The week in focus

The government continues to borrow from the central bank in the face of soaring expenditures.

The government has continued to borrow from the central bank in the face of soaring expenditures and stagnant income from tax revenues, triggering fears of high inflation and feeble growth.

According to data released by the State Bank of Pakistan (SBP) last week, the government borrowed a net Rs336 billion from July to December 11 this year. The rate of monetary growth during the period hit 6.24 per cent, higher than the 4.61 per cent seen last year.

“Government borrowing from the State Bank at an increasing rate reflects severe fiscal vulnerabilities. Given the delays in introduction of tax reforms and weak industrial production, the task of achieving enhancement in tax revenues is beginning to look quite ambitious,” the central bank said in its monetary policy statement last month.

Problems have mounted after the recent floods, which have caused a loss of around $10 billion to the economy, according to estimates provided by the World Bank and the Asian Development Bank. The State Bank expects the gross domestic product to grow two to three per cent this fiscal year compared with the growth of 4.1 per cent last year.

Inflation is projected between 13.5 and 14.5 per cent, compared with 11.7 per cent last year.

Treading a dangerous path

In the eyes of experts the government is treading a dangerous path which may take energy out of the economy. “Increase in borrowing will cut industrial investment by the same amount. Savings are already low at eight per cent and these too have been consumed by the government,” said eminent economist AB Shahid.

He added that productivity and profitability of the private sector, which is the engine of economic growth, will weaken as a consequence of less credit supply for business expansion.

Discussing the reformed general sales tax (RGST) and flood surcharge, he said an increase in taxes in recessionary conditions will hurt the economy. Instead, taxes should be reduced to boost investment and stimulate growth.

Shahid said the government has no capacity to repay the loans being taken at high interest rates. To put its house in order, he suggested, state expenses should be reduced and the bleeding public sector enterprises restructured.

“Billions of rupees in borrowed money are stuck in commodity operations, dealing a blow to state coffers in terms of heavy mark-up and cost of maintaining commodity stocks.” If prices of procured commodities come down, these should be disposed of as quickly as possible to avoid heavy losses for holding the commodity for a long period.

Income tax versus sales tax

InvestCap Research Head Khurram Shehzad suggested that instead of relying on the RGST, the government should increase the income tax rate and widen its scope to bring evaders under the net. “Income tax is a direct tax, contrary to RGST which is indirect, and its results will come in early and it will produce more revenues.” Besides, there is a need to create awareness among people of the importance of taxes in an economy.

He said the government should constitute a task force comprising private-sector professionals for conducting surveys and studies in order to discover potential income tax payers, adding that the agriculture sector must be brought under the tax net.

Shehzad stressed that the government should reduce its non-development expenditures, particularly security-related expenses. “We have paid a heavy price in terms of opportunity cost, such as lack of foreign investment and lost export orders due to the law and order situation. This is not considered while assessing the cost incurred on the war on terror.”

He underscored the need for spending on health and education projects as a dearth of investment in these areas is putting the country’s future at stake.

The writer is incharge Business desk for the Express tribune and can be contacted at [e-mail]

Published in The Express Tribune, December 27^th, 2010.