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
Growth in Nom. GDP vs FBR Tax Collection
35
GDP
30
Tax Collection(FBR)
25
20
15
10
5
0
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
22
Context
Stagnant Tax revenues ….
Tax to GDP (%)
Source: FBR
23
Context
Stagnant Tax revenues ….
Tax to GDP (%)
Avg = 9.2%
Source: FBR
24
Object Classification
Principal repayment of loans
Interest payment
Operating expenses
Grants, Subsidies & Loan write
offs
Employees related Expenses
Civil
Military
Investment
Physical assets
Civil Works
Repairs & Maint.
Transfers
Total Expenditure
2012-13 (B)
7,562
928
884
% of Total
725
486
158
328
30
14
10
9
8
7%
0.3%
10,650
100%
71%
9%
8%
5%
1%
3%
0.1%
0.1%
0.1%
0.1%
25
Object Classification
Principal repayment of loans
Interest payment
Operating expenses
Grants, Subsidies & Loan write
offs
Employees related Expenses
Civil
Military
Investment
Physical assets
Civil Works
Repairs & Maint.
Transfers
Total Expenditure
2012-13 (B)
7,562
928
884
% of Total
725
486
158
328
30
14
10
9
8
7%
0.3%
10,650
100%
71%
9%
= 80%
8%
5%
1%
3%
0.1%
0.1%
0.1%
0.1%
26
Context
• Rising losses of Power sector ….
Rs bn
Tariff
Capital
Injections
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
Total
As % GDP
Source: MoF; Sakib Sherani
27
Fiscal deficit vs Target
Rs billion
Year
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
28
Context
• Record fiscal deficits ….
10
8.8
2012
2013
7.6
8
6.3
6
4
8.6
6.6
5.3
4.3
4.3
2006
2007
3.3
2
0
2005
Source: MOF
2008
2009
2010
2011
29
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
Fiscal
deficit
BOP
stress
Govt
borrowing
Inflation
Public
debt
Monetary
expansion
39
Impact on Growth & Investment
Source: SBP; Sakib Sherani
Domestic constraints
Severity of Constraints Reported by SAR Benchmark and Expanding Firms
Urban Formal Sector
PoliticalInstability
2.6
Electricity
2.2
Corruption
1.8
TaxAdministration
1.7
GovPolicyUnc
1.4
MacroInstability
1.3
Competit
1.2
CrimeTheftDisorder
1.1
AccessLand
1.1
Customs
1.1
InadEducLabor
1.1
LaborReg
1.0
Transport
1.0
BusLicensing
Benchmark Firm
Expanding Firm
0.9
Courts
0.9
Telecoms
0.7
0.0
0.5
1.0
Severity of Constraint
[0=No Obstacle. 4=Very Severe Obstacle]
1.5
2.0
2.5
3.0
Source: World Bank
Domestic constraints
Severity of Constraints Reported by SAR Benchmark and Expanding Firms
Urban Formal Sector
PoliticalInstability
2.6
Electricity
No. 4
2.2
Corruption
1.8
TaxAdministration
1.7
GovPolicyUnc
1.4
MacroInstability
1.3
Competit
1.2
CrimeTheftDisorder
1.1
AccessLand
1.1
Customs
1.1
InadEducLabor
1.1
LaborReg
1.0
Transport
1.0
BusLicensing
Benchmark Firm
Expanding Firm
0.9
Courts
0.9
Telecoms
0.7
0.0
0.5
1.0
Severity of Constraint
[0=No Obstacle. 4=Very Severe Obstacle]
1.5
2.0
2.5
3.0
Source: World Bank
Jul-05
Sep-05
Nov-05
Jan-06
Mar-06
May-06
Jul-06
Sep-06
Nov-06
Jan-07
Mar-07
May-07
Jul-07
Sep-07
Nov-07
Jan-08
Mar-08
May-08
Jul-08
Sep-08
Nov-08
Jan-09
Mar-09
May-09
Jul-09
Sep-09
Nov-09
Jan-10
Mar-10
May-10
Jul-10
Sep-10
Govt Borrowing & Inflation
SBP credit for the budget
Source: IMF
Inflation (RHS)
Year-on-year increase in percent
300.0
28.0
250.0
24.0
200.0
20.0
150.0
16.0
100.0
12.0
50.0
8.0
0.0
4.0
-50.0
0.0
43
Public debt
Conclusion
I. M. F.
Conclusion
Its Mostly Fiscal
Thank You