pakistan’s weak fiscal framework macroeconomic implications
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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. - PowerPoint PPT PresentationTRANSCRIPT
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Pakistan’s Weak Fiscal Framework
Macroeconomic Implications
Sakib Sherani
Comsats │ October 2013
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Fiscal Framework
Marked by structural rigidities:
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Fiscal Framework
Marked by structural rigidities:
• Revenue
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Fiscal Framework
Marked by structural rigidities:
• Revenue
– Narrow tax base
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Fiscal Framework
Marked by structural rigidities:
• Revenue
– Narrow tax base
• Reliance on indirect taxes
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Fiscal Framework
Marked by structural rigidities:
• Revenue
– Narrow tax base
• Reliance on indirect taxes
– Low tax buoyancy and elasticity
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Fiscal Framework
Marked by structural rigidities:
• Revenue
– Narrow tax base
• Reliance on indirect taxes
– Low tax buoyancy and elasticity
– Tax assignment & provincial fiscal effort
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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
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Fiscal Framework
Marked by structural rigidities:
• Expenditure
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Fiscal Framework
Marked by structural rigidities:
• Expenditure
– Generous fiscal transfers regime (NFC Award)
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Fiscal Framework
Marked by structural rigidities:
• Expenditure
– Generous fiscal transfers regime (NFC Award)
– Debt servicing & defense-related
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Fiscal Framework
Marked by structural rigidities:
• Expenditure
– Generous fiscal transfers regime (NFC Award)
– Debt servicing & defense-related
– Untargeted subsidies
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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
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Pakistan’s Tax Culture
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Pakistan’s Tax Culture
180 million people
15
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Pakistan’s Tax Culture
180 million people
3.7 million tax registered
16
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Pakistan’s Tax Culture
180 million people
3.7 million tax registered
711,000 file return
17
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Pakistan’s Tax Culture
180 million people
3.7 million tax registered
0.7 million file return (0.9 mn salaried)
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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
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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
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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
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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)
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Context
Stagnant Tax revenues ….
23
Tax to GDP (%)
Source: FBR
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Context
Stagnant Tax revenues ….
24
Tax to GDP (%)
Source: FBR
Avg = 9.2%
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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%
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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%
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= 80%
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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
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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
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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
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Macroeconomic Implications
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Macroeconomic Implications
• A weak fiscal framework impacts:
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Macroeconomic Implications
• A weak fiscal framework impacts:
– Public debt
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Macroeconomic Implications
• A weak fiscal framework impacts:
– Public debt
– Growth and investment
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Macroeconomic Implications
• A weak fiscal framework impacts:
– Public debt
– Growth and investment
• Pernicious long run impact
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Macroeconomic Implications
• A weak fiscal framework impacts:
– Public debt
– Growth and investment
• Pernicious long run impact
– Inflation
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Macroeconomic Implications
• A weak fiscal framework impacts:
– Public debt
– Growth and investment
• Pernicious long run impact
– Inflation
– Balance of payments
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Macroeconomic Implications
• A weak fiscal framework impacts:
– Public debt
– Growth and investment
• Pernicious long run impact
– Inflation
– Balance of payments
– Public service delivery
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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
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A vicious spiral
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Impact on Growth & Investment
Source: SBP; Sakib Sherani
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Domestic constraints
Expanding Firm
Benchmark Firm
Severity of Constraints Reported by SAR Benchmark and Expanding Firms Urban Formal Sector
Source: World Bank
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Domestic constraints
Expanding Firm
Benchmark Firm
Severity of Constraints Reported by SAR Benchmark and Expanding Firms Urban Formal Sector
Source: World Bank
No. 4
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Govt Borrowing & Inflation
43Source: IMF
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Public debt
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Conclusion
I. M. F.
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Conclusion
Its Mostly Fiscal
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Thank You