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Pakistan’s Weak Fiscal Framework Macroeconomic Implications

Pakistan’s Weak Fiscal Framework Macroeconomic Implications. Sakib Sherani Comsats │ October 2013. Fiscal Framework. Marked by structural rigidities:. Fiscal Framework. Marked by structural rigidities: Revenue. Fiscal Framework. Marked by structural rigidities: Revenue Narrow tax base.

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Pakistan’s Weak Fiscal Framework Macroeconomic Implications

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  1. Pakistan’s Weak Fiscal FrameworkMacroeconomic Implications Sakib Sherani Comsats │ October 2013

  2. Fiscal Framework Marked by structural rigidities:

  3. Fiscal Framework Marked by structural rigidities: • Revenue

  4. Fiscal Framework Marked by structural rigidities: • Revenue • Narrow tax base

  5. Fiscal Framework Marked by structural rigidities: • Revenue • Narrow tax base • Reliance on indirect taxes

  6. Fiscal Framework Marked by structural rigidities: • Revenue • Narrow tax base • Reliance on indirect taxes • Low tax buoyancy and elasticity

  7. Fiscal Framework Marked by structural rigidities: • Revenue • Narrow tax base • Reliance on indirect taxes • Low tax buoyancy and elasticity • Tax assignment & provincial fiscal effort

  8. Fiscal Framework Marked by structural rigidities: • Revenue • Narrow tax base • Reliance on indirect taxes • Low tax buoyancy and elasticity • Tax assignment & provincial fiscal effort • Governance issues & exemptions regime

  9. Fiscal Framework Marked by structural rigidities: • Expenditure

  10. Fiscal Framework Marked by structural rigidities: • Expenditure • Generous fiscal transfers regime (NFC Award)

  11. Fiscal Framework Marked by structural rigidities: • Expenditure • Generous fiscal transfers regime (NFC Award) • Debt servicing & defense-related

  12. Fiscal Framework Marked by structural rigidities: • Expenditure • Generous fiscal transfers regime (NFC Award) • Debt servicing & defense-related • Untargeted subsidies

  13. Fiscal Framework Marked by structural rigidities: • Expenditure • Generous fiscal transfers regime (NFC Award) • Debt servicing & defense-related • Untargeted subsidies • Consumption-oriented rather than Investment-driven

  14. Pakistan’s Tax Culture

  15. Pakistan’s Tax Culture 180 million people

  16. Pakistan’s Tax Culture 180 million people 3.7 million tax registered

  17. Pakistan’s Tax Culture 180 million people 3.7 million tax registered 711,000 file return

  18. Pakistan’s Tax Culture 180 million people 3.7 million tax registered 0.7 million file return(0.9 mn salaried)

  19. Pakistan’s Tax Culture 180 million people 3.7 million tax registered 0.7 million file return (0.9 mn salaried) X% actually pay

  20. Pakistan’s Tax Culture 180 million people 3.7 million tax registered 0.7 million file return (0.9 mn salaried) X% actually pay Z% pay honestly

  21. Pakistan’s Tax Culture • 776,000 people in 3 cities with assets, property, >1 car, bank accounts, foreign travel ≠ not on tax register • Expanded to 3.2 million in 2012 (FBR/NADRA) • 61% of parliament reportedly filed “nil” taxable income in last filed income tax return

  22. Tax vs GDP Growth

  23. Context Stagnant Tax revenues …. Tax to GDP (%) Source: FBR

  24. Context Stagnant Tax revenues …. Tax to GDP (%) Avg = 9.2% Source: FBR

  25. Object Classification

  26. Object Classification = 80%

  27. Context • Rising losses of Power sector …. Source: MoF; Sakib Sherani

  28. Fiscal deficit vs Target

  29. Context • Record fiscal deficits …. Source: MOF

  30. Macroeconomic Implications

  31. Macroeconomic Implications • A weak fiscal framework impacts:

  32. Macroeconomic Implications • A weak fiscal framework impacts: • Public debt

  33. Macroeconomic Implications • A weak fiscal framework impacts: • Public debt • Growth and investment

  34. Macroeconomic Implications • A weak fiscal framework impacts: • Public debt • Growth and investment • Pernicious long run impact

  35. Macroeconomic Implications • A weak fiscal framework impacts: • Public debt • Growth and investment • Pernicious long run impact • Inflation

  36. Macroeconomic Implications • A weak fiscal framework impacts: • Public debt • Growth and investment • Pernicious long run impact • Inflation • Balance of payments

  37. Macroeconomic Implications • A weak fiscal framework impacts: • Public debt • Growth and investment • Pernicious long run impact • Inflation • Balance of payments • Public service delivery

  38. Macroeconomic Implications • Fiscal weakness ... • Inability / unwillingness to tax • Inability / unwillingness to limit spending • ... leads to excessive borrowing/money creation • Leading to inflation + BoP pressure • ... AND, to a rapid build-up of public debt

  39. A vicious spiral

  40. Impact on Growth & Investment Source: SBP; Sakib Sherani

  41. Domestic constraints Severity of Constraints Reported by SAR Benchmark and Expanding Firms Urban Formal Sector Benchmark Firm Expanding Firm Source: World Bank

  42. Domestic constraints Severity of Constraints Reported by SAR Benchmark and Expanding Firms Urban Formal Sector Benchmark Firm No. 4 Expanding Firm Source: World Bank

  43. Govt Borrowing & Inflation Source: IMF

  44. Public debt

  45. Conclusion I. M. F.

  46. Conclusion ItsMostlyFiscal

  47. Thank You

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