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Pakistan may miss fiscal deficit target - LahoreEstate - 02-10-2009 09:43 AM
AHMED MUKHTAR
ISLAMABAD (February 10 2009): Pakistan might miss its fiscal deficit target unless it takes strong corrective actions, says Fiscal Policy Statement 2008-09 released a few days back by Finance Ministry.
It said: "The revenue balance for the first quarter is in deficit by Rs 42.8 billion while the primary balance is in deficit by Rs 24.5 billion. If the current trends persist, and strong corrective measures are not undertaken promptly, the annual fiscal deficit target of 4.2 percent of GDP for 2008-09 may not be met."
The statement stresses on implementing rules-based fiscal policy rather than discretionary measures based policy, which proves ad hoc to cope with day to day economic issues.
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It is very crucial that the government makes an effort to achieve the fiscal deficit target as this would send a strong signal of the government's commitment to fiscal discipline and macroeconomic stability, adds the statement. Pakistan failed to fulfil two elements of the 'Fiscal Responsibility and Debt Limitation Act 2005 in fiscal year 2007-08.
Under the Act, the government was required to achieve zero revenue deficit by the end of the fiscal year 2007-08. Instead of achieving, it jumped to an 18-year high (with the exception of 1998-99), increasing by Rs 359 billion, or 3.4 percent of GDP.
The Act also required to reduce public debt at least 2.5 percentage points of GDP every year. Public debt, instead of declining by 2.5 percentage points of GDP, in fact increased by 1.1 percentage points. The Statement does not doubt the government's efforts.
It says: "The government is making serious efforts to reduce imbalances in the shortest possible time because it believes that the longer the imbalances persist, the greater will be the adjustment requirement and more will be the associated pain for the common man."
It expects that the government will return to a rule-based fiscal policy (rather than discretionary measures which prove normally ad hoc to cope with day to day issues) and will adhere to the principles as laid down in the FRDL Act 2005, in the next two years, that is, by the end of the fiscal year 2009-10.
The Statement says that there is increasing evidence that the present tax system can no longer serve the needs of the country. Pakistan's tax system faces several structural weaknesses that resulted in the stagnation of tax-to-GDP ratio at around 10 to 12 percent over the last many years.
"It is time to take a fresh look at Pakistan's tax system and tax administration which require far-reaching reforms. Widening the tax base by reducing exemptions, incentives and concessions is one of the guiding principles of an efficient tax system.
"No country can develop on a sustained basis with tax-to-GDP ratio at 10 percent. Broadening the tax bases by bringing sectors which are either un-taxed or under-taxed into the tax net is the only way forward in achieving a tax-to-GDP ratio at 16 to 17 percent which is the average tax effort of developing countries.
"Going forward, Pakistan will be needing large resources to build and strengthen the country's physical and human infrastructure. With current limited tax bases, it will be next to impossible to generate adequate resources to fund these infrastructure programs. This would lead to increasing debt burden."