On assuming power in August 2018, the Pakistan Tehreek-i-Insaf (PTI), contrary to its election promises, failed to undertake the much-needed and long-delayed structural reforms in all institutions, especially administration, where the Pakistan Administrative Service (PAS), better known as the District Management Group (DMG), controls most of the key posts, both in the federal and provincial governments. The Supreme Court has time and again pointed out the failures of successive governments in governance, including the poor justice delivery system.
The PTI Government came in with tall claims of establishing an egalitarian society and providing “justice to all.” However, more than two years down the road, it has failed to provide a roadmap for the reformation of obsolete and outmoded institutions, especially the judicial system. No country can progress economically, without fixing its justice delivery system and improving all areas of governance.
The primary focus of this article is an appraisal of the PTI Government’s fiscal performance from August 2018 onwards and the challenges it faces in 2021. However, one cannot review or analyse a government’s fiscal policy in isolation because oppressive taxes, a narrow tax base, amnesties, money and asset-whitening schemes, huge tax expenditure and massive debt, poor social spending and the high cost of running an inefficient gigantic state apparatus are all interlinked in Pakistan. Foreign lenders, donors and so-called aid agencies fund Pakistan in an attempt to reform the tax system but they have never understood that this is impossible in a society where defying the rule of law is a national trait and an expression of one’s power.
The PTI Government failed to restructure the Federal Board of Revenue (FBR) and raise taxes to the tune of Rs. 8 trillion — its main election promise, which was doable
To begin with, by hiring a huge team of ministers, state ministers and advisers, the PTI Government has belied its promise of having a small and competent cabinet and making all the state institutions efficient. Its 100-day agenda proved to be a dead horse, much before the arrival of the COVID-19 pandemic. The claims of inclusive growth and alleviating poverty through revitalising the Benazir Income Support Programme (renamed as the Ehsaas programme) proved ineffective and the pandemic is now being used as a scapegoat to cover up failures on the fiscal front.
Firstly, the PTI Government failed to restructure the Federal Board of Revenue (FBR) and raise taxes to the tune of Rs. 8 trillion — its main election promise, which was doable. Had it fulfilled its pledge, it could have obtained the required revenue to overcome its monstrous fiscal deficit and made Pakistan self-reliant in the coming years.
Successive governments have always been very keen to make efforts — unsuccessfully — to enhance tax revenues, especially through tax collection by the FBR, but failed to address the real issue, which is the huge tax expenditure and excessively high unproductive expenses. If these two are reduced even by 30 percent, Pakistan can decrease its fiscal deficit by 40-50 percent. The cost of the unprecedented tax-free perquisites and benefits available to high-ranking state functionaries have caused losses of billions of rupees to the national exchequer [Tax exemptions and concessions worth Rs. 30 billion were given to the top civil and military officers and judges of superior courts in the tax year 2019].
The FBR, in its Statement of Estimated Tax Expenditure of the Federal Government, has admitted that out of the total tax expenditure of Rs. 1150 billion in the tax year 2019, sales tax was the highest at Rs. 519 billion (45 percent), followed by income tax at Rs. 378 billion (33 percent) and customs duty at Rs. 253 billion (22 percent). It amounted to 30 percent of the FBR’s total tax collection of Rs. 3828 billion and 3 percent of the Gross Domestic Product (GDP).
Like every other government, the PTI government did not reduce its wasteful, unproductive expenditure by right-sizing and revamping or privatising the loss-bearing Public Sector Entities (PSEs). It merely resorted to patchwork measures here and there. Consequently, the fiscal year 2019-20 witnessed the government obtaining record loans, both external and internal. On the contrary, more regressive taxes were imposed and in its two-year tenure, tax exemptions/waivers/concessions amounted to Rs. 2.12 trillions.
In fiscal year (FY) 2018-19, the fiscal deficit was 8.9 percent of the GDP (Rs. 3.45 trillion) and in fiscal year 2019-20, it was 8.1 percent of the GDP (Rs. 3.37 trillion). Had the tax expenditure been curtailed by 50 percent (Rs. 500 billion) and wasteful expenses brought down by 40 percent (Rs. 400 billion), the fiscal deficit of the GDP for both the years would have been around 6 percent of GDP. It was 6.5 percent in fiscal year 2017-18.
In the pre-COVID-19 era, poor fiscal management, wrong economic policies and adoption of failed strategies pushed the country into stagflation, leading to recession, high inflation and unemployment, closing down of industries/businesses resulting in job losses, high-interest rates and extremely low growth. It generated disappointment and despair in the general public.
According to the FBR Year Book 2018-19, in the PTI Government’s first year in power, the total tax collection was Rs. 3828.5 billion as against the original target of Rs. 4435 billion, revised downward first to Rs. 4398 billion and finally to Rs. 4150 billion, showing minus 0.4 percent growth compared to FY 2017-18.
In its second year in power, the PTI government originally agreed to the International Monetary Fund’s (IMF) tax revenue target of Rs. 5555 billion. Even prior to the outbreak of COVID-19, the FBR was far short of meeting the target, despite the appointment of a competent man from outside the government cadres as pro-bono Chairman of FBR. The target was revised to Rs. 5238 billion, after the first IMF review under the $6 billion Extended Fund Facility (EFF) programme. Later, it was further reduced to Rs. 4803 billion on the eve of an incomplete second review (held prior to the COVID-19 outbreak), and after the pandemic and lockdowns, finally to Rs. 3908 billion. According to the FBR’s Year Book for 2019-20, it exceeded the third-time revised target of Rs. 3908 billion by Rs. 88.7 billion, collecting the net amount of Rs. 3997 billion — direct taxes (Rs. 1523 billion); sales tax (Rs. 1597 billion); federal excise tax (Rs. 250 billion); and customs duty (Rs. 626 billion). The refunds paid were: direct taxes (Rs. 68.6 billion), sales tax (Rs. 92.6 billion), federal excise (nil) and customs (Rs. 12.2 billion).
The FBR’s target for the current FY 2020-21 is Rs. 4963 billion. It is grossly overstated, and all economic experts predict that it will not be achieved.
On September 2, 2020, FBR officials confessed before the National Assembly’s Standing Committee on Finance that the actual liability of income tax and sales tax refunds as of June 30, 2020 was Rs. 710 billion (sales tax: Rs. 142 billion; income tax: Rs. 568 billion). If the admitted refunds payable are deducted from the total tax collection of the FBR for fiscal year 2019-20, the net figure comes to Rs. 3287 billion or just 7.7 percent of the GDP. However, it must be highlighted that the bulk of the refunds, nearly Rs. 600 billion, were blocked by the economic wizard of the previous PML-N government, Muhammad Ishaq Dar, now a proclaimed offender and fugitive, facing trial on a complaint filed by the National Accountability Bureau (NAB) for having assets beyond his known/declared sources of income.
The FBR’s target for the current FY 2020-21 is Rs. 4963 billion (a 27 percent increase from the previous target). It is grossly overstated, as highlighted by the Pakistan Institute of Development Economics (PIDE) in its report, Budget 2020-21: Highlights & Commentary, and all economic experts predict that it will not be achieved.
While announcing the budget for FY 2020-21 on June 12, 2020, amid the devastating impact of COVID-19, fixing an irrational target for the FBR attracted widespread criticism from all quarters. Interestingly, even Dr. Abdul Hafeez Shaikh, then Adviser to the Prime Minister on Finance and Revenue and now appointed Minister for six months under Article 91(9) of the Constitution, in a statement on June 13, 2020, “advised the provinces not to make their budgets on the basis of the proposed Rs. 4.963 trillion tax collection target fixed for the FBR for fiscal year 2020-21.” He clearly warned that “the provinces should make their budgets while keeping in mind the Federal Board of Revenue’s past performance and the difference between performance, projections and reality.” It was an admission of the fact that the budget was not based on universally established norms of good fiscal management; consequently, it led to wider-than-expected fiscal deficit and further borrowing.
In the first five months of the current FY, the FBR has collected Rs. 1.69 trillion, showing a growth of around 4.2 percent. It needs a 22 percent growth in the remaining 7 months to achieve the target of Rs. 4.963 trillion. A recent report reveals that the IMF has projected a collection shortfall of over Rs. 300 billion and “is asking Pakistan to introduce a mini-budget.” If the IMF prevails, additional taxes will be levied which would stymie the revival of an already ailing economy. Strangely enough, while the IMF is lauding other countries for giving tax incentives to businesses to recover from the losses incurred due to COVID-19, it is insisting that Pakistan continue with its oppressive taxes and, additionally, further impose burdensome indirect taxes, rather than pressing for the withdrawal of exemptions that were given to the privileged classes. Ironically, even after imposing multiple and higher taxes, the FBR has failed to enforce the filing of tax returns by the 7.4 million people who, according to its own admission, paid withholding taxes in billions. However, the problem on the fiscal front is not only related to the inadequate revenues, but also to the quantum of debt servicing, tax expenditure and wasteful expenses incurred on running the gigantic and inefficient government machinery.
“The FBR contributes around 80 percent of the total revenues of the federal government; therefore, any miscalculation or mistargeting can severely cripple the budget, not just of the federal but the provincial governments as well” — Budget 2020-21: Highlights & Commentary, PIDE.
In Annex-II appended to Economic Survey 2019-20, tax expenditure is shown at Rs. 1,149.95 billion. The PTI, in its first two years, incurred a tax expenditure of Rs. 2.12 trillion — an amount equal to the cost of two Mainline One (ML-I) projects of the China-Pakistan Economic Corridor (CPEC). The estimated cost of the ML-1 project is Rs. 1.1 trillion or $7.2 billion — and the government has given Rs. 2.2 trillion in tax concessions!
The PTI government is using the COVID-19 pandemic as a face-saving device, but the fact remains that from the outset its fiscal policy was a disaster.
In fiscal year 2019-20, debt servicing by the federal government amounted to Rs. 2620 billion (domestic, Rs. 2313 billion and foreign, Rs. 307 billion) against the net revenues of Rs. 3278 billion after transfer to the provinces. Debt servicing formed 79 percent of the total net revenues of the federal government and 65 percent of the tax collection of the FBR. This is the real challenge faced by the federal government on the fiscal front.
The PTI Government is using the COVID-19 pandemic as a face-saving device, but the fact remains that from the outset its fiscal policy was a disaster. Ex-Finance Minister Asad Umar, while presenting the Finance Supplementary (Amendment) Bill 2018 on September 18, 2018 in the National Assembly, took the traditional bureaucratic approach to balance the books. He failed to include the key areas of Theme 3: Revitalise Economic Growth, which was part of the First 100-Day Plan of PTI, unveiled during the election campaign after forming the Federal Government.
The PTI Government lacked a roadmap to fulfil its election promise of collecting Rs. 8 trillion. On the contrary, the FBR’s target was reduced by Rs. 169 billion — a reduction of 3.5 percent from the original target. The shortfall of Rs. 606.5 billion in collection led to a historic high fiscal deficit of 8.9 percent of the GDP, leading to unprecedented indebtedness. The PTI Government had nine months in FY 2018-19 to initiate reforms for revenue mobilisation, but its economic managers did not bother to implement even its own tax reform agenda unveiled/promised during its election campaign.
However, instead of blaming FBR officials alone for their inefficiency, the PTI Government must admit its lack of will to reduce exemptions, concessions, waivers and amnesties to powerful segments of society. If only 40 percent of the taxes waived/forgone in fiscal year 2019-20 were recouped in the Finance Act 2020, there would have been a fiscal space of Rs. 600 billion to reduce taxes. But the PTI Government, like its predecessors, showed complete apathy towards the weaker sections of society and the small and medium enterprises (SMEs), who were left to face the unbearable toll of COVID-19, by not reducing the exorbitant sales tax, withholding tax, advance tax, and the high cost of utilities as well as the oppressive 12.5 percent advance income tax from mobile-users, irrespective of their quantum of income. The latest data on the website of the Pakistan Telecommunication Authority (PTA) shows that the total number of subscribers as of August 31, 2020 were 169 million, of which 85 million were 3G/4G subscribers, 3 million basic telephone-users and 87 million broadband subscribers. All of them are also paying 19.5 percent sales tax on services to provinces and 17 percent federal excise duty, if based in Islamabad Capital Territory (ICT).
The PTI Government has added Rs. 397 billion more in public debt during the first four months of the current fiscal year, which is contrary to the claims allegedly made by the Prime Minister and the Finance & Revenue Minister, Dr. Abdul Hafeez Shaikh
In the Finance Supplementary (Second Amendment) Bill of 2019 presented on January 23, 2019, again no steps were announced for making the FBR efficient, simplifying taxes and making them fair, low and broad-based to harness the real potential, drastically reduce wasteful expenditure and accelerate growth.
In the two budgets for FY 2019-20, presented on June 11, 2019, and for FY 2020-21, on June 12, 2020, respectively, the burden on businesses and common citizens increased manifold as indirect taxes were enhanced, while asset whitening/amnesties/exemptions/waivers/immunities were extended to the rich and the mighty. Before coming to power, the PTI labelled tax amnesties as “immoral” and “unlawful” and a “slap on the face of honest taxpayers.”
On November 7, 2019, the FBR admitted before the National Assembly’s Standing Committee on Finance & Taxation that the governments of the Pakistan Muslim League (Nawaz) and the PTI, in their amnesty schemes of 2018 and 2019 respectively, extended a benefit of Rs. 61.4 billion to 191 billionaires, caught concealing undeclared/untaxed offshore assets. The FBR revealed that definite information was available against them under the Automatic Exchange of Information (AEOI), an initiative of the Organisation for Economic Cooperation and Development (OECD), yet amnesties were given to them, and their names kept “confidential.” It belies Prime Minister Imran Khan’s tall claims of accountability and transparency for all.
For the PTI Government, the main challenges on the fiscal front in 2021 are not only revival of the economy amidst the rising human and financial toll taken by the COVID-19 pandemic, but also management of the mounting debt burden and meeting of revenue targets fixed for the fiscal year 2020-21. According to a recent report, the PTI Government has added Rs. 397 billion more in public debt during the first four months of the current fiscal year, which is contrary to the claims allegedly made by the Prime Minister and the Finance & Revenue Minister, Dr. Abdul Hafeez Shaikh. The report states that the public debt of Rs. 35.1 trillion in June 2020 “increased to Rs. 35.5 trillion by end-October, according to the State Bank of Pakistan (SBP). There was an increase of Rs. 397 billion or 1.2 percent in the debt stock, which was lower than the pace of increase recorded in the previous months.”
The PML-N government, during its five-year rule, added Rs. 5.65 billion a day to public debt, but the PTI government’s record is even more worrisome as it has been adding “on average, Rs. 13.2 billion a day
The PTI Government borrowed over $13 billion in foreign loans in the fiscal year 2019-20. The burden of the ever-increasing national debt during PTI’s tenure is also highlighted by the Institute of Policy Reforms (IPR) in its report, Pakistan’s debt and debt servicing is cause for concern.
When it assumed power in August 2018, the PTI Government inherited a public debt of nearly Rs. 24.2 trillion. The Pakistan Muslim League (Nawaz) government during its five-year rule added Rs. 5.65 billion a day to public debt, but the PTI government’s record is even more worrisome as it has been adding “on average, Rs. 13.2 billion a day,” according to the IPR report. The federal budget deficit was Rs. 894 billion or 2 percent of the GDP in the first four months of the current fiscal year due to the double-digit growth in expenditures, despite a squeeze on both defence and development spending.
It is high time the federal and provincial governments chalked out a national plan for the long-overdue second Green Revolution in Pakistan for increasing productivity and quality, reducing costs and establishing agro-based industries capable of meeting local demands and producing a value-added exportable surplus. Our emphasis should be on growth, productivity and enhancing exports through diversification and value addition.
The IT sector has been highly ignored and heavy taxation on the telecom sector is proving to be anti-growth. This needs to be rectified.
Managing a high fiscal deficit coupled with a massive debt burden is the toughest challenge faced by the country’s economic managers in 2021. The obvious and undisputed solution is a substantial increase in resources and a drastic reduction in spending, but this is easier said than done. For the last many decades, Pakistan’s fiscal policy has remained under immense pressure owing to the constant under-performance of the FBR, continuing security-related outlays, rise in wasteful expenditure and higher than targeted subsidies, the losses of the PSEs, and circular debt, especially in the energy sector.
The Prime Minister has to realise that the World Bank/IMF’s iniquitous prescriptions of high taxes and complicated laws will not resolve our fiscal woes. These will bring more miseries as the economy is in recession.
In the days of global economic recession, following the pandemic, the government’s first and foremost priority should have been to take measures to ensure survival, revival and growth in all sectors. However, to this day no concrete steps have been taken by the federal or provincial governments to meet this emergent situation. Resource mobilisation should be given preference in order to build infrastructure, facilitate the growth of SMEs in the industrial sector and small farms in the agricultural sector for an employment-intensive and equitable economic growth process. There is a need to run PSEs with equity stakes for the poor through public-private partnerships. This would set the stage for a structural change that could help achieve economic growth for the people and by the people, which is presently restricted to the elites.
The Prime Minister has to realise that the World Bank/IMF’s iniquitous prescriptions of high taxes and complicated laws will not resolve our fiscal woes. These will bring more miseries as the economy is in recession. The viable solution would be to reduce and simplify taxes, reduce the huge tax expenditure by withdrawing exemptions available to the rich and the mighty, give relief to the taxpayers as they have suffered heavily during the lockdown, and pay all outstanding refunds.
In order to progress, Pakistan must end its anti-growth/anti-business taxes, dismantle all elitist structures and empower the masses at the grass-roots level by implementing Article 140A in letter and spirit, thus ensuring social service delivery and prosperity to the masses. No other plan will work, not even the Pakistan Raises Revenue Project, for which a $400 million loan was taken by the federal government from the World Bank. Following in its footsteps, the Punjab Government also decided to borrow $304 million from the World Bank for tax reforms. Such loans, which were not needed, were taken when the debt-to-GDP ratio had reached an alarming level of 87.2 percent by June 30, 2020 — a 15 percent increase in PTI’s two-year tenure. It runs contrary to the tall promises made by the Prime Minister during his election campaign, in which he stated that after coming to power his government would not take any foreign loans, but would raise revenues to the tune of Rs. 8 trillion through its own efforts.
If the PTI Government wants to put Pakistan on the path to prosperity, it must drastically cut down on expenditure, eliminate its circular debt, get rid of loss-bearing PSEs and improve efficiency and productivity in all sectors of the economy. State lands situated in the heart of the cities should be leased out for business and commercial ventures, which would generate substantial funds, ensure rapid growth and create new jobs.