Pakistan’s Weak Fiscal Framework

Macroeconomic Implications

Sakib Sherani

Comsats │ October 2013

Fiscal Framework

Marked by structural rigidities:

Fiscal Framework

Marked by structural rigidities:

• Revenue

Fiscal Framework

Marked by structural rigidities:

• Revenue

– Narrow tax base

Fiscal Framework

Marked by structural rigidities:

• Revenue

– Narrow tax base

• Reliance on indirect taxes

Fiscal Framework

Marked by structural rigidities:

• Revenue

– Narrow tax base

• Reliance on indirect taxes

– Low tax buoyancy and elasticity

Fiscal Framework

Marked by structural rigidities:

• Revenue

– Narrow tax base

• Reliance on indirect taxes

– Low tax buoyancy and elasticity

– Tax assignment & provincial fiscal effort

Fiscal Framework

Marked by structural rigidities:

• Revenue

– Narrow tax base

• Reliance on indirect taxes

– Low tax buoyancy and elasticity

– Tax assignment & provincial fiscal effort

– Governance issues & exemptions regime

Fiscal Framework

Marked by structural rigidities:

• Expenditure

Fiscal Framework

Marked by structural rigidities:

• Expenditure

– Generous fiscal transfers regime (NFC Award)

Fiscal Framework

Marked by structural rigidities:

• Expenditure

– Generous fiscal transfers regime (NFC Award)

– Debt servicing & defense-related

Fiscal Framework

Marked by structural rigidities:

• Expenditure

– Generous fiscal transfers regime (NFC Award)

– Debt servicing & defense-related

– Untargeted subsidies

Fiscal Framework

Marked by structural rigidities:

• Expenditure

– Generous fiscal transfers regime (NFC Award)

– Debt servicing & defense-related

– Untargeted subsidies

• Consumption-oriented rather than Investment-driven

Pakistan’s Tax Culture

14

Pakistan’s Tax Culture

180 million people

15

Pakistan’s Tax Culture

180 million people

3.7 million tax registered

16

Pakistan’s Tax Culture

180 million people

3.7 million tax registered

711,000 file return

17

Pakistan’s Tax Culture

180 million people

3.7 million tax registered

0.7 million file return (0.9 mn salaried)

18

Pakistan’s Tax Culture

180 million people

3.7 million tax registered

0.7 million file return (0.9 mn salaried)

X% actually pay

19

Pakistan’s Tax Culture

180 million people

3.7 million tax registered

0.7 million file return (0.9 mn salaried)

X% actually pay

Z% pay honestly 20

Pakistan’s Tax Culture

• 776,000 people in 3 cities with assets, property, >1 car, bank accounts, foreign travel ≠ not on tax register

– Expanded to 3.2 million in 2012 (FBR/NADRA)

• 61% of parliament reportedly filed “nil” taxable income in last filed income tax return

21

Tax vs GDP Growth

22

0

5

10

15

20

25

30

35

FY-97 FY-98 FY-99 FY-00 FY-01 FY-02 FY-03 FY-04 FY-05 FY-06 FY-07 FY-08 FY-09 FY-10

Growth in Nom. GDP vs FBR Tax Collection

GDP

Tax Collection(FBR)

Context

Stagnant Tax revenues ….

23

Tax to GDP (%)

Source: FBR

Context

Stagnant Tax revenues ….

24

Tax to GDP (%)

Source: FBR

Avg = 9.2%

Object Classification

2012-13 (B) % of TotalPrincipal repayment of loans 7,562 71%Interest payment 928 9%Operating expenses 884 8%Grants, Subsidies & Loan write offs 725 7%Employees related Expenses 486 5%Civil 158 1%Military 328 3%Investment 30 0.3%Physical assets 14 0.1%Civil Works 10 0.1%Repairs & Maint. 9 0.1%Transfers 8 0.1%

Total Expenditure 10,650 100%

25

Object Classification

2012-13 (B) % of TotalPrincipal repayment of loans 7,562 71%Interest payment 928 9%Operating expenses 884 8%Grants, Subsidies & Loan write offs 725 7%Employees related Expenses 486 5%Civil 158 1%Military 328 3%Investment 30 0.3%Physical assets 14 0.1%Civil Works 10 0.1%Repairs & Maint. 9 0.1%Transfers 8 0.1%

Total Expenditure 10,650 100%

26

= 80%

Context

• Rising losses of Power sector ….

27

Rs bn TariffCapital

Injections Total As % GDP

2008 133 0 133 1.3

2009 110 301 411 3.2

2010 171 125 296 2.0

2011 335 120 455 2.5

2012 464 391 855 4.1

Total 1,214 937 2,151 2.6

Source: MoF; Sakib Sherani

Fiscal deficit vs Target

28

Year

Rs billion As % GDP

Target Actual Target Actual

2007-08 423 778 4.0 7.6

2008-09 582 680 4.7 5.2

2009-10 762 929 5.1 6.3

2010-11 721 1,190 4.0 6.6

2011-12* 826 1,761 4.0 8.5

2012-13 1,105 2,088 4.7 8.8

*includes 1.9% of GDP of power sector debt consolidation

Context

• Record fiscal deficits ….

29Source: MOF

3.3

4.3 4.3

7.6

5.3

6.3 6.6

8.6 8.8

0

2

4

6

8

10

2005 2006 2007 2008 2009 2010 2011 2012 2013

Macroeconomic Implications

Macroeconomic Implications

• A weak fiscal framework impacts:

Macroeconomic Implications

• A weak fiscal framework impacts:

– Public debt

Macroeconomic Implications

• A weak fiscal framework impacts:

– Public debt

– Growth and investment

Macroeconomic Implications

• A weak fiscal framework impacts:

– Public debt

– Growth and investment

• Pernicious long run impact

Macroeconomic Implications

• A weak fiscal framework impacts:

– Public debt

– Growth and investment

• Pernicious long run impact

– Inflation

Macroeconomic Implications

• A weak fiscal framework impacts:

– Public debt

– Growth and investment

• Pernicious long run impact

– Inflation

– Balance of payments

Macroeconomic Implications

• A weak fiscal framework impacts:

– Public debt

– Growth and investment

• Pernicious long run impact

– Inflation

– Balance of payments

– Public service delivery

Macroeconomic Implications

• Fiscal weakness ...

– Inability / unwillingness to tax

– Inability / unwillingness to limit spending

• ... leads to excessive borrowing/money creation

• Leading to inflation + BoP pressure

• ... AND, to a rapid build-up of public debt

38

A vicious spiral

39

Impact on Growth & Investment

Source: SBP; Sakib Sherani

Domestic constraints

Expanding Firm

Benchmark Firm

Severity of Constraints Reported by SAR Benchmark and Expanding Firms Urban Formal Sector

Source: World Bank

Domestic constraints

Expanding Firm

Benchmark Firm

Severity of Constraints Reported by SAR Benchmark and Expanding Firms Urban Formal Sector

Source: World Bank

No. 4

Govt Borrowing & Inflation

43Source: IMF

Public debt

Conclusion

I. M. F.

Conclusion

Its Mostly Fiscal

Thank You