Finance ministry clarifies report

Islamabad

The federal finance ministry has issued a clarification in response to an article, Three Alarm Bells’, published by The News. The article has raised three issues: trade deficit, budget deficit, and energy issues. To substantiate his argument, the writer states with regard to budget deficit that there is revenue shortfall, which would lead to higher taxes, additional debt, higher debt repayments, higher rate of inflation, and higher rate of interest, which may lead to budget deficit of 6%.

The writer’s logic is not sound and the claims are not based on up-to-date facts and figures. Starting from inflation 4.01% (Jul-March 2017) it is much lower than the targeted 6% for FY 2016-17. The prudent fiscal and effective monetary policies along with monitoring of prices and supply of commodities both at federal and provincial level are playing an important role in managing inflation.

The policy rate is at a decade low of 5.75%, which helped increase credit to private sector (CPS). The flows of CPS have seen a growth of 36% during Jul-24 March 2017, while stock of CPS witnessed a growth of 12.8%.

With regards to the writer's concern of the shortfall in tax collection, it is pertinent to mention that the shortfall in collection of taxes and duties by FBR was due to the conscious decision of the government not to pass on the burden of the increasing oil prices to consumers. This was achieved through reduction in the rates of Sales Tax on various petroleum products as compared to the applicable rates in the corresponding months of the last year.

The collection of FBR accordingly could not register the desired growth. In addition to boost the agricultural sector that had negative growth in the last year, substantial relief has been provided on agricultural inputs namely fertilisers and pesticides through reduction in sales tax rates on these inputs that also had an adverse effect on the FBR revenues.

Similarly, in order to promote exports and reverse the declining trend all the imported as well as locally produced inputs and intermediate goods of the five major export-oriented sectors including textiles, carpets, leather, sports and surgical goods have been zero-rated and the sales tax collection has been foregone.

Despite all the above steps that were taken to bolster key sectors of the economy and to protect the consumers at the cost of FBR revenues, the FBR through its administrative measures was able to register a growth of around 16% in its collection for the month of March 2017 and is expected to make further gains in the last quarter of the current year.

Pakistan has undertaken two important initiatives with regards to taxation, which includes signing of the Avoidance of Double Taxation Agreement with Switzerland and the signing of the OECD's Multilateral Convention on Mutual Administrative Assistance in Tax Matters. Both of these initiatives will help in better regulating the cross-border flow of wealth.

In 2013, a refund stock of more than Rs200 billion was outstanding and despite the substantial increase in the FBR collection of around 60% in three years, the refund stock still remains at about the same figure. This shows that the flow and stock of the refunds has been managed under a conscious policy of the present government. Moreover, to ease the cash flow problem of the exporters in the last budget, the inputs of the five major export-oriented sectors have been zero-rated to preclude creation of refunds for the exporters.

The budget deficit, which stood at 8.2% of GDP in FY2013, has been brought down to 4.6% in FY 2016, and during current FY2017 it is projected to fall to 4.1% of GDP and not the 6% of GDP as claimed by the author.

With reference to the writer's concern on external sector, it needs to be pointed out that in a growing economy; a widening of CA deficit is a likely scenario. The widening of CA deficit took place due to a sizable increase in import payments and a fall in exports, besides delayed realisation of Coalition Support Fund (US$550 million in Q3-FY17). However, it should be noted that a large amount of the import bill is due to import of machinery and other capital goods, which will support the economy in its transition from a low-growth to higher growth phase by addressing the supply-side bottlenecks in energy and infrastructure.

The foreign exchange reserves remain at US$21.436 billion on April 7, 2017 which are sufficient to finance the country’s import payments of four months.

Pakistan’s exports have been facing headwinds for the past two years; mostly due to weak global demand and lower commodity prices. The analysis of data on exports shows that for many product categories, Pakistan exported higher quantities, but lower international prices meant that the country was unable to realise adequate FX receipts.   

For promotion and facilitation of exports, various important steps have been taken, which include: setting-up of EXIM Bank, reduction in mark-up rates on export Re-finance Facility and Long Term finance Facility. Also, the issuance of Strategic Trade Policy Framework (STPF 2015-18) which aims at promoting regional trade besides focusing on product sophistication and diversification, market access, institutional development and trade facilitation. The government is also working to release these refunds; this, together with record-low interest rates, should address exporters’ liquidity issues. It is believed that some gains in exports will be achieved due to these important measures. It may be noted that negative effect of exports are also bottoming out as the exports witnessed positive growth during four months Jul-Feb 2017 on YoY.

Remittances are one of the main factors in the stability of external account. However, during Jul-Feb FY2017, remittances declined due to inflows dropping from all three major corridors – the Gulf Cooperation Council (GCC), US and UK. Decline in remittances from Saudi Arabia and GCC was on account of slow economic activities in GCC and Saudi Arabia along with fiscal consolidation due to decline in oil price. The decline was also partly due to a seasonal (Eid) factor during Q1 – which had inflated personal transfers in June 2016 and then led to a big drop the following months. This will be offset by growth in remittances during May and June.

However, the development activities under Saudi Arabia's vision 2030 which provide a roadmap for Kingdom's development and economy for next 15 years, the FIFA World Cup 2022 in Qatar and Expo 2020 in Dubai will create more labour demand. Pakistan Remittance Initiative (PRI) is encouraging banks to increase their outreach efforts to ensure that the cost of remitting funds to Pakistan stays affordable. The recent visit of prime minister to Kuwait will be helpful in opening new avenues of employment. These developments are likely to keep remittance inflows close to last year’s level.

With regard to the writer's assertions about additional debt, it is pertinent to mention that Pakistan’s net public debt to GDP stood at 60.2% at the end of last fiscal year 2015-16. The net public debt has remained at the same level of 60.2% of GDP as at end June 2016 as compared with end June, 2013. Therefore, net indebtedness of the country has not increased during last three year and no pressure is foreseeable in the near term future.

External debt servicing obligations for Pakistan are an average of US$5 billion per annum until 2021. Keeping in view the track record of the country, this amount of repayments should not raise any concern. Pakistan has successfully met higher obligations in excess of US$6 billion per annum in FY 2013 and FY 2014, even with much smaller volume of FX reserves.

The writer's claims with regard to energy issues are also not based on facts. The government has undertaken broad-based power sector reforms under the framework of the National Power Policy 2013. Implementation of these reforms has pushed forward the structural reforms agenda, with the power sector distribution companies showing improvement both in terms of reduction in line losses and collection from consumers. As a result of signing of performance contracts, setting of quarterly performance targets, improved monitoring and enforcement, strengthening of legislations to purse electricity thefts, up-gradation of electricity transmission and distribution network, and the provisions of incentives to collectors, introduction of mechanism of at-source deduction; the power sector line losses have reduced to 17.9% during FY 2015-16 from 18.7% during FY 2014-15 and collection from consumers have improved to 94.6% during FY 2015-16 as compared to 89.2% of corresponding period which the writer has acknowledged.

The government has also substantially brought down power subsidies and has significantly contained the accumulation of new payable arrears in the power sector by (i) improving DISCOs' performance, (ii) rationalizing tariffs, and (iii) reducing delays in tariff determination. The figure of circular debt quoted in the article is not correct; the circular debt has been brought down to a level of around Rs320 billion currently, Rs335 billion in PHPL is fully funded through the tariff and thus cannot be classified as circular debt.

Loadshedding has generally been controlled, from 16-18 hours, three years earlier to the current average of 6 hours. The government has rehabilitated the existing generating plants and has thus reduced the cost. New investment has come in the power sector as a result of all these reforms the government will overcome load shedding in 2018. In the medium term, the electricity generation capacity will be doubled, including through CPEC projects.

International agencies have recognised Pakistan’s success in a difficult environment and with a slowing global growth.