`Project

“AN APPRAISAL OF PAKISTAN’S PUBLIC FINANCE
MANAGEMENT”
BY
ASIM AHMAD
(INLAND REVENUE SERVICE)
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PREFACE
This paper is an attempt to appraise Pakistan’s Public Finance Management during the
last 10 years with the ultimate objective of improving the quality of public service outcomes. An
effort has been made to highlight the challenges faced by Pakistan in reducing the fiscal deficit
and managing its debt. A critical evaluation has been made of the government’s fiscal policies
for managing the key components of Public Finance.
ii
Electroniccopy
Electronic copy available
available at:
at:https://ssrn.com/abstract=2824286
http://ssrn.com/abstract=2824286
EXECUTIVE SUMMARY
Public Financial Management (PFM) is fundamentally the management of financial

resources of a country in order to optimally address national and local priorities. Efficient PFM
enhances and sustains economic and social growth in the country and should cover aggregate
financial management, operational management, asset acquisition & disposal and treasury
management. The major components of PFM are Public Revenues, Public Expenditures and
Public Debt Management. The legal and institutional frameworks of PFM along with the
procedure for assignment financial powers and distribution revenues have been provided in the
Constitution of Islamic Republic of Pakistan, 1973.
In Pakistan, all the three major components of PFM suffer from a myriad of problems.
These problems are worsened as all three are interlinked and therefore need immediate
attention. Revenue Management in Pakistan is plagued with persistently low Tax to GDP ratio,
narrow tax base, weak enforcement of laws, skewed tax mix, ad-hoc policies and short-term
fixes. Due to inadequacy in tax collection at provincial level, the entire burden of revenue
collection has fallen on the Federal Government/FBR alone.
Similarly, our poor Expenditure Management and resultantly high fiscal deficit is
another point of concern. Since our current expenditure constitutes a major portion of the total
expenditure, the development expenditure remains neglected. Moreover, due to misplaced
priorities, whatever little is being spent on development projects, has hardly any benefit for the
public in general and results in creation of non-productive assets. Adding to the woes is the
continuous burden of loss making SOEs, lack of contingency planning and failure of
expenditure management reforms.
On the Debt Management side, there is an exponential increase in the Public Debt as a
result of high Domestic Debt due to unchecked domestic borrowing from SBP as well as
commercial banks. This has in turn resulted into increasing the debt servicing expenditure and
crowding out the private sector. Debt mismanagement continues in the form of floating
government bonds in the international market at high interest rates.
iii
Electronic copy available at: https://ssrn.com/abstract=2824286
Considering the interlinkages of the three components of PFM, their ailments must be
addressed as a whole with solutions having long term focus rather than the usual ad-hoc
firefighting approach. Long term planning for revenue collection should include broadening the
tax base, both at the federal and provincial levels, efficient enforcement measures, monitoring of
tax officials’ performance on the basis of KPIs. Long term planning in Expenditure Control is
absolutely essential. This refers to investments in developmental projects rather than spending
scarce resources on current expenditures. There is a need to freeze the non-development
expenditures for at least three years and focus on projects aimed at social and economic
development.
To break the current debt loop, it is important to begin by giving true autonomy to the
SBP and re-evaluate its regulations by including a fixed ratio for fund allocation to the
government and to the commercial sector. Another area that needs consideration and attention is
the lack of shared understanding between provincial and federal authorities. A Fiscal
Coordination Committee should be constituted at Federal Government level with specific
timelines and goals, to address and resolve federal and provincial jurisdiction issues.
iv
GLOSSARY OF TERMS
AGP Accountant General of Pakistan
BSP Budget Strategy Paper
CGA Controller General of Accounts
CPEC China Pakistan Economic Corridor
CVT Capital Value Tax
FABS Financial Accounting & Budgeting System
FBR Federal Board of Revenue
FY Financial Year
GDP Gross Domestic Product
GFMIS Government Financial Management Information System
GIDC Gas Infrastructure Development Cess
MTBF Medium Term Budgetary Framework
NFC National Finance Commission
NGDS Natural Gas Development Surcharge
OBB Output Based Budget
PFAA Public Finance Administration Act
PFM Public Financial Management
PIFRA Project to Improve Financial Reporting & Auditing
SGST Services General Sales Tax
SRO Statutory Regulatory Order
TMA Town Municipal Administration
VAT Value Added Tax
v
TABLE OF CONTENTS
PREFACE.................................................................................................................................................. ii
EXECUTIVE SUMMARY ....................................................................................................................... iii
GLOSSARY OF TERMS ........................................................................................................................... v
INTRODUCTION...................................................................................................................................... 1
STATEMENT OF THE PROBLEM........................................................................................................... 1
SCOPE OF THE STUDY........................................................................................................................... 2
REVIEW OF THE LITERATURE ............................................................................................................. 2
METHODOLOGY..................................................................................................................................... 4
Organization of the Paper ........................................................................................................................... 4
Section-1 .................................................................................................................................................... 5
PUBLIC FINANCE MANAGEMENT ....................................................................................................... 5
1.1 Objectives of Public Finance Management .................................................................................. 5
1.1.1 Aggregate Financial Management........................................................................................ 5
1.1.2 Operational management ..................................................................................................... 5
1.1.3 Asset Acquisition & Disposal .............................................................................................. 5
1.1.4 Treasury Management ......................................................................................................... 6
1.1.5 Review and Performance Evaluation.................................................................................... 6
1.1.6 Reporting to Stakeholders.................................................................................................... 6
1.1.7 Governance ......................................................................................................................... 7
1.1.8 Fiduciary Risk Management ................................................................................................ 7
1.2 Major Components of Public Finance Management ..................................................................... 8
Section-2 .................................................................................................................................................... 9
PUBLIC FINANCE MANAGEMENT IN PAKISTAN .............................................................................. 9
2.1 Legal and Institutional Framework of PFM in Pakistan................................................................ 9
Section-3 .................................................................................................................................................. 11
APPRAISAL OF PUBLIC FINANCE MANAGEMENT ......................................................................... 11
3.1 Revenue Management ............................................................................................................... 11
3.1.1 Inefficient Collection of Taxes:.......................................................................................... 11
3.1.2 No real growth: ................................................................................................................. 12
3.1.3 Inadequacy in tax collection at Provincial level:................................................................. 12
3.1.4 Cost of Tax exemptions: .................................................................................................... 13
3.1.5 Narrow tax base and weak enforcement: ............................................................................ 13
3.1.6 Skewed tax mix: ................................................................................................................ 13
vi
3.1.7 Inequity in taxation:........................................................................................................... 14
3.1.8 Ad-hoc tax policies:........................................................................................................... 14
3.2 Expenditure Management & Fiscal Deficit ................................................................................ 14
3.2.1 Nature of expenditure: ....................................................................................................... 15
3.2.2 Burden of loss making SOEs: ............................................................................................ 17
3.2.3 Misplaced priorities in development projects ..................................................................... 17
3.2.4 Lack of contingency planning: ........................................................................................... 17
3.2.5 Inconsequential effect of NFC Award: ............................................................................... 18
3.2.6 Failure of Expenditure Management Reforms .................................................................... 18
3.3 Debt Management ..................................................................................................................... 18
3.3.1 Incorrect Bonds valuation: ................................................................................................. 21
3.3.2 Reliance on SBP and its repercussions ............................................................................... 22
3.3.3 Crowding out the private sector ......................................................................................... 22
3.3.4 Lack of SBP autonomy ...................................................................................................... 22
3.3.5 Inconsequential impact of the 18th Amendment:................................................................ 22
3.3.6 Fiscal coordination Issues .................................................................................................. 24
CONCLUSION ........................................................................................................................................ 25
RECOMMENDATIONS.......................................................................................................................... 27
APPENDICES.......................................................................................................................................... 32
vii
INTRODUCTION
Public Financial Management (PFM) is the key source for improving and sustaining the
quality of public service outcomes. It is essentially the management of financial resources in
order to optimally address national and local priorities. It also includes the management of
available resources for investment and the cost-effectiveness of public services. Efficient PFM
thus enhances and sustains economic and social growth in a country.
The aim of PFM is to create and maintain effective, efficient and transparent management
of public finances through the use of laws, organizations and systems. It includes revenue and
other resource mobilization, expenditure and debt management, budget making process,
information & accounting systems and internal and external audit. 1 The importance of PFM is not
to be underestimated as inefficient PFM systems have serious repercussions and can lead to misuse
and misallocations of resources and waste of finances.
Proper PFM is especially important in developing countries, the recognition of which has
now been started within the international development community as well. This is because
developing countries are in even more dire need to reserve, sustain and prudently allocate their
very limited resources, and be able to maximize their utilization in achieving much needed
economic and social growth. PFM is also necessary to achieve the Sustainable Development
Goals (SDGs) set forth in the national development policies of these developing countries.
Moreover, effective PFM is also essential for financial decision making as accurate
financial information is often used as the mechanism to support the financial decisions and to
ensure optimal allocation of available resources.
STATEMENT OF THE PROBLEM

Pakistan’s continuous fiscal deficit is a result of three key issues namely — low capacity
of the state to raise public sector’s revenues, the inability to manage government expenditures
and recurring high capital cost due to debt mismanagement.
From the statement of the problem emanate the following research questions: What ails
1
Guidelines for public financial management reform - www.mof.go.jp. Accessed on 29-02-2016
1
Pakistan’s PFM? What is contributing to Pakistan’s budget deficit? Why has the domestic
resource mobilization remained stagnant? Are the government’s expenditure priorities in line
with economic growth? Why does the public debt continue to rise?
SCOPE OF THE STUDY

Public Finance encompasses a very broad area covering the entire economic activity of the
government machinery. To do justice to the topic, an appraisal of PFM should cover all its
components in all tiers of the government. However, a short research paper has limited scope;
therefore, this paper focuses on three core components of PFM, which are the Government of
Pakistan’s management of revenues, expenditure and debt along with their interlinkages.
Appraisal of PFM has been made covering a period of the last 10 years. It also touches upon the
expenditure management after devolution and the 7 th National Finance Commission (NFC) Award
and some of the reforms for improving financial reporting and auditing which have been
introduced to improve PFM.
REVIEW OF THE LITERATURE

1- Public Finance, Harvey S. Rosen and Ted Gayer, 2007, McGraw-Hil, 8th edition, 2008
The book gives a comprehensive theoretical background to public finance. It covers

analytical framework of public finance. It also covers the tax analysis as a fundamental tool for
public revenues interpretation, deficit financing, and the tax reform in the USA. The book is
primarily intended for students of economics /public finance. However, the book focuses on PFM
in USA only and does not cover the practical difficulties of PFM in developing countries.
2- Public Financial Management and the PFM International Architecture - A Whole System
Approach. CIPFA, London, 2009.
The research paper is first of its kind to propose a universal definition of PFM. It describes
the model system of processes that enable it to function together with a supportive institutional and
social framework. The paper builds on PFM assessment and performance improvement tools used
in the United Kingdom and proposes a ‘whole system model’ to support the international
development community. However, the paper ignores the fact that ‘one size fits all’ approach may
not work in the developing countries due to their socio-cultural and political diversities.
3- Amjad, Rashid, and Shahid Javed Burki (Editors), Pakistan Moving the Economy Forward.
Lahore School of Economics, 2013.
2
The book is a very thorough study in the form of a collection of essays authored by eminent
economists. It analyzes the economic ailments of Pakistan and suggests ways to reverse the current
prolonged period of low growth and stagflation. Most of the prescriptions given in the book are
general in nature and overlook the practical problems faced by financial managers in the public
sector.
4- Research & Advocacy for Advancement of Allied Reforms (RAFTAR). "Pakistan's Public
Expenditure-Insights and Reflections." 2014.
A very good analysis of management of public expenditure in Pakistan with comparison of

India. However, the report covers one component of PFM only. It concludes that only
improvement in revenue collection can lead to sustained economic growth. This may not
necessarily work as fiscal policies must be complemented by monitory interventions, which the
report totally ignores.
5- The World Bank. Pakistan Development Update. Washington D.C., 2015.
The report gives an overview of economy covering recent economic developments and
future outlook. It appears to be unrealistically optimistic in predicting economic recovery of
Pakistan and totally ignores the debt trap towards which we are heading.
6- Pakistan Economic Survey (from 2010-2014):
Published by the Ministry of Finance, Government of Pakistan, these reports provide the
relevant data necessary for any research relating to Pakistan’s economy. It includes essential
indicators of the health of the economy which are helpful in determining the priorities of the
managers of the financial sector in Pakistan. However, being government’s point of view, in most
of the cases where economic indicators do not show healthy growth, the blame is either put on
natural calamities or terrorism.
7- Narayan, Francis B. Financial Management and Government Issues in Pakistan. Manila:

Asian Development Bank, 2000.
This report describes financial management and governance arrangements in Pakistan,

identifies shortcomings and gives recommendations to address those shortcomings. However, it
restricts itself to only financial reporting and auditing arrangements and practices.
3
METHODOLOGY
In writing this paper, quantitative as well as qualitative analysis has been made. In
doing so, empirical as well as analytical approach has been adopted to highlight the trends in
major macroeconomic indicators that give an insight into Pakistan’s Public Finance
Management in the last 10 years. For the ease of analysis, graphs have been plotted between
major macro-economic indicators like Tax to GDP ratio, revenue-expenditure gap, trends in
expenditure as %age of GDP and trends in debt as %age of GDP on the basis of data available
in the relevant periods of Pakistan Economic Survey, Annual Reports of FBR.
Relevant books were consulted for understanding the theoretical frame work of Public
Financial Policy. Reports of World Bank, local and foreign Chartered Accountancy and policy
Research Institutes and articles written in journals, were also consulted. Lectures of leading
economists/guest speakers on fiscal policy, monetary policy, debt management and revenue
generation, delivered during the 104th NMC, were also very helpful in obtaining primary as well
as understanding different perspectives on the subject.
Organization of the Paper

The paper is organized into three sections, the first deals with the objectives of PFM and its
major components. The second section discusses the legal and institutional framework of PFM in
Pakistan. The third section gives a detailed analysis and appraisal of PFM in Pakistan in the
context of its three main components viz. revenue management, expenditure management and debt
management. This is followed by conclusion and recommendations.
4
Section-1
PUBLIC FINANCE MANAGEMENT
1.1 Objectives of Public Finance Management
PFM constitutes a vital component in the improvement of the quality of public sector’s
output and the sustainability of public services in operational and strategic decision making.
Furthermore, protecting and implementing the effective use of public funds as well as establishing
public trust for the sector are amongst a few of the functions PFM offers. An ideal PFM would
allow workability for desired sectors to assimilate with ease towards the changes created within the
public sector.
Effective PFM should cover the following key objectives:
1.1.1 Aggregate Financial Management
A state acquires its revenues through various channels, such as tax collection from the
public, using natural resources that it has under its control, taking loans, establishment and
privatization of state owned enterprises. After the acquisition, these resources are distributed to
various public departments through the annual budget, allocated through a priority listing that has
already been agreed upon by various stakeholders. The importance of PFM is not only through
meeting the fiscal requirements, or monitoring the progresses of the utilization of these resources
but also as a system that can help the government in ensuring future fiscal sustainability.
1.1.2 Operational management

A working PFM plays a strong role in the long and short term decision making processes,
in performance measurement, planning as well as measurement of public services. A few of the
operational aspects that are affected by PFM are as follows:
1.1.3 Asset Acquisition & Disposal
One of the key decisions in PFM is in the financing of capital assets as they act as a major
outflow of resources. In an ideal and effective financial management system, alternative choices
are considered in financing capital assets in a way that maintains the liquidity for future long term
5
goals. For proper governance structure to take effect, various authorizations are required from all
stake holders or their representatives before the implementation of any contracts.
Over the few years, a new and growing appeal has appeared for alternate forms of
financing. One is ‘Islamic Finance’ that has gained momentum in both Muslim and Non-Muslim
majority countries. For Pakistan, analysts have given the government recommendations on
rehabilitation programs financed by long term Sukuk (Islamic Bonds) for those state owned
ventures that are experiencing loss in finances.
1.1.4 Treasury Management

To manage financial resources with the aim to maximize their value incurs its own share of
many risks. In public finance, a proper treasury management system would work in balancing the
value maximization aim of the government while ensuring the need to support liquidity for the
institutional liabilities. Since such public funds are valuable, the considered investment options are
those that have medium to low risks attached to it.
1.1.5 Review and Performance Evaluation

Evaluation of performances within the system is a critical process as it allows for checks
and balances and therefore works in identifying and determining past mistakes and failures. Such a
review would allow for forming and initiating new and better strategies for the future. For the
performance evaluation to be productive, the appraisal methods must be decided amongst all
shareholders with a consensus taken, in order to promote understanding and monitoring of targets
as well as encouraging ownership of shared goals and outcomes.
In the public sector, where the services offered are either a joint venture with the public,
private or third sector entity or where the investments in one sector causes improvement in another
sector, performance evaluation becomes all the more difficult to implement and oversee.
The performance evaluations and reviews could lead to numerous insights and
groundbreaking solutions. As an example, as a way to optimize the limited funds available, the
government could consider automating some of the processes or removing those activities that are
not adding any productive value to the venture.
1.1.6 Reporting to Stakeholders

Another important aspect of PFM would be a mechanism by which entities have to meet
their financial accountability requirements, such as the annual auditing of financial documents
6
within the entity’s final reports. The aim behind the financial documents would be to highlight and
display an overall honest view of an institution’s performance and cash outputs. Therefore,
reporting has become a vital means of showcasing how the public sector, both at an individual and
on a government level, uses its financial management responsibilities.
It has been determined that finalization of an institution’s financial statements by an

impartial audit, is an important pointer of the effective nature of the institution’s own financial
management. Proper financial management system would inculcate confidence in the entity in
using the public funds with efficiency and would highlight the value for money.
The various modes of reporting of public services have constantly been under argument
mainly because of the varied nature of services offered by the public sector as well as the overlap
that exists between services provided by different organizations along with the existence of
multiple stakeholders.
1.1.7 Governance
Good governance in public service is described as “ensuring the organization is doing the
right things, in the right way, for the right people, in a timely, inclusive, open, honest and
accountable manner".2
An ideal PFM would, therefore, be connected to the anti-fraud and corruption environment.
To avoid such a corrupt culture, an independent and impartial audit system is needed. Internal
control structures need to place to determine whether the available resources are being
appropriately utilized for the desired service outcomes. Public organizations are expected to bring
forth new changes and developments within their own financial environments in order to lessen the
cases of fraud or malpractices that happen within these government structures.
1.1.8 Fiduciary Risk Management

An effective and workable fiduciary risk management is needed to alleviate any risks that
the public organizations may face. Continuous monitoring of the progress versus goals allows for
correction of errors or discovery of problem areas in order to highlight future risks. Public audits
from independent firms allow for the mitigation of possible risk factors for a desired goal.
Auditing processes are the inspection of reports and records of any governmental entity or
individuals responsible for a particular objective. Even though it is not possible to verify and
2
The Audit Commission UK (2009). www.gov.uk/audit-commission-annual-report-and-accounts.Accessed on 13-03-
2016
7
confirm every transaction, the auditing process would allow for assurances regarding the
performance of the government.
1.2 Major Components of Public Finance Management

Since PFM is the fundamental component of public sector governance, it includes all
constituents of a country’s budgetary processes including strategic planning, medium term
expenditure framework, annual budgeting as well as revenue management, expenditure control,
accounting, reporting, evaluation, monitoring and audit. The major components of PFM are as
follows:
(i) Public Revenue – which constitutes the major source of government’s income:
a. Taxes and theirs effect on the economy of the country
b. Non-tax revenues (including fee, grants, levies, fines, interest receipts etc.)
(ii) Public Expenditure – the government spends and contributes towards the financial flows of the
economy through public expenditure. It also acts as a tool for implementing welfare and other
public policies. Since public expenditure is inflow to the economy, it affects the country’s
economics.
(iii) Financial Administration: It involves preparation, administration and approval of

government’s expenditure budget, its financial implementation, internal control systems and audit.
Financial administration is a very important component of PFM in the absence of which, the
subject of public finance remains incomplete.
(iv) Federal finance: It deals with division of functions and resources in the multilayer system of
government as well as inter-governmental relations. In the context of Pakistan it includes
allocation of finances to the provinces by the federal government under constitutional arrangement.
(v) Public debt management: If government expenditure exceeds the revenue collection, it has to
borrow from various sources to finance the difference, which is called the ‘budget deficit’. The
accumulation of past borrowings from domestic sources is the public debt which is
a source of income.
8
Section-2
PUBLIC FINANCE MANAGEMENT IN PAKISTAN
2.1 Legal and Institutional Framework of PFM in Pakistan
The federal and provincial assemblies prepare the annual budget statements in respect of
every financial year as per the financial procedure prescribed in Arts. 78-88 of the Constitution
of Islamic Republic of Pakistan, 1973 in the case of Federal Government and Arts.118-127 in
the case of Provincial Governments. Under Art. 70, the Constitution provides for a Federal
Legislative List in respect of which the Federal Government/ Parliament is empowered to make
laws on the matters enumerated therein including public finances. It also provides the enabling
legal framework with respect to public finances, public debt management, and public sector
audit through Articles 79 and 160-171 of the Constitution.
Art. 160 of the Constitution prescribes the basic structure for the assignment of fiscal
powers and the distribution of revenues between the federation and through the National
Finance Commission (NFC) which comprises the Federal and Provincial Ministers of
Finance and any other persons who may be appointed by the President in consultation with the
respective Governors of the provinces. The NFC is empowered to make recommendations
regarding distribution of the net proceeds of taxes amongst the provinces; payment of
grants-in-aid to the provincial governments; the exercise of the borrowing powers by the
federal and the provincial governments; and any other financial matters referred to the
Commission by the President. Under the 7th NFC Award, which is in force since FY2010-11,
the provincial share in net proceeds of taxes increased from 46.5% in 2010 to 57.5% in 2014
with resultant reduction in the share of the federal government. The power of levy of Sales Tax
on services was also transferred from the federal to the provincial governments with effect from
2011 onwards. 3
The PFM process at the federal and provincial levels of government commences
with the annual budget preparation. The Ministry of Finance/Finance Department, as the case
may be, is responsible for compiling the budget within the prescribed time lines and after
3
Fiscal Federalism in Pakistan: The 7th National Finance Commission Award and Its Implications, Pakistan Institute
of Development Economics (PIDE), 2011. w.ww.pide.org.pk. Accessed on 04-03-2016.
9
detailed deliberations with their respective line departments. The Planning and Development
Department is entrusted with the responsibility for the preparation and monitoring of the Annual
Development Program. The federal/provincial budget is then presented before the respective
legislature deliberations and approval. As per the existing legal framework, the Auditor General
of Pakistan (AGP) is responsible for prescribing the procedure for maintenance of the accounts
of the Federation as well as the Provinces. The AGP is also responsible for conducting the
external audit of the accounts of the Federation and the Provinces, which are then laid before the
Parliament and Provincial Assemblies, as the case may be.
10
Section-3
APPRAISAL OF PUBLIC FINANCE MANAGEMENT
3.1 Revenue Management

Major sources of federal revenue include Income Tax, Sales Tax, Federal Excise and
Customs Duty. The Achilles heel of Pakistan’s PFM is its inefficient tax system. Federal Board of
4
Revenue (FBR) tax to GDP ratio has hovered between 8.5% to 9.7% during the last 10 years.
Compared to 20% in the case India and 30% for Turkey. However, the Tax to GDP ratio is only
an indicator of the underlying problems. The major contributors to this low ratio are:
3.1.1 Inefficient Collection of Taxes:

Over 80% of government revenues are earned by imposing taxes. This is around 10% of
GDP out of which 9% of GDP is collected through FBR---lowest collection by any Federal
government excluding oil-producing countries. Therefore, the state’s inability to collect taxes is a
serious problem hampering the management of Pakistan’s finances. A key reason of elite not
paying taxes is weak enforcement. During the current financial year, 21 prosecution cases on
account of tax crimes having revenue implication of Rs. 4,515 M were filed. Out of these, only 3
convictions have been made and only Rs. 484 M (11% of the default) could be recovered.
Figure-1: Tax Revenue as % of GDP

9.80%
9.60%
9.40%
9.20%
% of GDP
9.00%
8.80%
8.60%
8.40%
8.20%
8.00%
7.80%
2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15
Data Source: Pakistan Economic Survey 2014-15
4
Pakistan Economic Survey 2014-15, www.finance.gov.pk/survey_1415.html. Accessed on 30-03-2016
11
Figure-1 depicts the trends in tax to GDP ratio from 2005-06 to 2014-15. It is evident that
there have been minor corrections due to policy interventions without any sustainable consistent
growth. In 2013, the World Bank had noted that the total revenue collected by tax and other
sources, was 13% of GDP — lowest across emerging economies.5 The tax to GDP ratio declined
from 14 per cent in the mid-1980s to 10%.
Another issue regarding the inefficient collection of taxes stems from the FBR’s tunnel
vision and their entire focus on achieving revenue targets from the existing tax payers by raising
frivolous tax demands and withholding refunds. Therefore, FBR has been using all their human
resources on this target alone, and in the process neglecting other key areas such as broadening of
tax base, enforcement of returns and conducting tax audits.
3.1.2 No real growth:

Even though, there has been an increase of around 1% in Tax to GDP ratio (2013-14), this
change is not attributable to any improvement in the tax collection but is factually due to inclusion
of Gas Infrastructure Development Cess (GIDC), Natural Gas Development Surcharge (NGDS)
and Petroleum Levy in taxes to show higher tax-to-GDP Ratio. In 2014-15 alone Rs. 301 Billion
were added in taxes under these heads. 6 It has also forced the government to rely heavily on non-
tax revenue which increased from Rs. 443 billion in 2011-12 to Rs. 941 billion in 2013-14 it was
Rs. 838 billion in 2014-15. This change in the numerator is a desperate attempt on part of the
government to show an artificially increased ratio without any real improvement in the taxes.
3.1.3 Inadequacy in tax collection at Provincial level:

Despite increased fiscal administration powers with the provinces in a post-18th
Amendment milieu, most provinces have struggled to increase their own tax receipts in recent
years. On an average 0.4% of GDP is collected by the provinces. 7 Politicians at the provincial
level do not wish to see increased taxes in their constituencies. Secondly, provincial tax collection
in rural areas lacks institutional capacity to audit incomes and wealth. This in turn makes it
difficult to validate the tax liability.
5
Proceedings Report by Sustainable Development Policy Institute (SDPI), March 2014. www. sdpi.org. Accessed on
10-04-2016
6
Dr. Ashfaq Hassan, Lecture Discussion: Fiscal Policy & Debt Management, NMC, 16-03-2016
7
Pakistan Economic Survey 2014-15
12
3.1.4 Cost of Tax exemptions:
Various governments in Pakistan allowed tax exemptions and preferential treatments to
select sectors and even organizations. These exemptions were provided through Statutory
Regulatory Order (SRO) by the FBR. Independent studies have estimated the loss from such
exemptions to be around PKR 800 billion. If tax evasion, estimated to be 4% of GDP is added to
this amount, the leakage in revenues is equal to the annual government borrowing. 8 However, the
Finance Act 2015 has withdrawn this power from FBR and gradually, exemptions are being
phased out.
3.1.5 Narrow tax base and weak enforcement:

The process of tax collection has also been described as non-transparent and prone to rent-
seeking. The Tax Administration Reform Project started in 2005 has largely failed to achieve its
objectives. Tax administration continues to suffer from inefficient and fragmented human resource,
cumbersome automated systems, a very complicated Income Tax return and misuse of discretion
by officials. Weak tax monitoring also results in high levels of tax avoidance and evasion. For
instance, out of an already very narrow tax base of 3.34 Million registered taxpayers, only 1.17
Million9 i.e. 35% have filed their latest Income Tax returns and are on the Active Taxpayers List
(ATL) of FBR, whereas, 65% of the registered taxpayers are non-filers.
3.1.6 Skewed tax mix:

It is important to note that the manner in which the government raises its revenues has
implications for the poorest of the poor. If we analyze Pakistan’s Federal revenue mix we observe
that the share of Direct Taxes (Income Tax) which is supposed to be progressive and less
burdensome for poor is 42% as compared with indirect taxes (Sales Tax & Federal Excise) at
48%.10 Within the Direct Taxes, Deductions at Source/Withholding Taxes contribute 67% of the
total Income Tax collection. 11 These taxes, by their very nature, are effectively indirect taxes as
these have no correlation with income and their incidence is passed on. If this aspect is taken into
account, the share of indirect taxes in total FBR revenue increases to around 64%. Sales Tax is the
main contributor to the Indirect Taxes which makes this type of tax along with non-tax revenue
measures, regressive and having a higher burden on the poor. This also implies that the role of
fiscal policy in mitigating inequality also diminishes.
8
Dr. Vaqar Ahmed, Roadmap for Economic Growth of Pakistan, Chapter 2, Fiscal Challenges and Response,
www.ipripak.org. Accessed on 23-03-2016
9
Active Tax Payers List as on 03-04-2016. www.fbr.gov.pk. Accessed on 10-04-2016.
10
Pakistan Economic Survey, 2014-15
11
Federal Board of Revenue, Biannual Report 2014-15. www.fbr.gov.pk. Accessed on 10-04-2016
13
3.1.7 Inequity in taxation:
Due to a very narrow tax base, the only policy intervention on part of the government to
enhance its revenue comes in the form of increasing tax rates on various consumer products, for
example, on certain petroleum products; the rate of sales tax is as high as 68%.
3.1.8 Ad-hoc tax policies:

Recently, in a fraught attempt to increase the tax base and consequential revenue and in the
garb of a tax amnesty scheme, a Voluntary Tax Compliance Scheme for traders was introduced by
FBR. Due to cumbersome procedure for availing benefit from the scheme and lack of enforcement
deterrence from FBR, the expected results could not be achieved. This isn’t the first time that the
government has failed to predict/forecast revenue from a proposed policy measure. Each year, at
the time of proposing amendments in tax laws, unrealistic and baseless revenue implications are
worked out, which, distort the projected collection of revenues. Revenue management suffers
from inherent weaknesses, both at policy as well as implementation levels.
Furthermore as mentioned previously, FBR’s lack of focus on expanding tax base is also a
prime example of focusing only on short term fixes and not investing in a long term solution to the
country’s tax problem. It should be noted that the process of expanding the tax base has a lagged
effect, and needs to be addressed today in order for that base to start filing returns and paying taxes
tomorrow. However, this is not being taken as a priority as FBR’s entire focus is on achieving the
revenue target of existing tax payers.
3.2 Expenditure Management & Fiscal Deficit

“It is not the expenditure per se but the quality of expenditure matters for economic development.”
– Dr. Ashfaq Hassan Khan12
The second main component of PFM is expenditure management and its consequence on a
country’s fiscal deficit. Public Expenditure Management is vital for the government in order to
meet the expenditures, specifically, when the revenues are insufficient to cover the developmental
projects. To understand public expenditure it is important to distinguish between Current
Expenditure and Development Expenditure. Current Expenditure includes Interest Payments,
Defense Expenditure, Running Civil Administration and Subsidies. Development Expenditure
creates productive assets for e.g. infrastructure development, public sector development programs
etc.
12
14
The gap between a country’s revenue and expenditures is the fiscal deficit/surplus. This
can be seen in Figure-2 which depicts the trends in Revenue to GDP and Expenditures to GDP
ratios. The need for a cooperative relationship between revenue receipts and expenditure is crucial
in avoiding high deficits for the government.
Figure-2: Revenue-Expenditure Gap (% of GDP)

22.00
Expenditures
20.00
18.00
% of GDP
Fiscal Deficit
16.00
14.00
Revenue
12.00
10.00
2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15
It is important to note the effect of Current vs. Development Expenditures. While the
Developmental Expenditures aim at developing assets for the country thereby ensuring long term
benefit to the economy; Current Expenditure only serves a short term purpose and inevitably is a
burden on a country’s economy. Therefore, a deficit is not necessarily undesirable provided the
nature of expenditure is mostly developmental.
The consistently high fiscal deficits prevent any efforts to achieve fiscal policy goals such
as sustained economic growth with declining debt service, reduced poverty and advancement in
physical and human infrastructures. Such lack of development can be attributed to the absence of
fiscal space to cover such increasing expenditures.
Pakistan’s Fiscal Deficit is only a symptom of the problems in its PFM. The reasons of its
mismanagement are as follows:
3.2.1 Nature of expenditure:

As mentioned above, a country’s prime focus should be on developmental expenditures
15
which promise a long term benefit to the country. However, as depicted in figure-3 below,
Pakistan’s major component of expenditure is current and not developmental. This has been a
persistent problem which has taken a toll on Pakistan’s public sector development.
As a result of 1988 financial sector reforms, when policy shift was introduced and interest rate was
determined by market, the interest rate jumped from 4.5% to 19%13. Interest payments increased
and current expenditure grew to the detriment of development expenditure which remained low
and stagnant (3.9% of GDP in 90s to 3.1% in 2001-07 and 3.4% in 2008-15).14
This essentially means that majority of Pakistan’s expenditure caters to expenditure such as
administrative expenditure, interest payments and subsidies instead of infrastructure, health,
education etc. In current expenditure, interest payments make up 30% and this share has been
rising since 2005-06, lingering around 3% of the GDP.
This is also reflected in Figure-4 which shows consistently rising interest payments,
fluctuating and inconsistent subsidies and while the Defence spending has been on a decline
since the same year, however, it still occupies a little over 12 % of the total government
expenditure.15
30.00
Figure-3: Trends in Expenditure as % of GDP
25.00
20.00
15.00 Development
Expenditure
10.00 Defence
5.00 Current Expenditure
0.00
13
www.tradingeconomics.com. Accessed on 01-05-2016
14
15
Pakistan Economic Survey, 2014-15
16
Fig 4: Trends in Defense, Interest Payment and Subsidies (as % of GDP)
6 4
3.5
5
3
4
2.5
3 2
1.5
2
1
1
0.5
Defence Interest Payment Subsidies
0 0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
3.2.2 Burden of loss making SOEs:

The Government of Pakistan has been supporting sick and loss making SOEs like PIA and
Pakistan Steel Mills for their sustainability. The government provides support to SOEs by way of
equity injection, subsidies, grants, loans and guarantee on loans amounting to Rs. 500 billion
annually16. Expenditure is being incurred to artificially sustain these chronic loss making
enterprises without fixing their problematic areas. For instance, in the case of PIA alone, since
2001-02, the government has provided cash support of Rs. 85 Billion, equity amounting to Rs. 25
Billion for purchase of aircraft, loan guarantees of Rs. 138 Billion. 17
3.2.3 Misplaced priorities in development projects

Despite a dire need for improving the quality of basic needs for example clean drinking
water, health care, education etc. The government of Punjab is instead spending the already
limited development budget on projects such as the Orange Line Train (Rs. 165 billion), Metrobus
projects at Lahore and Rawalpindi-Islamabad (Rs. 74 billion), Signal Free Corridor Jail Road
Lahore (Rs. 2 billion) which are just a few to name.
3.2.4 Lack of contingency planning:

For Pakistan, the high rates affecting fiscal management can be linked to the unplanned
expenditures due to natural calamities such as floods, security related problems, untargeted
subsidies such as recurring losses in State Owned Enterprises (SOEs), energy subsidies, non-
16
Salman, Ali, Express Tribune, Business. www.tribune.com.pk. Accessed on 02-05-2016
17
Data provided by J.S.(Exp), Ministry of Finance on 15-02-2016.
17
developmental projects and increased payment of interest. Therefore, the deficit has risen by an
average approximate of 6.6% in previous five years.18
3.2.5 Inconsequential effect of NFC Award:

As mentioned in Sec. 2.1, the 7th NFC Award was granted in 2010 and allowed for an
increase in spending on various important sectors such as Health and Education at 19.4% per
annum between 2005-06 and 2013-1419. In reality however, the expenditure allocated is being
spent more on wages and salaries. This is because the salaries of employees have risen due to
inflation while the social services offered are labor intensive and require a larger workforce.
Therefore, the increase in the resource has not brought about the desired improvement that the
social sector needs.
3.2.6 Failure of Expenditure Management Reforms

To create an efficient system for accounting, reporting and auditing ‘Project to Improve
Financial Reporting and Audit’ (PIFRA) was developed by Pakistan Audit Department. The
purpose behind PIFRA was to ensure that the standards that were in place were being met
consistently as well as to bring in place a reporting system to ensure more transparency and better
internal control with respect to accounting and auditing. While PIFRA was successful in creating
Government Financial Management Information System (GFMIS) that gave real time information
at department level, the overall execution of this program was under estimated and by the end of
2014, PIFRA project was closed. The difficulty in its execution was primarily deep resistance to
change. Non adaptability of middle management and absence of proper training only increased the
disinterest of departments in using PIFRA. Furthermore, the existing systems such as FBR and
SBP were not compatible with the new system.
3.3 Debt Management

Public debt management involves strategically managing a government’s debt portfolio in
order to manage capital and funding needs, while also factoring in risk and cost in a way that aids
the overall development of an economy.
Managing public debt is an especially tricky and ‘make-or-break’ area for developing
countries like Pakistan. In cases of high debt burden, developing countries often have a trade-off
between servicing the debt and contributing to its development sector.
18
ibid
19
Pakistan Bureau of Statistics. www.pbs.gov.pk. Accessed on 01-05-2016
18
Public debt refers to a country’s total indebtedness, meaning it includes external as well as
domestic debt. External debt comprises of foreign loans while domestic comprises of loans given
by the State Bank and commercial banks.
18,000 Figure-5: Trends in Debt

16,000
14,000
12,000
10,000 Public Debt

Rs. in Billion
Domestic Debt
8,000
External Debt
6,000
4,000
2,000
0
Year 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Pakistan has seen an expontential rise in public debt since 2006, as can be seen in Figure-5
above. Both External as well as Domestic Debts have been on the rise. Over a period of ten years,
the Public Debt has increased from Rs. 4,000 Billion to Rs. 17,000 Billion out of which Domestic
Debt component has shown an increase of 500% from Rs. 2,000 Billion to Rs. 12,000 Billion.
External Debt has also increased steadily from Rs. 2,000 Billion to Rs. 5,000 Billion during this
period.
An increase in debt has its own repercussions for the economy of a country as it takes
greater focus and resources towards future debt servicing. To meet the demands set by debt
servicing, extra strain is placed on the governments’ finite resources and can in turn become the
cause for the loss of investments or expenditures set towards other sectors within the economy.
Analyzing a country’s ability to repay the debt with debt services is a good way to understand
19
whether the country will face difficulties in its debt services for the foreseeable time period.
Figure-6 Trends in Public Debt to GDP

65%
64%
63%
Public Debt to GDP
62%
61%
60%
59%
58%
57%
56%
2010-11 2011-12 2012-13 2013-14 2014-15
Figure-6 depicts the profile of Public Debt as a percent of GDP. In 2013-14, it stood at
63.8% of GDP. Since 2010-11, it has continued to remain higher than the threshold of 60% and
defies the Fiscal Responsibility and Debt Limitation Act, 2005. According to this Act, public debt
should not be more than 60% of the GDP, public debt is to be reduced by 2.5% annually, revenue
deficit to be eliminated by 2008 etc.
Government’s performance is poor viz the cited benchmarks. Debt to GDP ratio is 270%.
In comparison, for India and Bangladesh it is less than 90%. 20 Borrowing domestically or abroad is
a normal part of economic activity. If the borrower earns high economic and social rate of return,
the cost of invested funds is recovered whereas Pakistan has followed wrong policies by indulging
in short term borrowing for long term projects.
It should be noted that contrary to popular perception, foreign debt is not nearly as big a
component in Pakistan’s total debt as compared to domestic debt. This is discussed in detail to
allow for a more thorough analysis of the prime problems plaguing Pakistan’s debt structure.
20
20
3.3.1 Incorrect Bonds valuation:
In 2014 the Government of Pakistan issued Euro Bonds with 10-year maturity period
targeting to raise $500 million. The rate of interest offered was exorbitantly high at 8.25%
resulting in over subscription at $2 billion. Similarly, in 2015, Euro Bonds were once again
floated in the international market at the same rate of 8.25% and consequently traded in premium.
The justification given by Finance Ministry was that “it was necessary to cover repayment of a
maturing bond of the same size that was issued in 2006”. The ministry also saw it as a positive
sign that despite difficult global conditions, “the bond was twice oversubscribed”. 21 In comparison,
during the same period, Reliance Industries Limited, India’s private sector company raised $ 10
billion by floating 10-year bonds @ 5.4%. Over subscription is understandable in view of a very
high rate of interest being offered which is backed by sovereign guarantee.
The practice of floating bonds in the international market at high interest rates to pay for
earlier maturing bonds is a clear indication of shortsighted fiscal policy. It is paradoxical to note
that each successive government continues repeating the same flawed option which is adding up
not only the debt but also the debt servicing expenditure.
Figure-7 REGIONAL COMPARISON

Government Bonds (10Yr) Rate
8.41%
7.63% 7.44%
4.69%
3.92%
2.91%
2.00% 1.81% 1.80%
0.87%
Data Source: www.tradingeconomics.com. Rates as on 01-01-2016 Accessed on 01-05-2016
21
www.dawn.com. 29-09-2015. Accessed on 01-05-2016
21
Figure-7 shows the regional comparison of Government Bonds rates with highest current
market 8.41% rate being offered by Government of Pakistan. The additional debt servicing
expenditure will add on to the already increasing debt burden.
3.3.2 Reliance on SBP and its repercussions

Due to the existing inefficient and insufficient collection of taxes, the Federal Government
invariably has to rely on debt for its financing needs. For domestic debt, the two options available
are the State Bank of Pakistan (SBP) or Commercial Banks. Borrowing from SBP has inflationary
effects on the economy as the SBP has to print more money to finance the deficit. The second
option, i.e. borrowing from commercial banks incurs debt servicing expense. The problem is
deepened when the commercial banks themselves end up borrowing from the SBP, which in turn
has to print money for this. This loop essentially brings together the worst of both the financing
options as Pakistan now has twin troubles of inflation as well a hefty interest bill.
3.3.3 Crowding out the private sector

As a result of Federal Government’s reliance on debt financing, when commercial banks
lend money to the government, they are unable to provide credit to the private sector.
This is also reflected in the World Development Indicators (WDIs) which show a very rate of
penetration by Pakistan’s banking sector (only 9% firms use bank financing). In regional
comparison, Sri Lanka has a bank penetration rate of 43%, followed by India and Nepal at 22%.
Last year, Rs. 200 Billion were supposed to be lent to this sector, but since all the money available
in banking sector was borrowed by Government, private sector could only get Rs.12 Billion. This
was one of greatest failures of the Government.
3.3.4 Lack of SBP autonomy

The State Bank of Pakistan currently does not enjoy autonomy when it comes to monetary
policy options as the Ministry of Finance dictates its terms leaving little room for SBP to function
as an autonomous decision making entity. This essentially means that SBP inevitably has to cater
to the Ministry of Finance’s demands even if it is not in the best interest of the economy in the
long run.
3.3.5 Inconsequential impact of the 18th Amendment:

Introduction of the 18th Amendment has allowed for many changes to occur within the
governance framework of Pakistan. Some of these changes include the reinforcement of the
Council of Common Interest (CCI) as well as making the National Economic Council (NEC) more
22
accountable to the provincial interests. The role of Federal Government in the legislation and its
involvement in various functions was removed along with the elimination of the concurrent list..
As a result, 17 federal ministries were eliminated.
The fiscal impact of the 18th amendment has been inconsequential since the expenditure
responsibility that has been devolved to the provinces only covers 0.25% of the total GDP (in other
terms, 3.6% of the combined budget of the provinces) 22. This limited fiscal involvement is due to
the provincial governments’ already carrying out major aspects of the transferred functions such as
education and health, wherein, the federal involvement in these functions was already
insignificant.
After the term of the present NFC Award ends, the provinces will have to raise their own
resources to meet the additional cost transferred from the federal budget as the Federal
Government will not be financing some of the major devolved programs. The possible transfer of
these programs from the federal to provincial budgets indicates that the provinces will have to find
adequate fiscal space to finance these programs through their own resources. The 18th Amendment
also includes some major changes in taxation powers of the Federal and Provincial Governments.
Now, the Federal Government cannot collect taxes on immovable property, Sales Tax on services,
capital value tax on immoveable property and Zakat and Usher as these have been devolved to the
provinces. It is now the responsibility of the provinces to manage these additional revenue sources.
In addition to this, under devolution, the provinces have also been given the right to borrow from
domestic and international lenders, subject to limits and conditions imposed by the NEC.
With stagnant federal and provincial revenues and sharply rising interest and subsidy
expenditures, (Ref: Figure-4), the consolidated fiscal deficit hovering in the range of 5-6% of GDP
and by giving greater share of revenue to the provinces, the NFC Award has made fiscal
adjustment more difficult. Theoretically, the reassignment of revenue from the Federal to
Provincial Government should have created a larger deficit at the level of the federal government
and consequent fiscal surplus at provincial level, keeping the consolidated deficit (federal and
provincial) more or less unchanged.
The chargeability of Income tax was already bifurcated on the basis of source of income
i.e, income from agriculture is being taxed by the provinces and other than that by the Federal
22
ibid
23
Government. Although Services General Sales Tax (SGST) was collected by the Federal
Government, it was credited to the provinces. The NFC Award has practically thwarted any
possibility for an integrated VAT type of sales tax at federal level in Pakistan as the collection of
SGST has now been assigned to provinces.
3.3.6 Fiscal coordination Issues

After the 18th Amendment, Sales Tax on services is now collected by the provinces instead
of the Federal Government. Even after the passage of 6 years, the FBR and Provincial Revenue
Authorities are undecided over taxation of certain services. For example, the questions whether
restaurant receipts are sales of goods or services remains un-answered, as a result of which, bith
the Federal Government as well as Provinces are trying to tax these receipts. Presently, the issue is
pending in courts for final decision. Similarly, certain contentious issues amongst the provinces
remain unresolved. For example, the question as to whether this tax is to be charged on the basis
of the place where the service has been rendered or the place of recipient of service remains
unanswered. Unnecessary litigation and lack of fiscal coordination between the Federal and
Provincial Governments not only hampers the levy and collection of revenue but is also a source of
inconvenience and confusion for the taxpayers. This issue has also been highlighted by IMF in its
10th Review of Extended Arrangement 23 .
23
Tenth Review Under The Extended Arrangement And Request For Modification Of Performance Criteria—Press
Release; Staff Report; And Statement By The Executive Director For Pakistan, March 2016. www.imf.org. Accessed
on 04-05-2016
24
CONCLUSION
It is alarming that all three major components of PFM which are revenue generation,
expenditure control and debt management; are suffering from a myriad of problems. These
problems are worsened because all three have certain commonalities and are interlinked with each
other, meaning in order to fix Pakistan’s PFM, all three components will need immediate and
drastic control measures. Furthermore, this stage was not reached overnight, neither are there any
quick fixes for this dire situation. However, due to the nature of interlinkages between these
components, there are a few problems which can be analyzed as common denominators between
all three. Such common denominators include poor financial planning, corruption, lackadaisical
approach to long term planning, ad-hoc mindset to solving problems, lack of due diligence and
improper governance to name a few. Such problems aim at a deeper evil residing in Pakistan’s
systems, and will always serve as a barrier to positive change, implementation of reform and
systematic problem solving.
There are, however, problems which are specific to the individual components as well. The
poor tax collection system, for example, is a revenue specific problem and requires serious and
equitable action to be enforced. Persistently narrow tax base has made the tax system inequitable
as the entire burden of revenue is being borne by those who are already in the tax net. The entire
resources of the tax department are deployed towards recovery/collection from this rather small
segment for the purpose of achieving the assigned targets. This ad-hoc short term gain is at the
expense of broadening of tax base and little effort is being made to bring the potential taxpayers
into the tax net. Due to inadequate tax collection on part of the provincial revenue departments, the
entire burden of revenue collection has fallen on FBR alone, which ultimately ends up in resorting
to ad-hoc tax measures which further distorts the scenario of tax burden.
Similarly, poor allocation of developmental finances is yet another problem specifically

plaguing Pakistan’s expenditure structure. Since current expenditure constitutes a major portion of
the total expenditure, development expenditure not only remains neglected but due to misplaced
priorities has whatever little is being spent on development projects has hardly any benefit for the
public in general and results in creation of non-productive assets.
25
The third essential component of PFM i.e. Debt Management is also essentially
mismanaged. Reliance on commercial banks is another specific problem affecting Pakistan’s debt
structure. Incessant domestic borrowing results in inflation, adds on to the interest bill/debt
repayment and eventually crowds out the private sector as no money is left with the banks to lend
to private sector.
A quick and appropriate response to the fiscal crisis can have sufficient long and short term
impact on the economy. The choice remains as to whether support the current developmental
expenditures of the country or focus on lowering the fiscal deficit. The former choice would lead
to a greater increase in the debt as revenues are insufficient to finance the expenditures and hence
increase the fiscal deficit. On the other hand, if the government cuts down on developmental
expenditures for lessening the fiscal deficit, it would cause a delay in the economic growth due to
lack of developmental expenditures available.
Invariably, all these problems will need to be addressed; however, their commonalities
might give us a good starting point when we set out on a damage-control mission. However,
regardless of where we start, this matter cannot afford to be pushed under the rug any further as
poor PFM not only damages a country’s current progress (industrial, developmental, systematic
etc.) but also hampers the long-term growth which could be achieved only through proper
management of public finances. In the interest of Pakistan and its future generations therefore, it is
imperative that this country’s PFM is taken seriously and immediate corrective measures are
deployed.
26
RECOMMENDATIONS
As mentioned above, whilst the three major components of PFM (revenue, expenditure and
debt management) are all ailing in their own respective areas; however, there are certain problems
which interlink these three components, and are a commonality between them. As a starting point,
these commonalities can be addressed as a whole, followed by recommendations for the specific
problems in revenue generation, expenditure control and debt management.
That being said, it should be noted that at this stage solutions need to have a long-term
focus rather than the usual ad-hoc, short term fire-fighting approach. That in turn requires that
policy making should have a strategic and long term focus towards development wherein root
causes are addressed rather than having a focus on the superficial symptoms of the problem and
ignoring core issues.
Long term planning for revenue collection for example should include focus on expanding
the tax base so that in the long term, more revenue is collected. This will require consistent effort,
time and dedicated resources; however it will ensure tax collection in the future for times to come.
Furthermore, this cannot be achieved without proper resource allocation (human and capital), as it
is more than just a side-job, and should be treated as a serious target by the FBR. There is,
therefore, a need to have a separate dedicated human resource at each regional tax office, having
access to banking and property registration data to book new taxpayers for the purpose of
broadening of tax base. The provincial authorities can play their role in this process by also
focusing on broadening of tax base through agriculture tax, property taxes and taxing new sources
of income in services sectors.
Similar attention needs to be directed towards efficient enforcement when it comes to tax
collection. This would mean putting KPIs in place at the FBR to ensure monitoring of tax officials’
performance and effort towards ensuring compliance to existing tax laws and regulation.
Furthermore weak enforcement is also a result of untouchable political and industrial
heavyweights, who have managed to use their influence to evade taxes. Serious attention needs to
be directed towards addressing these cases in order to not only improve revenue collection but also
to set a reassuring example for other tax payers.
27
Long term planning in Expenditure Control is equally important. This refers to investments
in developmental projects rather than spending scarce resources on current expenditures. There is
an immediate need to freeze the non-development expenditures for at least three years so that the
resources can be diverted to development projects. Furthermore, these developmental projects
should focus on addressing public needs rather than Good-To-Have projects. Projects such as the
Orange Metro Train, Signal-Free Corridors are non-essential and more politically provoked instead
of being need-based. The future focus should be on projects aimed at social and economic
development for instance clean drinking water, health care, education etc.
With respect to Pakistan’s debt management, again, strategic long-term policies are
required along with prudent financial decisions. For example, the bond interest rates which have
continuously been erroneously valued should be re-evaluated and a smaller interest rate should be
offered on future bonds. The existing and continuous over-subscription of the Euro bonds is a clear
indicator that Pakistan Government is not seen as a risky debtor and investors will be willing to
buy the bonds at a lower rate.
Moreover, in order to break the current debt loop where SBP lends money to the
government directly and then via commercial banks, it is important to begin by giving true
autonomy to the SBP in a similar manner as of India’s Reserve Bank, so that SBP’s decisions are
not influenced by the Ministry of Finance’s demands.
Furthermore, the issue of private firms being crowded out because of lack of funds
available to them for loans can be addressed by re-evaluating the SBP’s regulations and including
a fixed ratio for fund allocation to the government and to the commercial sector.
The issue of interest payments eroding the country’s significant revenues can be addressed
simultaneously when earlier mentioned long-term developmental policies are put in place, as the
policies will ensure higher tax collection and correspondingly result in more revenue which can
meet expenditure needs, eventually, if not immediately.
Another area that needs consideration and attention is the lack of shared understanding
between provincial and federal authorities. A Fiscal Coordination Committee should be made at
Federal government level with specific timelines and goals, to address and resolve federal and
provincial jurisdiction issues. This is crucial so that a shared understanding can be reached
between both, and there can be a joint focus on problem solving, instead of internal conflict.
28
With respect to managerial control and efficiency on the tax administration front, FBR
should be given autonomy in exercising control over its human resources. Moreover, there is a dire
need for functional expertise across all levels in FBR which should include a strategic think-tank
team which should be formed for the sole purpose of presenting long and short term strategies after
each quarter.
Performance management can be improved by introducing monthly KPIs and monthly

review meetings to address all shortcomings in KPI targets. A track of these KPIs should be kept
by HR for annual review meetings as well.
Another important issue to be addressed is the lack of expertise and knowledge when it
comes to change implementation in government sectors especially changes involving fiduciary
repercussions. Considering the underlying problem of resistance to change, corruption, self-interest
motives and general apathy; it is no wonder than projects like PIFRA failed to deliver. For all
future programs involving change, not only is it necessary to ensure thorough research and strategy
before implementation, but also to ensure a gradual and phase-wise enrollment program. This is
important as change cannot be enrolled hastily with assumptions that it will be a seamless
execution agreeable by all. Trainings and coaching have to be provided before and during the
implementation process, and execution should be at a slow pace in gradual attempts to ensure
success.
29
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Institute of Public Finance and Accountancy, 2009.
The World Bank. "Implementation Status & Results - Pakistan- Second Improvement to Finanacial
Reporting And Auditing Project." 2013.
The World Bank. Program Appraisal Document on Punjab Management Reform Program. The
World Bank, 2013.
Wescott, Clay G. World Bank Support for Public Financial Management: Conceptual Roots and
Evidence of Impact. Background Paper to Public Sector Reform: What Works and Why?
An IEG Evaluation of World Bank Support, Washington, DC: The World Bank, 2008.
Worldbank. Pakistan Development Update. Washington D.C.: the World Bank, 2015.
31
APPENDICES
TABLE-I
FISCAL INDICATORS AS PERCENT OF GDP
2005-06 to 2014-15
Expenditure Revenue
Overall
Real GDP
Year Fiscal Total Non-
Growth Total Current Development Tax
Deficit Rev. Tax
2005-06 5.8 4.0 17.1 12.6 4.5 13.1 9.8 3.3
2006-07 5.5 4.1 18.1 14.9 4.6 14.0 9.6 4.4
2007-08 5.0 7.3 21.4 17.4 4.0 14.1 9.9 4.2
2008-09 0.4 5.2 19.2 15.5 3.7 14.0 9.1 4.9
2009-10 2.6 6.2 20.2 16.0 4.4 14.0 9.9 4.1
2010-11 3.6 6.5 18.9 15.9 2.8 12.3 9.3 3.0
2011-12 3.8 6.8 19.6 15.6 3.7 12.8 10.2 2.6
2012-13 3.7 8.2 21.5 16.4 5.1 13.3 9.8 3.5
2013-14 4.0 5.5 20.0 16.0 4.9 14.5 10.2 4.3
2014-15 5.1 5.0 19.4 15.3 4.1 14.5 11.5 3.0
Source: Pakistan Economic Survey 2014-15, www.finance.gov.pk/survey_1415.html. Accessed on 30-03-2016
FIGURE-1
REVENUE TO GDP RATIO IN EMERGING ECONOMIES (2013)
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
Source: World Development Indicators 2013-14
32
TABLE-2
STRUCTURE OF FEDERAL TAX REVENUE
2005-06 to 2014-15 (Rs. Billion)
Year Total Tax Rev as % of Direct Indirect Taxes

(FBR) GDP Taxes Customs Sales Excise Total
2005-06 713.5 9.4 225.0 138.4 294.8 55.3 488.5
[31.5] {28.3} {60.3} {11.3} [68.5]
2006-07 847.2 9.2 333.7 132.3 309.4 71.8 513.5
[39.4] {25.8} {60.3} {14.0} [60.6]
2007-08 1,008.1 9.5 387.9 150.7 377.4 92.1 620.2
[38.5] {24.3} {60.9} {14.9} [61.5]
2008-09 1,161.1 8.8 443.5 148.4 451.7 117.5 717.6
[38.2] {20.7} {62.9} {16.4} [61.8]
2009-10 1,327.4 8.9 526.0 160.3 516.3 124.8 801.4
[39.6] {20.0} {64.4} {15.6} [60.4]
2010-11 1,558.2 8.5 602.5 184.9 633.4 137.4 955.7
[38.7] {19.3} {66.3} {14.4} [61.3]
2011-12 1,882.7 9.4 738.4 216.9 804.9 122.5 1,144.3
[39.2] {19.0} {70.3} {10.7} [60.8]
2012-13 1,946.4 8.7 743.4 239.5 842.5 121.0 1,203.0
[38.2] {19.9} {70.0} {10.1} [61.8]
2013-14 2,254.5 9.0 877.3 242.8 996.4 138.1 1,377.3
[39.0] {17.6} {72.3} {10.0} [61.1]
2014-15 2,810.0* 9.7 1,180.0 281.0 1,171.0 178.0 1,630.0
[42.0] {17.2} {71.8} {10.9} [58.0]
TABLE-3 (Rs. Billion)

CONSOLIDATED REVENUE & EXPENDITURE OF THE
GOVERNMENT
2014-15 July-March Growth
2014-15 2013-14
A. Total Revenue 4,220.6 2,682.6 2,477.4 8.3
a) Tax Revenue 3,337.2 2,063.2 1,786.2 15.5
Federal 3,129.2 1,918.0 1,650.0 16.2
of which FBR Revenues 2,810.0 1,775.1 1,574.8 12.7
Provincial Tax Revenue 208.0 145.2 136.2 6.6
b) Non-Tax Revenue 883.3 619.5 691.2 -10.4
B. Total Expenditure 5,642.4 3,731.6 3,446.2 8.3
a) Current Expenditure 4,462.3 3,199.1 2,904.6 10.1
33
Federal 3,097.3 2,255.8 2,083.2 8.3
Markup Payments 1,325.2 974.5 909.1 7.2
Defence 700.1 485.9 451.7 7.6
Provincial 1,365.0 943.2 821.4 14.8
b) Development Expenditure & 1,180.1 594.0 555.8 6.9
net lending
c) Statistical discrepancy - -61.4 -14.1 -
C. Overall Fiscal Deficit 1,421.8 1,048.9 968.9 -
As % of GDP 5.0 3.8 3.9 -
Financing of Fiscal Deficit 1,421.8 1,048.9 968.9 8.3
i) External Sources 508.0 137.8 107.1 28.7
ii) Domestic 913.9 911.1 861.7 5.7
- Bank 227.9 469.4 436.9 7.4
- Non-Bank 686.0 426.5 424.8 0.4
GDP at Market Prices 29,078 27,384 25,068 9.2
TABLE-4
TRENDS IN DEBT (Rs. Billion)
Year Public Domestic External Year Public Domestic External Year Public Domestic External Debt
Debt Debt Debt Debt Debt Debt Debt Debt
1971 30 14 16 1986 390 203 187 2001 3,684 1,799 1,885
1972 55 17 38 1987 458 248 209 2002 3,636 1,775 1,862
1973 60 20 40 1988 523 290 233 2003 3,694 1,895 1,800
1974 62 19 44 1989 634 333 300 2004 3,866 2,028 1,839
1975 70 23 48 1990 711 381 330 2005 4,211 2,178 2,034
1976 85 28 57 1991 825 448 377 2006 4,359 2,322 2,038
1977 97 34 63 1992 969 532 437 2007 4,802 2,601 2,201
1978 112 41 71 1993 1,135 617 519 2008 6,126 3,275 2,852
1979 130 52 77 1994 1,340 716 624 2009 7,731 3,860 3,871
1980 146 60 86 1995 1,497 809 688 2010 9,006 4,654 4,352
1981 145 58 87 1996 1,704 920 784 2011 10,767 6,017 4,750
1982 189 81 107 1997 1,995 1,056 939 2012 12,695 7,638 5,057
1983 227 104 123 1998 2,392 1,199 1,193 2013 14,293 9,522 4,771
1984 257 125 132 1999 2,946 1,389 1,557 2014 15,996 10,920 5,076
309 153 156 2000 3,172 1,645 1,527 2015 16,936 11,932 5,004
1985
34

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“AN APPRAISAL OF PAKISTAN’S PUBLIC FINANCE

Public Financial Management (PFM) is fundamentally the management of financial

AGP Accountant General of Pakistan

BSP Budget Strategy Paper

CGA Controller General of Accounts

CPEC China Pakistan Economic Corridor

CVT Capital Value Tax

FABS Financial Accounting & Budgeting System

FBR Federal Board of Revenue

GDP Gross Domestic Product

GFMIS Government Financial Management Information System

GIDC Gas Infrastructure Development Cess

MTBF Medium Term Budgetary Framework

NFC National Finance Commission

NGDS Natural Gas Development Surcharge

OBB Output Based Budget

PFAA Public Finance Administration Act

PFM Public Financial Management

PIFRA Project to Improve Financial Reporting & Auditing

SGST Services General Sales Tax

SRO Statutory Regulatory Order

TMA Town Municipal Administration

VAT Value Added Tax

STATEMENT OF THE PROBLEM

SCOPE OF THE STUDY

REVIEW OF THE LITERATURE

The book gives a comprehensive theoretical background to public finance. It covers

A very good analysis of management of public expenditure in Pakistan with comparison of

5- The World Bank. Pakistan Development Update. Washington D.C., 2015.

6- Pakistan Economic Survey (from 2010-2014):

7- Narayan, Francis B. Financial Management and Government Issues in Pakistan. Manila:

This report describes financial management and governance arrangements in Pakistan,

Organization of the Paper

PUBLIC FINANCE MANAGEMENT

1.1 Objectives of Public Finance Management

Effective PFM should cover the following key objectives:

1.1.1 Aggregate Financial Management

1.1.2 Operational management

1.1.3 Asset Acquisition & Disposal

1.1.4 Treasury Management

1.1.5 Review and Performance Evaluation

1.1.6 Reporting to Stakeholders

It has been determined that finalization of an institution’s financial statements by an

1.1.8 Fiduciary Risk Management

1.2 Major Components of Public Finance Management

(iii) Financial Administration: It involves preparation, administration and approval of

PUBLIC FINANCE MANAGEMENT IN PAKISTAN

2.1 Legal and Institutional Framework of PFM in Pakistan

APPRAISAL OF PUBLIC FINANCE MANAGEMENT

3.1 Revenue Management

3.1.1 Inefficient Collection of Taxes:

Figure-1: Tax Revenue as % of GDP

Data Source: Pakistan Economic Survey 2014-15

3.1.2 No real growth:

3.1.3 Inadequacy in tax collection at Provincial level:

3.1.5 Narrow tax base and weak enforcement:

3.1.6 Skewed tax mix:

3.1.8 Ad-hoc tax policies:

3.2 Expenditure Management & Fiscal Deficit

Figure-2: Revenue-Expenditure Gap (% of GDP)