Post-budget seminar: Pasha praises, criticises Sindh government in equal measure

Dr Hafiz Pasha, former federal finance minister and a well-known economist, has said the delivery of basic services in Sindh has virtually collapsed. He was speaking at a post-budget seminar, which was jointly organized by Karachi Chamber of Commerce and Industry and Institute of Policy Reform at local hotel here on Monday.
He said it was unacceptable that Sindh government has failed to deliver basic services in the province despite after getting Rs 1 trillion and added that there is no improvement in basic social indicators; and no increase in educated workforce during the last three years if seen from the prism of NFC award.
He said that Pakistan Social Living Standard Measure Survey indicated a 2 percent decline in overall literacy rate to 58 per cent and Sindh has witnessed a 4 percent decline, despite having a favourable NFC award. Dr Pasha said that money was efficiently spent in the era 2003 to 2008 and now immunisation rate, which was the most basic function of people of Pakistan, fell from 82 per cent to 76 per cent in a year where Sindh had dropped by 13 points, despite negotiating well in NFC award and getting big transfers.
He suggested the authorities concerned to add performance indicator before awarding the next NFC award in order to make the provinces accountable for their spending, saying that authorities should adopt the Indian model to monitor the targets and if provinces meet their targets, transfers should be carried out else they would be fined. On the other hand, he lauded the performance of Sindh Revenue Board (SBR), saying that SRB with its innovation and commitment escalated its revenue collection to the level of Punjab's, despite 2.5 times less in size. He also raised question on financing of the protection programme announced by Punjab government in its budget 2015-16 for police, disabled persons, poor, etc.
He lauded the decision to reduce the rate of sales tax on services from 15 percent to 14 percent by Sindh government, despite a low economic growth, saying that Sindh has set an example for all other revenue collection authorities by proving that a reduction in tax rate increases revenue collection.
Dr Pasha said that federal government could not ignore provincial governments as around 40 percent of services sector falls under the provincial ambit. He said that the NFC award was aimed at decentralising the resources to uplift the standard of backward provinces especially in education and health sectors. He said that government had miserably failed to achieve the target of Tax-to GDP ratio. Contrary to the report of 7th NFC secretariat for next five years, the provinces had received Rs 1000 billion less than projected amount. Resultantly, the provinces spent Rs 1100 billion less on development as per projection and needed an additional amount of Rs 250 billion annually.
He said that growth in social indicator was not witnessed in post-NFC era due to absence of local governments and urged the authorities concerned to ensure well-defined sources of revenue for local governments before bringing them it back. Moreover, he said that Sindh and Balochistan must be allocated their shares in gas revenue and similarly profits generated from hydro-electricity should be shared with KPK. He also expressed concern over zero allocation for KPK in hydro-electricity profits by federal government, saying that although it was not a part of NFC, KPK had a constitutional right to get its share from hydro-electricity profits.
He also reprimanded the federal government for collecting Gas Infrastructure Development Cess (GIDC), saying that collection made in GIDC account despite having Gas Development Surcharge, was unjustified. He said that there was a steady encroachment by federal government on the provinces' taxpayers on account of advance withholding tax; adding that 35 percent sales tax was being collected on telecom services where provinces collected 19.5 percent sales tax on services while the rest of the other was "forcibly" collected by federal on account of advance WHT for the last two years.
"The same has been done by federal government in property and motor vehicle registration." There is no rationale to collect Federal Excise Duty (FED) when the provinces collect sales tax on services," he added. He further said that it was the responsibility of provincial government to protect industries, especially agro-based industries, as there are 22 different interactions of provincial departments with the industry and if the provincial governments wants to cut cost of business, these interactions must be reduced.
Earlier, Humayun Khan former commerce minister, said that the performance during fiscal 2014-15 was mixed at best. He said that it was important to see whether government's policies and performance address major challenges faced by the economy. The economy has had seven years of low growth. Severe infrastructure and social deficit also restrict economic activity. The tax burden fell unevenly on the people. Indirect levies and increase in liability of those who already pay taxes may lead to more tax burden.
He said that policymakers have focused entirely on fiscal consolidation within the ongoing IMF program. There were some positives. Inflation rate and current account deficit declined mostly because of a steep fall in oil prices; in other areas, however, the economy performed poorly.
Large-scale manufacturing grew at an estimated 2.5 per cent while agriculture showed a modest growth with a decline in wheat, maize, and sugarcane production. Cotton production increased and the service sector performed well.
The country's two major concern of security and continued loadshedding impede economic activity. Coupled with a steep fall in private credit, these factors caused private investment to fall to 9.7 per cent of GDP, perhaps the lowest level ever. Public investment is likely to be 3.4 per cent of GDP and overall Investment to CDP ratio is very poor. The economy seems to be stuck in a low growth trap. Its inability to create new jobs is especially worrying.
Once again, FBR tax revenues will miss the reduced target of Rs 2,691 billion for 2014-15. For the first ten months, revenue grew by 12.7 per cent only compared to the budgeted growth rate of 24 per cent. This is despite indiscriminate increase in indirect taxes during the year.
A shortfall in revenues may lead to an inevitable cutback in PSDP releases. As of May 22 2015, the government had released less than 60 per cent of the budgeted amount. The power sector continues to underperform, raising questions about management rather than generation.
In 2014-15, there was a modest increase in generation capacity, but actual power supply still fell by 2.3 per cent and the government has been unable to address the enduring issues of sustainability of the sector. Humayun said that worsening social sector indicators are especially alarming and this is perhaps for the first time in Pakistan's history. Literacy rate has fallen from 60 to 58 percent. Immunisation fell by 6 points from 82 to 76 percent, and percentage of household with improved water declined by 4 points from 30 percent to 26 percent.
With a reduced fiscal deficit its prime objective, there seems no possibility of a jump in GDP growth rate. The budget seems to have been prepared on unrealistic assumptions. The budget sets a fiscal deficit target of 4.3 percent of GDP. On the other hand, it has allowed growth of 29 percent in PSDP and a fall of 14 percent in non-tax revenues. This is overly optimistic, he added.
He said that FBR revenues of 3.1 trillion are ambitious and require a growth rate never achieved before. The budget projects a 10 percent reduction in current expenditure. A reduction in subsidies and provincial surplus are fragile assumptions. The government has done nothing to reduce line losses in DISCOs and provinces are likely to increase expenditure to establish high benchmarks for the next NFC award. The budget estimates an additional yield of 253 billion in tax revenue from the multitude of taxation proposals. He said that allocations had been reduced in some areas including higher education (18%), water and irrigation projects 35 %, and health by 25%. 80 % of power projects allocations are for LNG power plants and added that allocation for hydro projects has actually declined. People from different walk of life attended the seminar.