March 31, 2003	Monday	Muharram 27, 1424

The government has recently issued a review covering the economic developments in the country during the first seven months of the fiscal year 2002-03.

Taking advantage of the occasion, the government has also narrated the story of the successes during the last three years commencing the takeover by the military in October 1999.

This article critically examines the three important aspects of the document — fiscal sector, domestic debt sector and external debt sector.

Fiscal sector: It has been mentioned in the review that the amount of the net tax collections (after deducting the amounts of the refunds/rebate) during the first seven months of the current fiscal 2002-03 was Rs238.637 billion, as against the target of Rs238 billion. The collections are stated to be 15.1 per cent higher than the collections of the same period of the fiscal year 2001-02. The share of different taxes are: (a) sales tax Rs108.862 billion (45.62 per cent); central excise duty Rs23.567 billion (9.88 per cent); (c) customs duty Rs33.654 billion (14.1 per cent); and (d) direct taxes Rs72.554 billion (30.4 per cent). It has been claimed in the review that the backlog of the refunds was cleared during the fiscal the FY-02.

The review states that as against 26.4 per cent increase in the sales tax collections during July-Jan 03 over the same period of the fiscal FY-02, the increase in the refunds merely constitutes 6.7 per cent only. What does this reflect? Have the refund claims pertaining to the fiscal FY-03 been held back by the government in order to give a rosy picture of the tax collections? A news item appearing in Dawn (March 12, 2003) substantiates this version as it states that the refund/rebate claims of Rs25-30 billion are yet to be settled. If we deduct this sum of Rs25 billion from the net collection of Rs238.637 billion of July-Jan 03, it will come down to Rs213.637 billion, which will be only 3.08 per cent higher than the net collection of Rs207.324 billion of the same period of the previous fiscal (FY-02).

As window-dressing is always possible in the figures of the “net” collections by withholding the refund claims, for analytical purposes, according to my view, the gross amount of the collections should invariably be taken into consideration. Yet another reason for this idea is that it is the gross amount which the taxpayers actually put into the government’s exchequer, while the beneficiaries of the refunds are a few businessmen.

Below are the figures of the gross collections under various heads: Table “A”

The figures have been derived from the government’s review itself. The increase in the tax (gross) collections during July-Jan 03 are only 9.79 per cent higher than the collections (gross) of the same period of the fiscal FY-02. The claim of 15.1 per cent increase seems a mere window dressing by withholding the refunds.

It is not clear on what criterion the periodical/monthly collection targets are fixed by the government as it was never made public. At the flat rate system, collections during July-Jan 03 based on the budget estimates of Rs460 billion should have been Rs268.33 billion and not Rs238 billion.

The amount of the “direct taxes” recovered during July-Jan 03 has come down by 3.65 per cent when compared to the collection of the same period of the previous fiscal FY-02. It is universally accepted that the “direct taxes” are progressive while the “indirect taxes” are regressive in nature. It may, however, be seen that the share of the direct taxes in the total collection goes on decreasing instead of increasing despite the survey conducted by the Central Board of Revenue in 2000 with the aim of bringing more persons in the tax net and increasing the revenues by Rs100 billion. But the government had succumbed to the pressures of the “trader mafia”. It may not be out of place to indicate here that even the taxes classified as “direct taxes” include “indirect taxes” like withholding tax, notional taxes, etc. If we exclude these items, the share of the direct taxes in the total collections will further reduce.

It will be seen from Table “A” that the regressive sales tax has become the largest contributor— about 50 per cent— in the revenues. It appears that the government is bent upon generating revenues from this head by keeping the rate one of the highest in the world finding itself helpless before the “trader and feudal mafia” in the matter of recovery of direct taxes. The imports have grown by 19.1 per cent during July-Jan 03 as compared to the same period of the fiscal FY-02, but increase in the amount of the custom duty (gross) is only 9.68 per cent. It is true that the rate of custom duty was lowered by 5 per cent in the budget for the current fiscal year and the rupee appreciated by 3 per cent (total impact 8 per cent). Thus, increase should have been around 11.1 per cent. As stated in the government review, several revenue spinners (including POL products) were transferred from the central excise duty to the customs duty. The quantum of this transfer has not been indicated but it is likely to be heavy because of the POL products, which should have inflated the custom collection even beyond 11.1 per cent over the corresponding period of the previous fiscal.

Unless the quantum of transfer from the CED to the custom duty is made public, it will be impossible to examine the justification for CED remaining static despite substantial growth of 13.5 per cent in the production of sugar, 17.8 per cent in cement , 42 per cent in cars,47.9 per cent in light commercial vehicles (LCVs), etc.

The review puts the quantum of fiscal deficit during FY-02 at 5.1 per cent while the State Bank’s annual report for the said fiscal year puts this figure at 6.6 per cent. There is a vast difference between the two sets of figures. Then whom to believe? The SBP’s figure seems more reliable while the government’s figure seems to be an exaggeration to indicate better macro-economic performance.

This view is also supported by the fiscal deficit figure for the fiscal FY-02 given in the publication brought out by the Habib Bank Ltd titled “Economic focus” issued in June, 2002. The Habib Bank figure is is 7.1 per cent which is nearer to the SBP’s data.

Domestic debt: The figures of the domestic debt as given in the government’s review and the SBP’s annual report for the fiscal FY-02 are enumerated in the Table “B”.

It can be seen that there is a vast difference in the figures of the domestic debt given in the government review and the SBP’s report. The government’s figures include the amounts of Foreign Exchange Bearer Certificates (FEBCs), Foreign Currency Bearer Certificates (FCBCs), US$ Bearer Certificates and Special US $ Bonds. The SBP’s figures of the domestic debt exclude these items but the amounts of these items given in the footnote of table 8.7 (page 140) of the SBP’s annual report for FY-02 have been put at $90 million (end June 2001) and $66 million (end June 2002). If we add rupee equivalent of the above amounts to the SBP’s figures five in the Table “B”, the position emerges as under: Table ‘‘C’’

Even after making the necessary adjustments, there remains a difference of Rs80.94 billion (30-06-2001) and Rs54.24 billion (306-2002) between the government and the SBP’s figures. The causes of this huge difference need to be explained by the government.

According to the government data, domestic debt was reduced by Rs45.5 billion during the fiscal FY02, whereas the SBP data shows that the reduction is of the order of Rs17 billion. Unless the difference between the two sets of figures of debt stock is reconciled, no meaningful comments about the reduction are possible. Nevertheless, if we go by the SBP data, the reduction is of the order of Rs17 billion. Unless the difference between the two sets of figures of debt stock is reconciled, no meaningful comments about the reduction are possible. Nevertheless, if we go by the SBP data, the reduction in the interest payment on the domestic debt during the fiscal FY-02 was of the order of Rs16.312 billion while reduction in the debt was to the tune of Rs17 billion (see Table “B”), which means that the quantum of debt could be reduced only to the extent of the gap becoming available on account of savings in the interest expenditure and that no strategy as such exists in the matter of reduction of the domestic debt.

The interest rates on the government instruments were reduced on more than one occasions during July-Jan 03. This must have resulted in more savings in the interest expenditure and consequently more reduction in the debt should have been possible. But surprisingly, the government review speaks of increase of Rs11.9 billion in the domestic debt. Why? Is it because of the sale of the Treasury Bills for sterilizing the impact of the money pumped into the economy on account of heavy US $ purchases by the SBP from the inter-bank market after exhaustion of the SBP’s holdings of the Treasury Bills? This is because till the SBP’s holdings did exist, the same were liquidated and fresh Treasury Bills sold without having overall impact on the volume of the debt. If that being the position, domestic debt will continue to grow with the passage of time in the event of heavy foreign exchange inflows and its purchase by the SBP continuing.

External debt and foreign exchange liabilities: The previous government has persistently been claiming that it had inherited the foreign debt and liabilities of $38 billion and that it had reduced the same by about $2 billion. The mid-year review issued by the present government also repeats the same assertion. The current half-year review has, however, scaled down the claim from $2 billion to $1.4 billion. The data of foreign debts and liabilities outstanding during the last few years is contained in the Table “D”:

A perusal of the Table “D” indicates that there is nominal difference between the governmental and the SBP figures of the foreign debts/liabilities as at the end-June 2000, 2001 and 2002.

The government review, however, inflates the figures as of June 30, 1999, the fiscal year just preceding the October 12, 1999, takeover by outstanding debt figures by $2.215 billion and understating the liability figure by $1.215 billion — effecting the net overstatement by a billion dollar. The end-June 1999 figures appear to have been doctored in the above manner in order to justify the inheritance of the total debt/liability of $38 billion, but the government is not successful in it because its own figures put the inheritance at $37.6 billion (as at the end of June 1999). As for the reduction of $1.4 billion in the foreign debt/liabilities stock during the fiscal years FY-01 and FY-02, logically the figures of end June 1999 should be matched with the end-June 2002 figures because the alleged inheritance of $38 billion dates back to 1999 and not FY-01 and FY-02.

A perusal of Table “D” would reveal that according to the government’s own figures as well, foreign debt has not decreased since October 1999 takeover, but it has increased despite re-profiling of the Paris Club debts. Of course there has been a reduction in the foreign exchange liabilities of the order of slightly over $2 billion (as per SBP data), while as per the government data, there has been a reduction of $1.7 billion only. But the fresh external borrowings have negated the impact of reduction in the liabilities and the aggregate of the external debts and liabilities as of end-June 2002 remains almost the same as at the end-June 1999 viz $36.6 billion (barring overstatement of one billion dollar in 1999 governmental figures). Therefore, the claim of $1.4 billion reduction is far from reality.

The reduction in the foreign exchange liabilities is on account of (a) return by the SBP to the commercial banks the amounts of foreign currency deposits held by the former $1,313 million; (b) encashment of Special US dollar bonds of $240 million; (c) return of National Debt Repayment Programme (NDRP) deposits of $121 million; (d) liquidation of National Highway Authority Bonds of $66 million; (e) return of the NBP deposits of $116 million; (f) other liabilities of $377 million; total $2,233 million reduced by $50 million on account of increase in the deposits of certain central bank — net reduction $2.183 billion (source: Table 8.7 page 140 of SBP annual report for FY-02). This reduction has been possible on account of heavy inflows from abroad in the post-September 11/2001 developments and not because of any specific policies pursued by the government. The government could take the credit had it not taken fresh external loans and let the foreign debt/liability stock really decrease at least proportionately.

Thus, the only positive side of the external sector is projected (or more than projected) increase in the exports and improvement in the current account. But the non-export inflows are mainly on account of the measures taken by foreign governments in order to curb the informal transfers as admitted in the SBP report for the 1st quarter of the current fiscal FY-03 in these words: “the fact that the catalyst for the rise in foreign inflows was the policies of other countries towards the informal inflows.”