues almost 60 percent of government’s total revenues and constrained governments’ ability to devote and constrained governments’ ability to devote its resources to growth enhancing investment, its resources to growth enhancing investment, such as infrastructure and social and human such as infrastructure and social and human capital.capital.

Poverty Alleviation and Investors’ Poverty Alleviation and Investors’ ConfidenceConfidence

The objective of the government was to satisfy the The objective of the government was to satisfy the expectations of various segments of society ranging from expectations of various segments of society ranging from investors, businessmen, traders, middle and salaried class investors, businessmen, traders, middle and salaried class and teeming millions who languish in the abject poverty. and teeming millions who languish in the abject poverty.

Military government took some measures to eradicate Military government took some measures to eradicate poverty. For example, small public works schemes-Kush-poverty. For example, small public works schemes-Kush-Hall Pakistan for which Rs 11.5 billion were released in Hall Pakistan for which Rs 11.5 billion were released in 2001-02, better management of Zakat fund, establishment 2001-02, better management of Zakat fund, establishment of the Khushhali Bank. of the Khushhali Bank.

All these measures might be well meaning but they are All these measures might be well meaning but they are hardly effective to alleviate poverty keeping in view its hardly effective to alleviate poverty keeping in view its quantum prevailing in the country. quantum prevailing in the country.

Poverty Alleviation and Investors’ Poverty Alleviation and Investors’ ConfidenceConfidence

The poverty has increased over then past The poverty has increased over then past three years. Some of the estimates place three years. Some of the estimates place the incidence of poverty between 35 to 40 the incidence of poverty between 35 to 40 percent. percent.

The previous budgets have failed to The previous budgets have failed to address the issue of poverty alleviation in address the issue of poverty alleviation in a comprehensive manner.a comprehensive manner.

Emphasis on increasing employment, Emphasis on increasing employment, output and social justice are the areas to output and social justice are the areas to work out. work out.

InvestmentInvestment

One must keep in mind the IMF’s dictates under Structural and One must keep in mind the IMF’s dictates under Structural and Stabilization Programs which place constraints on real growth in Stabilization Programs which place constraints on real growth in public investment via tight monetary policy. public investment via tight monetary policy.

Total investment as % of GDP declined from 15.9 % in 2000-01 to Total investment as % of GDP declined from 15.9 % in 2000-01 to 13.9% in 2001-02.13.9% in 2001-02.

The events of Septmeber 11 and their aftermath greatly clouded The events of Septmeber 11 and their aftermath greatly clouded the investment climate and affected investment sentiment. the investment climate and affected investment sentiment.

While investment has declined, the national savings as percentage While investment has declined, the national savings as percentage of GDP have increased from 15.0 percent in 200-01 to 15.4% in of GDP have increased from 15.0 percent in 200-01 to 15.4% in 2001-02. 2001-02.

Measures were taken by the government to rebuild the investor’s Measures were taken by the government to rebuild the investor’s confidence. confidence.

The American Business Council of Pakistan (ABC) has proposed The American Business Council of Pakistan (ABC) has proposed slashing down of different duties and taxes to encourage slashing down of different duties and taxes to encourage investment in the economy. investment in the economy.

Growth Performance of Real SectorGrowth Performance of Real Sector

Percentage ChangePercentage Change 1980’s1980’s 1990-951990-95 1995-20001995-2000 2001-022001-02

A.GDP Growth Rate A.GDP Growth Rate

a.a. AgricultureAgriculture

b.b. ManufacturingManufacturing

c.c. Large Scale MfgLarge Scale Mfg

d.d. ServicesServices

B. Total Investment B. Total Investment

(As a % of GDP)(As a % of GDP)

a.a. Fixed InvestmentFixed Investment

b.b. Public InvestmentPublic Investment

c.c. Private InvestmentPrivate Investment

C. National SavingC. National Saving

a. Domestic Savinga. Domestic Saving

6.16.1

4.14.1

8.28.2

8.28.2

6.66.6

18.618.6

16.816.8

9.19.1

7.87.8

14.714.7

7.77.7

4.94.9

4.24.2

4.84.8

4.74.7

5.15.1

19.519.5

18.018.0

8.68.6

9.49.4

14.914.9

13.913.9

4.04.0

4.94.9

3.23.2

2.42.4

4.04.0

17.117.1

15.315.3

6.46.4

8.98.9

12.712.7

13.813.8

3.63.6

1.41.4

4.44.4

4.04.0

5.15.1

13.913.9

12.312.3

4.74.7

7.67.6

15.415.4

14.714.7

External and Internal FactorsExternal and Internal Factors Global economic downturn further aggravated by Global economic downturn further aggravated by

the events of September 11, the prolonged the events of September 11, the prolonged drought conditions, and heightened tension with drought conditions, and heightened tension with India are some of the major shocks which have India are some of the major shocks which have prevented Pakistan achieving higher economic prevented Pakistan achieving higher economic growth. growth.

Despite many difficulties, the real GDP growth Despite many difficulties, the real GDP growth staged a modest recovery to 3.6 % in 2001-02. staged a modest recovery to 3.6 % in 2001-02. This growth is supported by a 1.4 %, 4.4% and This growth is supported by a 1.4 %, 4.4% and 5.2% growth in agriculture, manufacturing and 5.2% growth in agriculture, manufacturing and services, respectively. services, respectively.

Concluding RemarksConcluding Remarks

On the basis of the analysis of the previous On the basis of the analysis of the previous budgets it could be concluded that:budgets it could be concluded that:

The budget planners had a difficult assignment to The budget planners had a difficult assignment to perform while preparing a budget that should perform while preparing a budget that should have addressed fiscal management problems, have addressed fiscal management problems, satisfied the donors and people as well. satisfied the donors and people as well.

The budget proposals provide certain incentives The budget proposals provide certain incentives to address longstanding issues directly or to address longstanding issues directly or indirectly related to revive economy and achieve indirectly related to revive economy and achieve a high growth target. a high growth target.

Concluding RemarksConcluding Remarks

Fiscal situation still continues to be the area of Fiscal situation still continues to be the area of concernconcern

Concerted efforts will have to be made on the Concerted efforts will have to be made on the revenue and expenditure side to curtail deficit.revenue and expenditure side to curtail deficit.

This would require enlarged tax base, reduced This would require enlarged tax base, reduced leakages and improved collection. leakages and improved collection.

Expenditure, in particular non development Expenditure, in particular non development expenditure will have to be kept in control as to expenditure will have to be kept in control as to reduce the deficit and reliance on borrowing.reduce the deficit and reliance on borrowing.

Measures must be taken to increase the rate of Measures must be taken to increase the rate of investment in the economy.investment in the economy.