ISLAMABAD: Pakistan was in the spotlight again this week over its need to reform the tax system as the government and potential donors worked on a plan to help the state in the face of a financial crisis. Just 1% of tax is collected in Pakistan.

Economic policymakers led by Shaukat Tarin, the Pakistan prime minister’s adviser on finance, said a radical improvement in income tax collection was vital in securing a crucial loan programme under discussion with the International Monetary Fund, reported the Financial Times.

Under the IMF loan, Pakistan is seeking to borrow $7.6bn (€6bn, £5bn) until the last quarter of 2010 to stave off a crisis on forthcoming debt payments. The government’s net liquid foreign currency reserves, which are below $3bn, are just enough to pay for about two to three weeks of imports.

Those reserves are likely to fall further without the IMF’s approval on the future policy direction of Pakistan’s economy, including measures such as tax reform. Only about 1 per cent of Pakistan’s population of more than 165m pay income tax, while the country’s tax-to-GDP ratio of about 10 per cent is the lowest in south Asia.

Mr Tarin said his objectives included raising the ratio to at least 15 per cent in the next five years. “We have to make everyone pay their dues. There should be no sacred cows. Everyone must pay their taxes so that we can overcome large-scale evasion and have more revenue to lower our fiscal deficit,” he said.

MANILA, PHILIPPINES – The Asian Development Bank (ADB) has approved a $500 million loan to support Pakistan’s efforts to address harm done to poor families and the country’s economy by unprecedented international food and fuel price hikes.

The ADB loan will support ongoing changes in the energy and agriculture sectors, and will help lay the foundation for a radical transformation of the economy by diversifying, deepening and expanding a competitive industrial sector, and creating much-needed jobs for Pakistan’s young and growing labor force.

ADB support comprises a key part of a global financing plan underpinning the government’s economic stabilization program. The stabilization plan includes actions to shore up and manage foreign reserves, improve monetary policy, trim the fiscal deficit and its financing gap, and cut back on government borrowing from the State Bank of Pakistan. The stabilization plan is focused on protecting the poor through special safety net programs, and reassuring financial markets through fiscal and monetary discipline.

“Addressing the impact of fuel and food price increases unleashes immediate benefits to Pakistan’s people and to markets,” said Juan Miranda, Director General of ADB’s Central and West Asia Department. “The fiscal space created by reforms will cut financing gaps, generate conditions for a better deal in the sectors down the road, and provide much-needed cash flow to pay for safety net programs that protect the most vulnerable. ADB’s support balances the need for addressing the needs of Pakistan’s people while reassuring markets that the government is on the right track with its ongoing economic stabilization program.”

The stabilization plan was formulated by the Government, with technical advice from other parties. “ADB financing takes place within the context of this stabilization framework,” added Mr. Miranda. “We are one of several parties contributing to the financing of this plan; others will soon follow with their own financing and programs.”

Pakistan will strengthen the legal and regulatory framework of its financial sector through the ADB program. The State Bank of Pakistan, working closely with the government, has undertaken a series of actions to improve risk management in the sector, strengthen payment systems and protect consumers. This will create stability at a time when international markets are in turmoil. “The measures supported by ADB’s program will benefit ordinary Pakistanis, directly as well as indirectly,” said Mr. Miranda. “Timing is of the essence here.”

ADB is a major financing partner of Pakistan. Its strategy focuses on three areas: infrastructure (roads, irrigation and logistics), utilities (power, energy, urban services) and reforms (including social service provision and finance, public financial resource management, financial sector intermediation and capital markets development).-ADB Media Center

ISLAMABAD: Due to Pakistan economy’s burgeoning income-expenditure gap, the government’s borrowing for budgetary support increased to Rs58.24 billion during the first month of fiscal year 2008-09, depicting an increase of 40.95 per cent compared to borrowing of Rs41.32 billion in the corresponding month of the last fiscal.

During July 1 to July 26, government’s borrowing from the State Bank of Pakistan stood at Rs30.07 billion and from scheduled banks Rs28.17 billion, while in corresponding month of the last fiscal borrowing from the central bank stood at Rs41.32 billion however Rs4.07 billion were retired of
scheduled banks. Economists believe that expansionary government fiscal policy is also considered as a source of diluting effects of the State Bank of Pakistan’s tight monetary policy formulated for capping high inflation.

It is feared that running a loose fiscal policy may crowd out private investment in the country. Currently, inflation is touching a record high which is not only affecting the macroeconomic indicators but also severely disturbing social life of millions of poor Pakistanis. Besides, the loose policy had also crowded-out private investment in the country. Though public spending help in developing right infrastructure for encouraging private investment, however if surge in the government spending
is not accompanied by increase in government revenue and proportionate hike in real GDP, it creates public debt and inflation respectively.

The higher public spending may put upward pressure on the interest rates and thus discourage private investors to invest. It is worth-mentioning that during fiscal year 2007-08, fiscal deficit stood at Rs777 billion or 7.4 per cent of GDP against Rs398.8 billion (4 per cent of GDP) targeted for the
fiscal under review.

In order to bring back the budget on a sustainable track, fiscal deficit for 2008-09 is proposed at 4.7 per cent of GDP i.e. Rs582.3 billion. During July-June 2007-08, the government borrowed Rs461.28 billion from banks (scheduled and central bank), which is about 469 per cent or Rs380.28
billion more than the actual target of Rs81 billion for fiscal year 2007-08, while Rs359.26 billion (or 352 per cent) more than, it borrowed in corresponding period of the last fiscal 2006-07 (Rs102.015 billion). More worrisome was that the government borrowing from the SBP increased to alarming Rs633.17 billion as against Rs58.57 billion it retired last year.

Of scheduled banks, it retired Rs171.89 billion against Rs160.59 billion it borrowed in corresponding period of the last fiscal. It is also feared that if the government was unable to attract external
inflows as a result of low remittances, slow down of privatization proceeds, the borrowing volume could balloon to unbearable level that could further affect the government’s efforts to rein in the inflationary pressure and bring down the poverty level in the country.

The State Bank since last year has time and again advised the government to reduce its dependence on bank borrowing especially, on SBP in order to control inflation and support the monetary policy. According to the bank, the excessive borrowing from the SBP spur the inflationary pressure in economy due to excessive money circulation in economy.

Resultantly, it becomes a source of demand pull inflation, a scenario when too much money chases too few goods. Few months back, the central bank also asked the government that the fiscal deficit be contained in years ahead to reduce the risk of crowding out of the private investment. —Internews
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