Behind the numbers

27 May 2016


The writer is a former economic adviser to government, and currently heads a macroeconomic consultancy based in Islamabad.
The writer is a former economic adviser to government, and currently heads a macroeconomic consultancy based in Islamabad.

ONE week from now, the country’s national and fiscal accounts for the current year (2015-16) will be officially unveiled. A day before the federal budget, the Economic Survey will be presented by the Ministry of Finance, detailing the overall state of the economy. The number that will perhaps garner the most attention will be the provisional growth rate reported for the overall economy as well as for the major sectors. In addition, the investment data, especially relating to the private sector, will be carefully analysed.

The economic data and numbers that will be presented will perforce be provisional. National accounts for 2015-16 will be based on nine (in some cases seven) months provisional data which will be subject to change in subsequent data cycles. This year’s provisional numbers will be firmed up and reported as ‘revised’ next year, while they will be finalised (and reported as ‘final’) the year after, ie in 2017-18.

Growth: The national accounts committee has compiled the provisional data for 2015-16 and presented it to the finance minister. While the data set is not publicly available at this stage, according to reports in the media, economic growth in 2015-16 has been officially recorded at 4.7pc, against a target of 5.5pc. Value addition in the agriculture sector contracted by 0.2pc for the year, mainly on the back of a catastrophic decline of 28pc in cotton output (a drop of over four million bales). Industry is slated to have grown 6.8pc, while the services sector recorded an expansion of 5.7pc for the year.

According to press reports, the growth drivers in 2015-16 were construction, electricity and gas distribution, financial services and general government services. The services sector provided the bulk of the growth in the economy for the year. The areas with weak performance were agriculture and exports. Real GDP growth for the previous year (2014-15) was revised down to 4pc, from the earlier-recorded 4.2pc. Total fixed investment in the economy decreased to 13.6pc of GDP, with private investment surprising with a weaker-than-expected outturn of 9.8pc of GDP, against a target of 12.2pc.

An honest assessment of economic performance will serve the nation well.

While much of the critical underlying data on growth and investment is weaker than expected, the reported headline real GDP growth figure has surprised most independent commentators. Credible independent estimates had placed economic growth at between 3pc to 4pc, with risks skewed to the lower side. This was largely predicated on the steep decline in domestic cotton output which has traditionally had strong explanatory power for overall growth in the economy in any given year. The cotton crop has strong linkages with the rest of the economy, including the services sector.

Historically, each decline of one million bales was estimated to translate into a reduction of 0.5pc in the headline GDP growth rate. Over time, this relationship has weakened somewhat. Nonetheless, a decline of four million bales in cotton output would still translate, in my estimate, to at least a one percentage point reduction in headline GDP growth. Based on this estimate alone, the official GDP growth rate implies that, adjusted for the failure of the cotton crop, the rest of the economy generated a growth rate of 5.7pc. This is highly implausible given the rest of the reported parameters, including the investment and savings data.

Revenue: A key source of satisfaction for the government is its interpretation of its fiscal performance. Under challenging (and questionable) stipulations of the IMF programme, the government is on course to recording a nearly 20pc increase in FBR tax collection for 2015-16, one of the highest annual rates of growth in the recent past. Cumulatively, government revenue has increased around 56pc in the past three years.

To its credit, the government has taken several positive steps in its endeavour to collect more revenue. It has appointed a serious and committed revenue tsar to work closely with FBR; previously it had appointed a reform-minded chairman who has since been re-assigned. The government is working to implement some of the recommendations of the competent Tax Reforms Commission it had set up. And in a path-breaking move, this government published for two consecutive years a taxpayers’ directory, including a separate one for parliamentarians. In addition, according to FBR, over 200,000 notices to potential new taxpayers have been issued following the setting up of a dedicated (but understaffed) tax base broadening unit.

Despite these measures, government efforts at reform of the tax system have been piecemeal and random, and have fallen far short of a serious, credible, well-thought-out and wide-ranging reform required. There has been little or no thinking about the fundamental redesigning of the tax system, a meaningful restructuring of FBR, or a simplification of the tax code.

To be sure, serious tax reform has been constrained rather than facilitated by the design of the IMF programme, which has laid primacy on increasing revenues upfront rather than through a fundamental revamp of the tax system. As a result, the bulk of the revenue increase touted by the government as an outstanding success has come from an increase in tax rates of existing taxpayers, an increase in the standard sales tax rate, newer withholding taxes, an across-the-board increase in import duties including on basic food items and essential goods, non-payment of refunds to industry, and anti-growth and anti-business measures such as increasing the sales tax on diesel to around 50pc while imposing the Gas Infrastructure Development Cess. In addition, FBR’s enforcement and audit actions have been extremely coercive and beyond the pale of the law, as evidenced by the unprecedented charge of ‘maladministration’ levied by the Pakistan Tax Bar Association.

In short, the overall increase in revenue is impressive — but it has come at a punishing cost to industry and exports.

The writer is a former economic adviser to government, and currently heads a macroeconomic consultancy based in Islamabad.

Published in Dawn, May 27th, 2016