Fiscal Year 2011-12: No tax-free budget any more in troubled Pakistan!


The next federal budget is less than a fortnight away. Next month the politico-strategically-embattled PPP-led coalition government would be sharing with the voters’ budgetary accounts and allocations of their hard-earned tax-money under the heads of receipts and expenditures for the next financial year, 2011-12.
Whatever the next budget may be it can at least not be a tax-free budget as, traditionally, expected by the taxpayers and tax evaders alike.
Needless to say that today the resource-constrained, floods-hit and diplomatically-alienated Pakistan needs additional sources of revenue more than ever before with options leading to macroeconomic stability seeming to be far and few.
The country’s economic managers, who have repeatedly been claiming to have inherited an ailing economy from their predecessors, are haunted by a widening fiscal deficit of 4.5 percent amounting to over Rs 783 billion that, the analysts believe, would easily cross the 6 percent figure against the targeted 5.5 percent of the GDP by the end of FY11 on June 30.
The analysts say the budget gap would aggregate to an unprecedented Rs 1.12 trillion primarily because of poor revenue collections and relatively heavy expenditure.
The government is expected to set a fiscal deficit target of 4.7 percent, accounting for over Rs 900 billion, in the upcoming budget the realization of which, the analysts believe, would primarily depend on the austerity and taxation measures the government would be revealing in the next fiscal document.
The pressing economic conditions at home and abroad leave the PPP-led government with no option but to successfully accomplish the uphill task of revenue generation through taking much-demanded measures like broadening the tax net that stands at lowest among the world at 9 percent of the country’s gross domestic product (GDP).
But if the federating units show less inclination towards implementation of the IMF-backed Reformed General Sales Tax (RGST) and Gross Asset Tax (GAT), the cash-strapped center would have to swallow some bitter political pills through lessening if not withdrawing the present backbreaking subsidies and tax exemptions. According to sources, the government would be seeking to save around Rs 100 to Rs 200 billion through withdrawals under the above two heads.
Like his predecessor, Finance Minister Dr Abdul Hafeez Shaikh is convinced that the government subsidies, which are most likely to be reduced in size instead of complete elimination in the new budget, should be “targeted” for the benefit of those deserving.
The new budget is also expected to bring the undocumented but economically major sectors like agriculture and real estate under the tax net with the services and retail sectors also likely to remain in focus.
Also, there are calls from the high profile economists for taxing the informal sectors like home remittances. Dr Ishrat Hussain, former Governor State Bank of Pakistan, told Pakistan Today that billions of rupees that are being remitted annually by the overseas Pakistanis to their families should be taxed either.
Overseas Pakistanis sent back home $ 9.046 billion during July-April FY11, some $ 1.74 billion more than last year’s $ 7.306 billion.
The sources, citing official data, claimed that the government in the next budget would be setting the tax revenue target at Rs 2.1 trillion amounting to 10.3 percent of the GDP against the expected collection of Rs 1.7 trillion in the last budget. The FBR revenue, they said, is expected to be projected at Rs1.9 trillion, 9.6 percent of GDP, as against the revised target of Rs1.6 trillion in the current fiscal year.
According to sources, total budget outlay in FY12 is estimated to range between Rs 3.5 trillion to Rs 3.7 trillion with the current expenditure to stand at Rs 3.0 trillion and Rs 610 billion Public Sector Development Program.
With the economic observers linking its success with the actual taxation steps, the government for FY12 is likely to set a revenue generation target of Rs 420 billion of which some Rs 394 billion would be collected through the Federal Board of Revenue.
Despite facing a strain diplomatic atmosphere abroad and criticism from political quarters at home, Islamabad seems to be keeping its reliance on the foreign loans and aid and assistance alive, particularly that of the International Monetary Fund.
This time the economic managers would go all out to comply with demands for financial reforms linked by the disenchanted lenders from the Fund to the release of remaining two tranches of $ 3.2 billion under the 2008’s Standby Arrangement (SBA).
“The theme would be to reduce fiscal deficit by eliminating subsidies and withdrawing tax exemptions in order to pave the way for IMF’s remaining tranches,” the analysts said.
Whereas the government continues to depend on heavy loans, as some Rs 700 billion and Rs 83 billion were borrowed, respectively, from internal and external sources to finance the 4.5 percent budget deficit during July-April FY11, the analysts have long been recommending an effective official campaign to recover the “embezzled” money that is estimated to range between Rs 700 and Rs 800 billion.
Further, the poor foreign investment inflows must ring alarm bells in the corridors of power in Islamabad as according to State Bank’s provisional data, the inflow of foreign investment to the terrorism-hit country dropped by 28.6 percent or $ 492.7 million to $ 1.232 billion during first 10 months of the current financial year, July-April FY11, against $ 1.724 billion of the corresponding perioud last year.
A deteriorating law and order and acute energy shortage are the two major hurdles often cited by the economic observers while reasoning the investors’ aloofness from Pakistan.
Above two are the very important factors the government should take into account while budgeting the security expenditures for next year.
Foreign investment is considered to be the real and only permanent stabilizing factor for a developing country like Pakistan whose current account balance remained in the green zone with a surplus of $ 99 million during the first three quarters of FY11.
The country’s current accounts are, however, envisioned to see a deficit of $ 3 billion during FY12 owing to, what the economic observers say, surge in the oil import bill.
The exports, which are estimated to cross the $ 25.5 billion figure this year, are expected to ease down to $ 25 to $ 26 billion during the next fiscal year on the back of recent fall in cotton prices.
“With rising risk that foreign inflows may slowdown after the Abbottabad incident, the new federal budget is expected to favor the consolidation for economic stabilization,” the analysts viewed.
The flow of Foreign Portfolio Investment into the country’s volatile equity market, however, witnessed a robust YoY growth of 749.5 percent to stand during July-April FY11 at $ 302 million against last year’s minus $ 46.5 million.
According to analysts, the government would have to keep in check its heavy budgetary borrowing specially from the central bank which craters the former’s need through printing more currency notes, something the analysts fear if not arrested would take the poverty-stricken country to the brink of three-digit hyperinflation.
Inflationary pressures would persist at least for near future due to upward monetary expansion in the country which, the SBP data show, saw the Broad Money, M2, in Pakistan expanding to 9.62 percent or Rs 555.651 billion during July-April this year against Rs 414.769 billion or 8 percent of last corresponding perioud.
“Inflation being the main problem area is expected to slowdown but would remain on the higher side between 12 and 13 percent below the expected 14.5 percent in FY11,” the analysts observed.
As the government has visibly reduced its dependence on the State Bank for budgetary support the analysts foresee an ease in the price hike during the next financial year.
The government should also remain on guard against its heavy reliance on the commercial banks for budgetary loans, which have ballooned to Rs 283.570 billion up to April 30, keeping in mind crowding out of the private sector that happens to be the real engine of growth. Minus private sector credits and there would be no economic activity in the country leading to more joblessness that would further eventuate into poverty.
A realistically patriotic approach requires both the economic managers and the troubled nation to brace for out-of-box politico-economic measures that, if implemented in letter and spirit, would make the resource-rich Pakistan sovereign in a true sense.