BUDGETS OF THE

ECONOMY OF PAKISTAN
The Era of 1990s
 What is Budget?
 The budget is the principal instrument
for the implementation of economic
and financial policies of the
government.
 It is indicative of the resource
mobilization effort of the government.
On the expenditure side it reflects the
aims and objectives of the State.
 As a matter of fact, no aspect of
economic activity can be escaped
from the budgetary policy.
 What is Budget?
 Hence budget is not only a statement
of revenues and expenditure for any
given period but also reveals the
structure and priorities of the
economy at a given time.

 The political credibility of a

government is judged by its ability to
manage its finances
 Salient Features of Budget in
Historical Perspectives
 The relative shares of various heads of revenues
and expenditures have undergone a change over
a period of time.

 In the initial years of Pakistan history, a balance

was maintained between total expenditure and
total revenue.

 Fiscal deficit was targeted to meet through

internal sources via imposing taxes.
 Salient Features of Budget in
Historical Perspectives
 Initially, an overwhelming reliance was placed on indirect
taxes, particularly on customs which was expected to yield
Rs 2295 lakhs or 43.7% of the total revenues.

 In 2001-2002 about 27% percent of revenue receipts were

collected from this source.

 Pakistan seems to have made considerable headway in

collecting indirect taxes from sales tax and excise duty.

 There had always been a need felt for allocating a huge

amount on defence expenditure due to Pakistan’s
geographical position.
 Salient Features of Budget
 Another important change worth
noticeable is the item of debt servicing. In
1948-49 debt servicing was minor one,
claiming only 3.8% of total expenditure.

 With the tendency of successive

governments to spend more than
resources, debt servicing in 2001-02 was
53 percent of total expenditure
FISCAL PERFORMANCE

THE ERA OF 1990s

 Table 1: Fiscal Indicators as percent of GDP
(MP)
Year GDP Real Fiscal Expenditure Revenue
Growth Deficit
%
1990-91 5.4 8.8 25.7 16.9
1991-92 7.6 7.5 26.7 19.2
1992-93 2.1 8.1 26.2 18.1
1993-94 4.4 5.9 23.4 17.5
1994-95 5.1 5.6 22.9 17.3
1995-96 6.6 6.5 24.4 17.9
1996-97 1.7 6.4 22.3 15.8
1997-98 3.5 7.7 23.7 16.0
1998-99 4.2 6.1 22.0 15.9
1999-00 3.9 6.5 23.6 17.1
2000-01 2.4 5.3 21.3 16.0
2001-02 3.6 5.7 22.5 16.8
 Table 2: Structure of Federal Tax Revenue
% share in total taxes
Year Tax Revenue Direct Taxes Indirect Taxes
(As a% of GDP
1990-91 11.0 18.0 82.0
1991-92 12.0 20.4 79.6
1992-93 11.0 24.0 76.0
1993-94 11.0 25.1 74.9
1994-95 12.0 27.4 72.6
1995-96 13.0 29.1 70.9
1996-97 12.0 30.1 69.9
1997-98 11.0 35.0 65.0
1998-99 10.0 35.8 64.2
1999-00 11.0 32.5 67.5
2000-01 11.3 32.3 67.7
2001-02 10.9 35.4 64.6
 Fiscal performance in the 1990s
 Table 1 shows the serious macroeconomics
imbalances in Pakistan caused primarily by the
persistence of large fiscal deficit.

 During the 1990s, fiscal deficit averaged almost

7.0 percent of GDP despite cuts in development
expenditure by almost 3.5 percentage points of
GDP, causing public debt to reach unsustainable
level by the end of the 1990s.

 The growing burden of debt servicing over the

years not only made fiscal adjustment more
difficult but crowded out private investment to
decline.
 Fiscal performance in the 1990s
 The overall investment declined by 3.0 percent of
GDP in the 1990s and caused growth to
decelerate.
 The additional resource mobilization through
improvements in tax structure and administration
fell short of expectations in the country because
of inherent weaknesses in tax structure.
 The composition of tax revenue has changed
significantly.
 The share of direct taxes had doubled from 18%
in 1990 to 35% in 2002, and the share of indirect
taxes has correspondingly declined from 82% to
65%. (Table 2)
 Consolidated Budgets
1990-91, 1995-96, 2001-02

 Three years have been selected,

1990-91, 1995-96 and 2001-02 to
compare the structure of the federal
budget.
 Budgets at Glance
B udg e ts a t Gl a nc e (i n bi l l i o ns )

900 838

800

700 625

600
495
E xpen dit ur e
500
387 Reven ue
400
Def ic it
247
300 2 12
18 8
200 10 9
59
10 0

0
19 9 0 - 9 1 19 9 5 - 9 6 2 0 0 1- 0 2

Year
 Budgets at Glance
Structure of Expenditue % share

10 0
19 .5 15.9
2 5.5
90

80

70

60

% S ha re 50
8 0 .5 8 4 .1
74 .5
40

30

20

10

0
19 9 0 -9 1 19 9 5-9 6 2 0 0 1-0 2
Ye ar

Current Exp end it ure Develo p ment Exp end it ure

 Structure of Current Expenditure
% share
1990-91 1995-96 2001-02
Defence 34.6 28.9 22.6
Interest payments 26.8 31.6 38.9
Current Subsidies 5.6 1.7 -
Social, eco.
community service 19.3 18.9 -
General Admin. 6.8 8.4 7.9
All Others 6.9 10.5 15.9
Total current Exp 100 100.0 100.0
(183.66) (398.5) (661.0)
(Rs billion)
 Analysis of Budgets
Deficit: Mother of Evils
 Budget analysis is done keeping in view the constraint of
budget planners. The focus of all budgets planners and
fiscal measures was to achieve economic growth because
it is the economic growth factor that helps to address
other issues.
 Pakistan’s economy faces a number of economic
problems. But the most pressing out of them are twin
deficits i.e. fiscal deficit and BOP deficit.
 Fiscal deficit has lot to do with the revenue receipts and
BOP deficit has much to do with the trade deficit and
obligations to be met on account of foreign debt
payments.
 Analysis of Budgets
Deficit: Mother of Evils
 The magnitude of deficit was 5.8%, 5%,
and 5.7% of GDP in 1990-91, 1995-96
and 2001-02 respectively. Despite the
efforts by the government to reduce the
deficit no success yet has been achieved.

 As a consequence, the government’s debt

and the associated debt servicing has
grown at a phenomenal rate.
 Deficit Financing
 Deficit financing is met through borrowing
from internal as well external sources.
 External borrowing has tremendously
increased from 17.7 billion in 1995-96 to
148.0 billion in 2001-02 thus registering
about 8% growth over last six years.
 The present government envisages to
dilute the debt trap in medium time frame
of 3-4 years.
 Deficit Financing
 High debt servicing is squeezing all sorts
of expenditure ranging from development
programs to defence, health, and
expenditure on education.
 Deficit financing is also met through
internal borrowing.
 Domestic borrowing as a percentage of
GDP has declined over a period of time.
 This declining trend may be due to success
of the debt management policy evolved in
1991-92 and tight monetary policy in the
country.
 Current Expenditure
 Total expenditure is composed of current expenditure
and development expenditure.

 Current expenditure is mainly comprised of defence,

interest payments, economic social and community
services, general administration and current subsidies.

 It is evident from the figures that the ratio of current

expenditure to GDP has increased over a period of time.
The hike in current expenditure is mainly due to the
increase in the % share of interest payments which have
jumped from 26.8% in 1990-91 to 38.9% in 2001-02.


 Development Expenditure
 The share of Development expenditure to total expenditure
has shown a downward trend. It was 6.2% of GDP in
1990-91 and declined to 3.4% in 2001-02.

 These trends show that the loans incurred to maintain the

ballooning governmental apparatus have reached a point
where debt servicing on past loans consumes more than
half the government revenue. At the same time, the ability
of the government to fulfill its essential function of
overcoming poverty have been severely undermined.

 Cut in development expenditure rules out the high claims

of the government to eradicate poverty via poverty
alleviation programs. Social sector has been ignored thus
mounting the miseries of common men
 The percentage share of tax to GDP has almost
remained constant throughout 1990s (almost
11%).
 In his budget speech of 2001-02, Finance
Minister, Mr Shaukat Aziz admitted that both tax
policy and administration have failed to inspire
legitimate tax regime, and consequently
governments’ income constantly lagging behind
its expenditure needs.
 Some measures were taken to administer taxes
effectively by the Military government.
 Tax Policy
 For example, in 2001 (a) CBR was equipped with
a massive database to enhance its effectiveness
in tax assessment. (b) A survey was conducted
in to collect data of tax payers. Hence:
 A profile of 600,00 taxpayers was prepared and
was made available to assessing authorities.
 It was claimed that number of taxpayers
increased by 7.4% in 2001.
 The government’s efforts on raising tax revenue
through greater compliance rather than imposing
taxes, broadening tax base, removing anomalies
and withholding taxes and implementation of GST
are appreciable.
 Public Debt (Rs in billion)
Debt as % 1990 1999 2000 2001 2002

of GDP

Debt payable 42.8 47.3 50.1 50.4 44.0

in Rupees

Debt payable
in Foreign
exchange 48.9 52.2 53.0 60.6 52.8
 Debt Burden
 During the fiscal year 2001-02, the government
has not only succeeded in arresting the rising
trend in external debt but exchange rate
appreciation to the extent of 7 percent has also
helped in reducing debt payable in foreign
exchange by more than 100 billion.

 The effort of reducing public debt must continue

on a sustainable basis so as to attain debt
sustainability in the medium to-to-long run. The
key element of the strategy must include the
continuation of fiscal consolidation and reduction
in real cost of borrowing.
 Debt Burden
 Pakistan public debt burden is much higher than
many developed and developing countries.
 For example, Pakistan public debt as percentage
of total revenue stood at more than 600 percent
in 1999 as compared to 385 percent in India, 291
percent in Malaysia, 286 percent in Phillipines,
and 22 percent in Mexico.
 The most worrisome aspect of Pakistan’s growing
debt burden is that its debt servicing consumes
almost 60 percent of government’s total revenues
and constrained governments’ ability to devote its
resources to growth enhancing investment, such
as infrastructure and social and human capital.
 Poverty Alleviation and Investors’
Confidence
 The objective of the government was to satisfy the
expectations of various segments of society ranging from
investors, businessmen, traders, middle and salaried class
and teeming millions who languish in the abject poverty.

 Military government took some measures to eradicate

poverty. For example, small public works schemes-Kush-
Hall Pakistan for which Rs 11.5 billion were released in
2001-02, better management of Zakat fund, establishment
of the Khushhali Bank.

 All these measures might be well meaning but they are

hardly effective to alleviate poverty keeping in view its
quantum prevailing in the country.
 Poverty Alleviation and Investors’
Confidence
 The poverty has increased over then past
three years. Some of the estimates place
the incidence of poverty between 35 to 40
percent.
 The previous budgets have failed to
address the issue of poverty alleviation in
a comprehensive manner.
 Emphasis on increasing employment,
output and social justice are the areas to
work out.
 Investment
 One must keep in mind the IMF’s dictates under Structural and
Stabilization Programs which place constraints on real growth in
public investment via tight monetary policy.
 Total investment as % of GDP declined from 15.9 % in 2000-01 to
13.9% in 2001-02.
 The events of Septmeber 11 and their aftermath greatly clouded
the investment climate and affected investment sentiment.
 While investment has declined, the national savings as percentage
of GDP have increased from 15.0 percent in 200-01 to 15.4% in
2001-02.
 Measures were taken by the government to rebuild the investor’s
confidence.
 The American Business Council of Pakistan (ABC) has proposed
slashing down of different duties and taxes to encourage
investment in the economy.
 Growth Performance of Real Sector
centage Change 1980’s 1990-95 1995-2000 2001-02

GDP Growth Rate 6.1 4.9 4.0 3.6

Agriculture 4.1 4.2 4.9 1.4
Manufacturing 8.2 4.8 3.2 4.4
Large Scale Mfg 8.2 4.7 2.4 4.0
Services 6.6 5.1 4.0 5.1
Total Investment 18.6 19.5 17.1 13.9
(As a % of GDP)
Fixed Investment 16.8 18.0 15.3 12.3
Public Investment 9.1 8.6 6.4 4.7
Private Investment 7.8 9.4 8.9 7.6
National Saving 14.7 14.9 12.7 15.4
Domestic Saving
 External and Internal Factors
 Global economic downturn further aggravated by
the events of September 11, the prolonged
drought conditions, and heightened tension with
India are some of the major shocks which have
prevented Pakistan achieving higher economic
growth.
 Despite many difficulties, the real GDP growth
staged a modest recovery to 3.6 % in 2001-02.
This growth is supported by a 1.4 %, 4.4% and
5.2% growth in agriculture, manufacturing and
services, respectively.
 Concluding Remarks

 On the basis of the analysis of the previous

budgets it could be concluded that:
 The budget planners had a difficult assignment to
perform while preparing a budget that should
have addressed fiscal management problems,
satisfied the donors and people as well.
 The budget proposals provide certain incentives
to address longstanding issues directly or
indirectly related to revive economy and achieve
a high growth target.
 Concluding Remarks

 Fiscal situation still continues to be the area of

concern
 Concerted efforts will have to be made on the
revenue and expenditure side to curtail deficit.
 This would require enlarged tax base, reduced
leakages and improved collection.
 Expenditure, in particular non development
expenditure will have to be kept in control as to
reduce the deficit and reliance on borrowing.
 Measures must be taken to increase the rate of
investment in the economy.