Fis­cal anom­alies

The Pak Banker - - FRONT PAGE -

Ac­cord­ing to ex­perts, at present ex­ter­nal im­bal­ance is the big­gest macroe­co­nomic chal­lenge the econ­omy is fac­ing, and all the fo­cus at this point is to fi­nance the gross ex­ter­nal fund­ing. This task is of ut­most im­por­tance in im­me­di­ate term; but the key to the whole prob­lem is fis­cal deficit. Fix­ing fis­cal woes is what we need to set the econ­omy on course. But the main is­sue in fix­ing fis­cal house is that in­flex­i­ble ex­pen­di­tures are with the fed­eral gov­ern­ment while the ma­jor share of rev­enues is with prov­inces. The po­lit­i­cal eco­nomic re­al­ity af­ter the 7th NFC award and 18th amend­ment is now be­com­ing a dif­fi­cult puz­zle to solve, even for the IMF.

In FY02-10, prior to 7th NFC award, the fed­eral share in to­tal rev­enue col­lec­tion was, on av­er­age, 93 per­cent while its share in rev­enues was 63 per­cent. There­after, fed­eral rev­enue con­tri­bu­tion is still on av­er­age at 93 per­cent while it share in rev­enue has gone down to 50 per­cent. The ad­di­tional 13 per­cent which has gone to prov­inces leaves lit­tle room at fed­eral level to ad­just fis­cal im­bal­ances. Any change in the ver­ti­cal dis­tri­bu­tion re­quires an­other NFC award or con­sti­tu­tional changes, which is next to im­pos­si­ble given po­lit­i­cal po­lar­i­ties amongst prov­inces. And the prob­lem of cor­rup­tion in prov­inces like Sindh has fur­ther ex­ac­er­bated the fis­cal in­dis­ci­pline.

The ques­tion that we face is: what limited av­enues fed­eral gov­ern­ment has and how smartly it can use small chunks of funds to marginally en­hance rev­enues share. First is to en­hance the FBR tax rev­enues; but for ev­ery ad­di­tional ru­pee, 50 paisa goes to prov­inces; so fed­eral gov­ern­ment has to think out of the box. One way is to ad­just the tax­a­tion on petroleum prod­ucts. There are two ma­jor com­po­nents of petroleum taxes - GST and PL. The for­mer is shared with prov­inces while lat­ter is not part of di­vis­i­ble pool. The gov­ern­ment should en­hance the PL and re­duce the GST pro­por­tion­ately to keep petrol and diesel prices un­changed. But this needs fresh leg­is­la­tion.

The petrol and diesel con­sump­tion is roughly 20 bil­lion liters and gov­ern­ment gets around Rs150 bil­lion in PL from it. The PL is Rs10 per liter for petrol and Rs8 per liter for diesel, while the lat­est GST is 17 per­cent and 25.5 per­cent re­spec­tively on petrol and diesel. The gov­ern­ment should dou­ble the PL and lower the GST ac­cord­ingly to keep prices same and then vary GST with change in in­ter­na­tional prices to check con­sump­tion. In this way, while hav­ing over­all same tax col­lected on petroleum prod­ucts, the fed­eral share in­creases at the cost of pro­vin­cial di­vis­i­ble pool.

The fed­eral gov­ern­ment can also work on re­duc­ing grants and sub­si­dies which are cur­rently at 1.1 per­cent of GDP (Rs352bn). These are mostly in en­ergy sec­tor; the gov­ern­ment should re­vise up the gas and elec­tric­ity prices af­ter re­solv­ing the ex­ist­ing stock of cir­cu­lar debt. It then can leave it to prov­inces to sub­si­dize customers through their own fis­cal kitty. This will give some room to re­duce the deficit. The ad­van­tage of clear­ing up cir­cu­lar debt amid rais­ing tar­iff is also on get­ting higher div­i­dends for state owned com­pa­nies in fed­eral chain, which is again not part of di­vis­i­ble pool.

OGDC's div­i­dend pay­off was Rs41 bil­lion in FY08 which has re­duced to Rs26 bil­lion in FY17. Sim­i­lar is the story of PPL, GHPL, SNGP, and SSGC. These com­pa­nies' div­i­dend used to be a good source of non tax rev­enues; but cir­cu­lar debt has made them cash strapped and their div­i­dend flows fell sub­stan­tially. These are some of the ways that can help re­duce the deficit marginally. But these won't be enough to bring con­sol­i­dated deficit be­low 4 per­cent of GDP on sus­tain­able ba­sis.

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