Struggling with an economy that seems constantly doomed to volatile instability and stuttering growth, achieving meaningful development has become a dream that appears to remain forever out of Pakistans reach. Amidst the growing external financing gap and the depletion of the countrys foreign exchange reserves due to debt re-payments and deficit financing, the news that the central government has failed to achieve the annual tax collection target yet again stings like the metaphorical salt being rubbed into the wounded soul of the economy. Remaining largely stagnant between 9-10 percent over recent years, Pakistans tax-to-GDP ratio is amongst the lowest in the world, leading to a stifled growth rate, rising inflationary pressures and the ever present risk of a Balance of Payments crisis. Added to this, the ruling coalitions lax expenditure control has meant that state expenditure cannot be maintained without additional borrowing from local institutions; borrowing which has already gone up by 29 percent over the same period of last year to Rs.7,437 billion at the end of April. The current governments inability to sustain diversified financing sources has also meant that government borrowings have crowded out credit availability to the private sector increasing pressure on liquidity. While the poster boys of the ministry are busy celebrating the end of FY12 "with a record level of tax revenue collection expected to surpass Rs.1,910 billion", it is essential not to forget that this tax revenue growth comes mainly as a consequence of monumental growth in sales tax on petroleum and related products, and any major setback on oil prices is very likely to have a deep impact on tax revenue generation. With the gap between income and expenditure widening further by Rs.80-85 billion during the current fiscal year, it has mainly been the absence of a functionally integrated tax administration that has led to the fiscal deficit going above 60 percent of the countrys GDP; a frightening prospect that makes it increasingly difficult for the government to bring the public sector debt under 40 percent of the GDP by FY14 as envisioned in the Medium Term Budgetary Framework. A major reason for these statistics spring from deeply rooted structural inconsistencies and a lack of resolve on the part of the powers that be to reform outmoded economic structures which have been responsible for major tax distortions. In that vein it is important to mention that rural incomes are increasing consistently. Now is the time that legislators should rethink the issue of taxing agricultural income. The sector constitutes a quarter of the countrys GDP while contributing less than one percent in taxes. The focus must shift to equitable taxation of all incomes, including agriculture sector. Moreover, the need to set attainable long-term goals to limit the fiscal deficit and decrease public borrowing remains implicit at this point. With the countrys fate today mired by circular debt in the energy sector stoked by a historical trend of inadequate resource mobilisation, financing expenditure -particularly development expenditure- conducive to measurable growth is becoming increasingly difficult. Until the stakeholders can start paying for them, basic social services and infrastructural requirements cannot be provided in the future.
========================================================================= Drivers of the Public Debt Burden ========================================================================= (% of GDP) FY07 FY08 FY09 FY10 FY11 FY12P ========================================================================= Public debt to GDP 60.1 59.1 59.7 60.4 59.4 58.2 Real growth of public debt 2.3 8.3 5.2 4.3 1.1 2.4 Real growth of revenue 11.9 (0.6) 2.9 0.3 (8.4) 1.5 Real growth in GDP 6.8 3.7 1.7 3.1 3.0 3.7 =========================================================================
Source: SBP
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