1. Pakistan’s Weak Fiscal Framework Macroeconomic Implications Sakib Sherani Comsats │ October 2013

2. Fiscal Framework Marked by structural rigidities:

3. Fiscal Framework Marked by structural rigidities: Revenue

4. Fiscal Framework Marked by structural rigidities: Revenue –Narrow tax base

5. Fiscal Framework Marked by structural rigidities: Revenue –Narrow tax base Reliance on indirect taxes

6. Fiscal Framework Marked by structural rigidities: Revenue –Narrow tax base Reliance on indirect taxes –Low tax buoyancy and elasticity

7. Fiscal Framework Marked by structural rigidities: Revenue –Narrow tax base Reliance on indirect taxes –Low tax buoyancy and elasticity –Tax assignment & provincial fiscal effort

8. 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

9. Fiscal Framework Marked by structural rigidities: Expenditure

10. Fiscal Framework Marked by structural rigidities: Expenditure –Generous fiscal transfers regime (NFC Award)

11. Fiscal Framework Marked by structural rigidities: Expenditure –Generous fiscal transfers regime (NFC Award) –Debt servicing & defense-related

12. Fiscal Framework Marked by structural rigidities: Expenditure –Generous fiscal transfers regime (NFC Award) –Debt servicing & defense-related –Untargeted subsidies

13. 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

14. Pakistan’s Tax Culture 14

15. Pakistan’s Tax Culture 180 million people 15

16. Pakistan’s Tax Culture 180 million people 3.7 million tax registered 16

17. Pakistan’s Tax Culture 180 million people 3.7 million tax registered 711,000 file return 17

18. Pakistan’s Tax Culture 180 million people 3.7 million tax registered 0.7 million file return (0.9 mn salaried) 18

19. 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

20. 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

21. 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 21

22. Tax vs GDP Growth 22

23. Context Stagnant Tax revenues …. 23 Tax to GDP (%) Source: FBR

24. Context Stagnant Tax revenues …. 24 Tax to GDP (%) Source: FBR Avg = 9.2%

25. Object Classification 2012-13 (B) % of Total Principal repayment of loans7,562 71% Interest payment928 9% Operating expenses884 8% Grants, Subsidies & Loan write offs725 7% Employees related Expenses486 5% Civil158 1% Military328 3% Investment30 0.3% Physical assets14 0.1% Civil Works10 0.1% Repairs & Maint.9 0.1% Transfers8 0.1% Total Expenditure10,650 100% 25

26. Object Classification 2012-13 (B) % of Total Principal repayment of loans7,562 71% Interest payment928 9% Operating expenses884 8% Grants, Subsidies & Loan write offs725 7% Employees related Expenses486 5% Civil158 1% Military328 3% Investment30 0.3% Physical assets14 0.1% Civil Works10 0.1% Repairs & Maint.9 0.1% Transfers8 0.1% Total Expenditure10,650 100% 26 = 80%

27. Context Rising losses of Power sector …. 27 Rs bnTariff Capital InjectionsTotalAs % GDP 20081330 1.3 20091103014113.2 20101711252962.0 20113351204552.5 20124643918554.1 Total1,2149372,1512.6 Source: MoF; Sakib Sherani

28. Fiscal deficit vs Target 28 Year Rs billionAs % GDP TargetActualTargetActual 2007-084237784.07.6 2008-095826804.75.2 2009-107629295.16.3 2010-117211,1904.06.6 2011-12*8261,7614.08.5 2012-131,1052,0884.78.8 * includes 1.9% of GDP of power sector debt consolidation

29. Context Record fiscal deficits …. 29 Source: MOF

30. Macroeconomic Implications

31. A weak fiscal framework impacts:

32. Macroeconomic Implications A weak fiscal framework impacts: –Public debt

33. Macroeconomic Implications A weak fiscal framework impacts: –Public debt –Growth and investment

34. Macroeconomic Implications A weak fiscal framework impacts: –Public debt –Growth and investment Pernicious long run impact

35. Macroeconomic Implications A weak fiscal framework impacts: –Public debt –Growth and investment Pernicious long run impact –Inflation

36. Macroeconomic Implications A weak fiscal framework impacts: –Public debt –Growth and investment Pernicious long run impact –Inflation –Balance of payments

37. Macroeconomic Implications A weak fiscal framework impacts: –Public debt –Growth and investment Pernicious long run impact –Inflation –Balance of payments –Public service delivery

38. 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 38

39. A vicious spiral Fiscal deficit Govt borrowing Public debt Monetary expansion Inflation BOP stress 39

40. Impact on Growth & Investment Source: SBP; Sakib Sherani

41. Domestic constraints Expanding Firm Benchmark Firm Severity of Constraints Reported by SAR Benchmark and Expanding Firms Urban Formal Sector Source: World Bank

42. Domestic constraints Expanding Firm Benchmark Firm Severity of Constraints Reported by SAR Benchmark and Expanding Firms Urban Formal Sector Source: World Bank No. 4

43. Govt Borrowing & Inflation 43 Source: IMF

44. Public debt

45. Conclusion I. M. F.

46. Conclusion I ts M ostly F iscal

47. Thank You