Category: Public Finance

In a previous post on our sister Blog, it was observed that the provincial governments in Pakistan are proving themselves to be totally irresponsible by presenting deficit budgets in spite of massive resources being transferred to the provinces after NFC Award. While presenting the views of a member of previous regime’s economic team, it was also observed that presenting a deficit or even a balanced budget in the midst of massive transfer of resources from the center is nothing but the height of financial indiscipline. By doing so, the provincial governments have sown the seeds of perpetual macroeconomic crises, rising debt burden, slower economic growth, unemployment and poverty.

By presenting deficit budget the provincial governments have already created serious financial difficulties for the country. Pakistan’s new fiscal year (2010-11) has dawned with a targeted budget deficit of Rs923 billion or 5.4 per cent of GDP. If slippages on revenue and expenditures were added, this deficit would rise to over Rs1100 billion or 6.5 per cent of GDP. How will the government finance such a large deficit?

This view was further reinforced during Prime Minister’s meeting with country’s economic managers on Friday who have surprised the prime minister, saying a high budget deficit last fiscal and a delay in taking immediate corrective measures have put the country’s financial stability at stake. This may also lead to blocking of foreign funding and depreciation of rupee. According to Express Tribune, the ministry officials told the Prime Minister that the overall budget deficit during financial year 2009-10 stood at an unprecedented Rs909 billion against a revised target of Rs769 billion. It may be noted that announcing the last budget, the government had fixed the budget deficit target at 4.9 per cent of gross domestic product or Rs724 billion. Later, it revised the target to 5.1 per cent but, according to provisional estimates, it ended up at 6.2 per cent. In 2007-08, the budget deficit was recorded at Rs777 billion, equal to 7.6 per cent of GDP.

In 2009-10, the government had also been unable to collect taxes according to the potential because of pressure from various lobbies. Sources said the ministry officials cautioned the PM that if the budget gap was not bridged in the current financial year, foreign donors may suspend release of funds. This, in turn, will mount pressure on the rupee, which may sink to new lows.

In fiscal 2010-11, the government has estimated budget deficit at Rs684 billion or four per cent of GDP on the assumption that provinces will present a surplus budget of one per cent of GDP or Rs170 billion. However, provincial budgets show that they may end up showing a one per cent deficit, suggesting this year too the overall deficit will be six per cent instead of four per cent.

The ministry officials also told the prime minister that the country may need to restrict imports of luxury goods to save foreign reserves in case the donors backed off.

They said inflation has again started increasing and for that matter tight fiscal and monetary policies will remain continue this fiscal year, indicating interest rate may not be reduced.

Sources said the finance ministry also sought support of the prime minister for implementing a reformed General Sales Tax from October 1. After failure to levy Value Added Tax from July 1, the government has given a new slogan of reformed GST but much depends on the support of provinces.

It is very easy to find a scapegoat for anything which goes wrong in the public sector. The easiest scapegoat in this country is hapless bureaucrat. Even those who are decision makers (politicians) lay the blame at the doors of bureaucracy.

There are many public sector entities which have been sunk along with massive funds of taxpayers money due to corrupt practices of politicians, their reckless governance and the politics of nepotism. It has now been clearly established that people who try to reach the corridors of power through “democracy” use every fair or unfair means including cheating and fraudulent practices. Imagine when these people are entrusted the management of economic resources, what they would do to these resources and the public sector entities.

Take the examples of PIA, PSM, PR to name a few. When these were run by bureaucrats of professionals, these entities were doing their jobs properly but when politicians were allowed to interfere, these were destroyed. Express Tribune, its latest edition has taken up the hopeless case of Pakistan Railways and, as usual, has tried to pass the buck on to the bureaucracy. The paper writes that  Pakistan Railways has hit a new low because of corrupt and incapable officers, delay in train schedule and frequent locomotive breakdowns. Only 250 of a total of 550 Pakistan Railways locomotives are fit for running, according to sources. The paper has ignored the role of a very “clean” minister who only recently was advocating on a TV talk show that those belonging to his constituency deserve Railway jobs more than those who meet the criteria. He even sacked a lady officer who refused to accept his list of potential recruits.

The paper will be well-advised to carry out a research on how and when Pakistan Railways started sinking. There was a time when out of 80,000 something employees, 38,000 were recruited by the three Railway Ministers, one each during Zia, BB and MNS regimes. These people had no jobs but were on the payroll. They were either rickshaw drivers, khokhawallahs, shopkeepers or simple workers but they were enrolled nonetheless. They would receive their pay on first of the month, overtime on 16th and even TA/DA on the specified date.

It was for the first time after these ministers’ excesses to the Railways that it started taking massive overdraft from SBP and started sinking. Consequently, it had no funds for development and expansion.

Instead of passing the buck on to easy preys, the critics should carry out objective analysis.

Pakistan is making improvements by leaps and bounds. Its credibility may not have been established but its credit riskiness has nosed down. It is now at some good position of credit worthiness. What is this position, let’s see. Oh no, not visible. Let’s look at it from the other side. Lo and behold. It has fourth position from the other side of the scale. Very prominent and very distinguished. The Global Sovereign Credit Risk Report for the second quarter of 2010 has ranked Pakistan’s sovereign debt the fourth most risky in the world.

According to Express Tribune, the report issued by CMA stated that the riskiness of debt owed by the Government of Pakistan has marginally reduced since last quarter when the country was ranked third on the list of world’s riskiest sovereign debtors. The risk premium on debt issued by the government stands at 719 basis points. The country’s sovereign debt currently holds a ‘B’ rating, an improvement from last quarter’s rating of ‘B minus’. Pakistan’s sovereign debt is still considerably riskier than all other Asian countries, despite dropping 131 basis points since hitting the peak of 850 basis points on April 27.

Good news is that Pakistan is ranked ahead of Venezuela, Greece and Argentina which are the riskiest sovereign debtors of the outgoing quarter.

CEO Topline Securities opined “thanks to the International Monetary Fund, Pakistan’s foreign exchange reserves are now worth more than five months of imports. Investors are viewing this as a positive sign. Political and security situation in the country has also been improving gradually over the past few months helping to bring down risk premium associated with the country’s sovereign debt.”

According to the report, Norway has maintained its title as the safest government to lend to. Its risk premium stands at 26.7 basis points. Iceland, Dominican Republic and Egypt have shown the most improvement in terms of reduction in risk premium on sovereign debt since last quarter.

On the flip side, Greece, Belgium, Spain and Portugal have posted the worst quarterly performances. The report cited that “towards the end of the quarter Greece temporarily overtook Venezuela as the sovereign with the highest default probability and has been the worst performer this quarter, globally.”

Risk premium on sovereign debt issued by Greece has increased by 190 per cent to reach 1,003.4 basis points.

The report also highlighted that “all of the worst performers have come from Western Europe this quarter, with protection costs for the poorest performers more than doubling,” adding “major widening action in European sovereign credits indicates that the eurozone remains the hub and focus of the global debt crisis, none of the Western European Sovereign CDS (credit default swaps) have tightened this quarter”.

Analysts said Pakistan is unlikely to face major problems due to the worsening economic situation of Western European states. Mohammad Sohail commented “the country is not heavily dependent on exports. Most of our international trade is with the US and China so we should remain fairly insulated from the crisis unfolding in countries like Greece and Belgium.”

CMA is a wholly-owned subsidiary of CME Group, the world’s largest derivatives exchange. CME is considered one of the leading sources of independent data on credit markets.

Did you always think that Pakistani budget is a recipe for disaster for average Pakistani? How wrong you were? There is another budget presented by another coalition government in what you always refer to as mother of democracies..yes the United Kingdom. This budget has taken away many things from the common man and increased the VAT which alone will cost every family 500 additional pounds. The rise in VAT will push up the price of many basic household items, notably petrol, alcohol, clothing, toiletries, furniture and electrical items.

It will push up the average price of petrol from £1.18 a litre to £1.21, adding £1.50 to the cost of filling up the average family car. The average pint of beer will rise above £3 for the first time and it will add £13 to the cost of an iPhone, which currently costs up to £630.

Deloitte, the accountancy firm, calculates that the average worker, earning £24,000 will pay an extra £183 a year as a result of the VAT rise. Charities said it was unfair because, unlike businesses, they can not claim back VAT. It has been calculated that charities pay £150 million a year in VAT.

It could also push up the rate of inflation, many fear, though the Treasury insisted the cost of living would fall next year.

Retail experts said the rise was “dangerously counterproductive”, while some economists pointed out it was one of the easiest and most efficient ways to raise extra revenues.

KPMG, the accountancy firm, warned that many retailers “teetering on the edge” following from the recession could be “pushed over the edge” by the VAT rise.

Andrew Burrell, Research Partner at King Sturge, a property consultant said: “The killer for retailers and consumers alike is clearly going to be the VAT hike. This was too big a temptation for the coalition to resist, despite the fact that consumer confidence remains extremely fragile and a sudden hike in prices could destabilise the recovery.”

“With inflation already running at around 5 per cent, earnings growth weak and public sector employment set to fall, household finances, which are already under severe pressure, will be dealt a further blow. Spare capacity for mortgage payments will also be squeezed.”

CEBR calculated that the poorest households pay disproportionately a higher amount of VAT. The bottom quarter of earners pay 12 per cent of their disposable income in VAT, compared with the top quarter of earners who pay just 6 per cent.

Matthew Sykes, chief executive of the anti-poverty charity Elizabeth Finn Care, said: “From its lowest point at the end of last year, VAT will have risen by a third. This latest measure alone is a rise of over 14 per cent. That is going to leave the poorest struggling to pay for many of the basics that the rest take for granted. Sadly, VAT is a disproportionate tax – the less you earn, the more you will feel the pinch when the rate is increased.”

David Buick, at City firm BGC Partners, however pointed out that the richest consumers still paid the most, if not proportionately, then certainly in actual money. “This tax could raise an extra £13 billion in a year and it is not as socially debilitating as Labour would have us believe. After all, the wealthier will spend the most and buy the most goods.”

The Treasury has also tweaked the rate of VAT that people pay on some insurance policies from 5 per cent to 6 per cent, which will raise £455 million a year.

This is in continuation of the post: Before you grumble……posted in this Blog. No doubt, economic resources along with natural resources play a significant role in making a country rich or poor but the role played by some of the human resource can not be ignored. It is, in fact a few at the helm of the economy and management of these resources who alone can make or break any economy. If the leaders are bulldozers, they can make you poor and yet scream at the top of their voice that their lives are dedicated to the poor.

These lives are dedicated to the poor to the extent of winning their votes; in a country like Pakistan, a person for a politician is not more than a mere ballot paper, a parchee which can make a difference at the time of elections. A rather interesting situation has been reported by US magazine, The Time in its current edition about the state of New Jersey where according to the magazine, taxes are high, the budget’s a mess, government is inefficiently organized, and the public pension fund is blown to kingdom come. Which makes New Jersey a lot like most other states in 2010.

What makes the state unusual is its rookie governor, a human bulldozer named Chris Christie, who vowed to lead like a one-termer and is keeping his promise with brio. He has proposed chopping $11 billion from the state’s budget — more than a quarter of the total — for fiscal year 2011 (which starts July 1). He’s backing a constitutional cap on property taxes in hopes of pushing the state’s myriad villages and townships to merge into more efficient units. He’s locked in an ultimate cage match with the New Jersey teachers’ union. It may be the bitterest political fight in the country — and that’s saying something this year. A union official recently circulated a humorous prayer with a punch line asking God to kill Christie. You know, New Jersey humor. And in an interview with the Wall Street Journal, Christie didn’t talk about the possibility that his fiscal initiatives might be compromised or defeated; he pictured himself “lying dead on State Street in Trenton,” the state capital. Presumably that was a figure of speech.

Are you surprised? Don’t you think New Jersey is just another province of the Fatherland? The politicians don’t see to realize that its economy and they just can’t play with it like they play politics. By the way, politics in this part of the world is synonymous with intrigues, scheming, cheating and plundering.

Will the Pakistan budget be able to appease frustrated Pakistanis hit by food inflation, unemployment and tax hikes seen as helping fuel an Islamist insurgency and discrediting civilian authorities?  Are its predictions to lower the budget deficit to 4% of GDP realistic or too ambitious?

For the present, the Government has put off hard decisions on spending and revenues for later, as well as almost guaranteeing a continued unpopular IMF bailout. Some experts say that ” this government is surviving not so much because of its popularity but more so by default. The government’s hands are tied and one must not forget, given the fact that we’re in the IMF program, that there is little fiscal space for the government to maneuver. It’s in survival mode.”

World Finance, in a recent article on Pakistan’s budget 2010-11 has commented that Pakistan was on the brink of default when it turned to the IMF in November 2008 for a $10.66bn loan package to help put its economy back on track. It received the fifth tranche of $1.13bn in May. The budget raised taxes on sectors such as capital gains, increased a sales tax and slashed some subsidies on energy and food, while trying to provide some social relief for the roughly third of the 170 million population that lives in poverty.

Key to meeting IMF conditions is cutting the deficit, targeted at 5.1 percent this year and seen as posing a serious inflation risk and hurting the economy just as it tentatively recovers from its lowest growth rate in decades. Pakistan’s tax-to-GDP ratio which is around 9.5 percent, is one of the lowest in the world.

The country’s main stock exchange was unfazed by the budget as analysts said all the measures had been priced in and there were no surprises and the uncertainty was over. The government has targeted 1.778 billion rupees in tax revenue, which is almost 21 percent higher than the current fiscal year’s target, one that is likely to be unmet as well. Pakistan collected 1.026 billion rupees in the first ten months of the 2009/10 fiscal year. Pakistan is also aiming to generate more than 51 billion rupees, which would be 0.3 percent of GDP, from an auction of 3G spectrum licenses that analysts said was unlikely to materialize.

The inflation target of 9.5 percent for fiscal year 2010/11 was unlikely to be met if there were slippages in the fiscal target.

Is it true that if we reverted to progressive taxation under Article 3 of the Constitution, this could fetch the Government more than thrice as much as it is collecting through regressive taxation? Read what experts have said on this. Please read In search of a new tax model? by Huzaima Bukhari and Dr Ikramul Haq in the News on Sunday

Critics of Pakistan budget have unleashed their criticism on the government’s economic plan without realizing that this budget has some admirable elements such as:

  • The proposed GST reform that will levy a 15% flat tax will not apply on health, education and food items consumed by the poor,
  • The exemption limit for salaried taxpayers is to be enhanced from Rs200,000 to Rs300,000 benefiting approximately 430,000 taxpayers,
  • Additional tax relief of about two billion rupees have been provided to benefit 300,000 taxpayers of Khyber Pakhtunkhwa, FATA & PATA,
  • Federal government employees will be allowed an ad hoc monthly allowance equal to 50% of one month’s basic pay. This benefit would not be available to such federal government employees who are already in receipt of a monthly allowance equal to one month’s basic pay,
  • This budget has been prepared by the technocrats and not the politicians. It has been made as per the text-book (read: IMF diktats).

But fact of the matter is that this budget is not pro-poor by any standard because the revenues rely on indirect taxes which are to be paid by everyone irrespective of their capacity to pay. This has triggered and will trigger more inflation and will make the life of common man really difficult. A pro-poor budget should have a minimum of 65% of revenue from direct taxes like income tax which is paid by wealthy people. Sadly, this budget collects 65% of revenue from indirect taxes i.e. from poor segment of the society and can be called a budget for “poor” privileged class. In this country, a person who can not make both ends meet pays as much tax as a person having palaces and limos. This is gross injustice and breeds hatred, frustration and unrest. This will spell disaster  for the society in the days to come.

Bye bye to day-to-day interference of Ministry of Finance in the micro-management of line ministries. From Budget 2010-11, Government of Pakistan has introduced Medium Term Budgetary Framework. MTBF has a strategic element to budget-making and is a step-forward to modernize the existing incremental budgeting system. It may, however, take several years for full implementation. Its objectives include:

  • Making the budget a flexible and responsive mechanism for carrying forward the policies, strategies and priorities,
  • Introducing a progressive process of the empowerment of line ministries to manage their own budgetary cycles in an overall context which provides the maximum achievable level of predictability of resource flows,
  • Shifting the role of the central agencies like Ministry of Finance and the Planning Commission in budget management from micromanagement of transactions to strategic management of the application of resources to achieve results.

This new budgetary approach helps planners and managers think through the logic of their intervention and how they relate to the ministry’s overall objectives. It requires that the ministry specify how its activities, outputs and outcomes are linked. This logic can then be tested by asking a series of “if-then” questions like:

If inputs (resources) are provided then activities can be undertaken. If activities are undertaken then outputs will be produced. If outputs are produced then outcomes will be achieved. If outcomes are achieved then the organization will have made progress towards achieving its overall goals.

The Goal means the overall objectives to which the ministry is aspiring. Summary of the goals is also called Vision Statement. Output is delivery of service or product and Activities are special tasks undertaken to achieve the required output. Inputs are resources required to undertake activities and Outcome is the result (or impact) of output on the target population.

Let us hope that MTBF will prove to be a welcome innovation.

Economic Survey 2009-10 has been released by the Government of Pakistan. It shows economic performance during the year ending June, 2010. The situation reported in the Survey is dismal and it is far too disappointing as compared with the situation of period 2000-07.

The alarming news is that during the year, capital over $600 million invested in telecommunication sector has flown back to where it had come from. This is really bad news because Government of the past had banked on the FDI in this sector. Major reason could be utter failure of Telecommunication De-regulation Policy, 2003 which was formulated by PTCL and was naturally PTCL-centric. In spite of privatization of PTCL, Pakistan created a total monopolized market and the private sector licensees had to flee along with capital. This happened due to flawed deregulation and half-hearted implementations of the Policy by the previous government. The present government has not to be blamed for this.

Foreign investment worth over one billion dollars made in telecommunication and financial services seems to have evaporated or simply flown away at light’s speed-via optic fiber.

Other major achievements on economic front are as under:

  • The economic survey shows a decline in growth in the agriculture sector in 2010 at 2 percent from almost 4 percent last year.
  • The Crops sector declined by 0.4 percent, while livestock rose by 4 percent.
  • Industrial output expanded by almost 5 percent, where Large Scale Manufacturing grew 4.4 percent and Services grew 4.6 percent, compared to 1.6 percent in 2009.
  • The bulk of the flight of foreign investment took place from Telecom (over $600 million) and Financial Services sector (over $500 million).
  • The finance ministry says in the survey that inflation at home rose mainly due to the rising international commodity prices.
  • Major factor for the crisis was the global recession, which had a strong impact on the domestic markets.