public expenditure luqman
TRANSCRIPT
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Public expenditure:
Public expenditure can be defined as the expenditure incurred by public authorities like
central, state and local governments to satisfy the collective social wants of the people is
known as public expenditure.
It is basically spending made by the government of a country on citizens' needs on items
such as pension, provision, infrastructure etc. Public expenditure was restricted only to a
small extent till 19th century due to laissez faire followed by the government, as classical
then believed money left in private hands could bring better returns. It was only in 20th
century when John Maynard Keynes pointed out the important role of public expenditure
in determining the level of income and distribution in the economy. Since then
governments expenditure has shown an increasing trend. Even though public expenditure
came into picture in 20th century, accelerating growth of government expenditure began
in late 70s.There are several factors that have led to enormous increase in public
expenditure through the years
Defense Expenditure: due to modernization of defense equipment by navy, armyand air force to prepare the country from war or for prevention.
Population growth: It increases with the increase in population, more ofinvestment is required to be done by government on law and order, education;
infrastructure etc. investment in different fields depending on the different age
group is required.
Welfare activities-: women welfare, mid day meals, pension provisions etc.Provision of public and utility services-provision of basic public goods given by
government (their maintenance and installation) such as transportation.
Accelerating economic growth: in order to raise the standard of living of thepeople.
Price rise: higher price level compels government to spend increased amount onpurchase of goods and services.
Increase in public revenue: with rise in public expenditure government is boundto increase the public expenditure.
International Obligation: maintenance of socio economic obligation, culturalexchange etc. (these are indirect expenses of government)
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Significance:
Public expenditure is the value of goods and services bought by the State and its
articulations. Public expenditure plays four main roles:
It contributes to current effective demand It expresses a coordinated impulse on the economy, which can be used for
stabilization, business cycle inversion, and growth purposes
It increases the public endowment of goods for everybody It gives rise to positive externalities to economy and society as a whole (or in
specific sectors and geographical areas), the more so through its capital
component. With its prioritized structure and its peculiar decision-making
processes, it substantiates the prevailing kind of State. In democracy, public
expenditure is an expression of people's will, managed through political parties
and institutions. At the same time, public expenditure is characterized by a high
degree of inertia and law-dependency, which tempers the will of the current
majority. Public expenditure can be financed through taxes, public debt, money
emission, international aid.
Classification of Public Expenditure:
Classification of Public expenditure refers to the systematic arrangement of different
items on which the government incurs expenditure. Different economists have looked at
public expenditure from different point of view. The following classification is a based on
these different views.
1.Functional Classification
Some economists classify public expenditure on the basis of functions for which they are
incurred. The government performs various functions like defense, social welfare,
agriculture, infrastructure and industrial development. The expenditure incurred on such
functions fall under this classification. These functions are further divided into subsidiary
functions. This kind of classification provides a clear idea about how the public funds are
spent.
2.Revenue and Capital Expenditure
Revenue expenditure is current or consumption expenditures incurred on civil
administration, defense forces, public health and education, maintenance of government
machinery. This type of expenditure is of recurring type which is incurred year after year.
On the other hand, capital expenditures are incurred on building durable assets, like
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highways, multipurpose dams, irrigation projects, buying machinery and equipment.
They are non recurring type of expenditures in the form of capital investments. Such
expenditures are expected to improve the productive capacity of the economy.
3. Transfer and Non-Transfer Expenditure
A.C. Pigou, the British economist has classified public expenditure as:-
1. Transfer expenditure2. Non-transfer expenditure
Transfer ExpenditureTransfer expenditure relates to the expenditure against which there is no corresponding
return. Such expenditure includes public expenditure on
1. National Old Age Pension Schemes,2. Interest payments,3. Subsidies,4. Unemployment allowances,5. Welfare benefits to weaker sections, etc.By incurring such expenditure, the government does not get anything in return, but it adds
to the welfare of the people, especially belong to the weaker sections of the society. Such
expenditure basically results in redistribution of money incomes within the society.
Non-Transfer ExpenditureThe non-transfer expenditure relates to expenditure which results in creation of income or
output. The non-transfer expenditure includes development as well as non-development
expenditure that results in creation of output directly or indirectly.
1. Economic infrastructure such as power, transport, irrigation, etc.2. Social infrastructure such as education, health and family welfare.3. Internal law and order and defense.4. Public administration, etc.By incurring such expenditure, the government creates a healthy conditions or
environment for economic activities. Due to economic growth, the government may be
able to generate income in form of duties and taxes.
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4.Productive and Unproductive Expenditure
This classification was made by Classical economists on the basis of creation of
productive capacity.
Productive Expenditure:Expenditure on infrastructure development, public enterprises or development of
agriculture increase productive capacity in the economy and bring income to the
government. Thus they are classified as productive expenditure.
Unproductive Expenditure:Expenditures in the nature of consumption such as defense, interest payments,
expenditure on law and order, public administration, do not create any productive asset
which can bring income or returns to the government. Such expenses are classified as
unproductive expenditures.
5.Development and Non-Development Expenditure
Modern economists have modified this classification into distinction between
development and non-development expenditures.
Development Expenditure:All expenditures that promote economic growth and development are termed as
development expenditure. These are the same as productive expenditure.
Non-Development Expenditure:Unproductive expenditures are termed as non development expenditures.
6. Grants and Purchase Price
This classification has been suggested by economist Hugh Dalton.
Grants:Grants are those payments made by a public authority for which there may not be any
quid-pro-quo, i.e., there will be no receipt of goods or services. For example, old age
pension, unemployment benefits, subsidies, social insurance, etc. Grants are transfer
expenditures.
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Purchase prices:Purchase prices are expenditures for which the government receives goods and services in
return. For example, salaries and wages to government employees and purchase of
consumption and capital goods.7. Classification According to Benefits
Public expenditure can be classified on the basis of benefits they confer on different
groups of people.
Common benefits to all: Expenditures that confer common benefits on all thepeople. For example, expenditure on education, public health, transport, defense, law
and order, general administration.
Special benefits to all: Expenditures that confer special benefits on all. Forexample, administration of justice, social security measures, community welfare.
Special benefits to some: Expenditures that confer direct special benefits oncertain people and also add to general welfare. For example, old age pension,
subsidies to weaker section, unemployment benefits.
8.Hugh Dalton's Classification of Public Expenditure
Hugh Dalton has classified public expenditure as follows:-
Expenditures on political executives: i.e. maintenance of ceremonial heads ofstate, like the president.
Administrative expenditure: to maintain the general administration of thecountry, like government departments and offices.
Security expenditure: to maintain armed forces and the police forces. Expenditure on administration of justice: include maintenance of courts,
judges, public prosecutors.
Developmental expenditures: to promote growth and development of theeconomy, like expenditure on infrastructure, irrigation, etc.
Social expenditures: on public health, community welfare, social security, etc. Public debt charges: include payment of interest and repayment of principle
amount.
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Determinants:
Public expenditure is determined by political will of the leading forces in the state: their
priorities, their desired state model, and their interpretation of current economic and
political phase. Past choices have relevant impact on public expenditure because of
inertia and instrumentalism. Bureaucracy may play an important decision role for the
actual expenditure. Sometimes considered as a completely exogenous variable, the public
expenditure would thus be fully in the hand of political decision-makers without
dependency from the economic context. Yet, policy makers may turn out to follow an
anti-cyclical broad control of public expenditure. Automatic stabilizers may be at work,
as with the case of support schemes for unemployment: in this case, higher
unemployment and disappointing GDP growth would lead to higher public expenditure
through unemployment benefits and financial support to firms. In a different political and
institutional context, public expenditure may, instead, positively respond to state
revenues. Higher revenues (and maybe even a public surplus) may lead to higher public
expenditure. Symmetrically, if there is an upper limit to public deficit and, because of arecession, tax revenue fall, the State may be forced to cut public expenditure. In this
context, public expenditure would turn out to be pro-cyclical.
Lawmakers facing elections are sensitive to the public opinion. Usually, low-income
social groupsare in favor of expanding public expenditure in social issues, as stimulus
for jobs, and provision of free or subsidized services. The rich tend to use less public
services and to be more worried by the amount of tax necessary to fund public
expenditure. The middle class is ambivalent and will react depending on the specific
frame that will be proposed by politicians. Specific expenditure categories and items have
their favorable and opponent constituencies. Certain large-scale projects can be thesubject of a national debate and the decision can depend on its outcome. The process of
public budgeting is crucial to influence the outcome, e.g. with the sequence of decisions
being capable of "leaving no money" for the "last" choices. The current level of public
deficit or surplus is ambivalently used to influence changes in the level of public
expenditure. For those who desire a more or less balanced budget, the surplus is an
invitation to spend, a deficit to cut. However, the same surplus can instead be directed to
tax cut and the deficit gap can be filled in by new taxes or more incisive fight to tax
evasion.
Impact on other variables:
A GDP component as it is, public expenditure has an immediate impact on GDP. An
increase of public expenditure raises GDP by the same amount, other things equal.
Moreover, since income is an important determinant of consumption, that increase of
income will be followed by a rise in consumption: a positive feedback loop has been
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triggered between consumption and income, exactly as in the case of shocks in export,
investment or autonomous consumption. The full extent of this mechanism will depend,
however, by the reactions of the other economic agents. Firms have to decide whether to
increase production or prices in response to demand. Moreover, if consumers interpret
the increase in public expenditure as a fall in their disposable income (i.e. after-tax
income),consumptionmay fall accordingly. Public expenditure is also told to crowd-out
investment, possibly through an interest rate increase, further leading, in a floating
exchange rate regime, to a currency appreciation.Exportswould then be displaced as
well. In more microeconomic terms, public expenditure may be directed to consumer
goods and thus substitute families' expenditure, as with the case of health drugs. By
contrast, in other cases, as with education, public expenditure may trigger further
consumption (books and all the other goods whose consumption depend on culture
levels).
Long-term trends:
In developed countries, it has always grown whatever the political orientation of the
government. Just the tempo can change. With a few exceptions, only under extremely
strong constraints has public expenditure been cut in absolute terms, so that this attempt
can be judged as difficult. Wars are episodes of extremely high public expenditure,
followed usually by a return to normality, unless the pressure of the ex-soldiers for social
advancement is met with an extension of the welfare state.
Business Cycle Behavior:
Public expenditure may turn out to be pro-cyclical or anti-cyclical depending on the
political and institutional attitude toward public deficit. During recessions, tax revenue
tends to fall, public budget usually depredates. Some governments react by reducing
public expenditure and freezing employment and wages in the public sector. Other
decides to spend more to stimulate the economy. The former risks to worsening GDP
dynamics and engendering a vicious cycle, which can be broken by international trade
dynamics, financial inflows or other variables. The second would provoke a deep public
deficit, waiting for GDP rebound and, possibly, new taxes. Still, real world data show
often little reaction of public expenditure to the cycle. Most cycles show public
expenditure as a stabilizing tool just keeping the same dynamics when the rest "goes
wrong Public expenditure by Federal Government:
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Fiscal Development 06-07:
A sound fiscal position is an essential prerequisite for achieving macroeconomic
stability which is increasingly recognized as a critical ingredient for promoting strong
and sustained economic growth and lasting poverty reduction. The importance of sound
fiscal policy cannot be overemphasized in the case of Pakistan as its chronically high
consolidated budget deficit (7 percent of GDP) and rising public debt burden (over
100 percent of GDP) have been the economys Achilles heal in the 1990s.
Pakistan has experienced serious macroeconomic imbalances in the nineties mainly on
account of its fiscal profligacy and accordingly paid a heavy price in terms of
deceleration in economic growth and investment and associated rise in the levels of
poverty. Considerable efforts have been made over the last seven years to inculcate
financial discipline by pursuing a sound fiscal policy. Pakistan has succeeded in reducing
fiscal deficit from an average of 7 percent of GDP in the decades of 1980s and 1990s
to an average of 3.5 percent during the last seven years. The associated public debt also
declined sharply from over 100 percent of GDP to 53 percent of GDP by end-March2007. Pakistans hard earned macroeconomic stability is therefore underpinned by fiscal
discipline. Adequate level of revenue generation is sine quo non for the public policy to
meet expenditure obligations. Inadequacy of revenue generation directly affects the
governments resource position and the availability of socially desirable public goods. In
Pakistans economic history and until recently the mismatch between revenue collection
and budgetary requirement was a norm rather than an exception.
Since the situation required radical changes, broad-based tax policy and tax
administration reforms were initiated by the Central Board of Revenue (CBR) to improve
upon the resource mobilization effort and increase tax compliance by providing congenial
environment to the taxpayers. The thrust of the reform has been at reducing tax rates,
broadening the tax base to hitherto untaxed or under-taxed sectors and shifting the
incidence of taxes from imports and investment to consumption and incomes. The tax and
tariff reforms are aimed at simplification of tax system, improvement in resource
mobilization, boosting economic activity to ensure robust economic growth, reducing
the cost of doing business for trade and industry, reducing tax burden for lower income
strata of the society and promoting a tax-payer friendly culture. During the last six years
from 2000-01 to 2006-07, tax collection by the CBR increased by112.8%.The revenue
deficit (th difference between total revenue and total current expenditure), a measureof government dies-saving, was at a deficit of 0.2% of GDP in 2005-06 compared to a
deficit of 2.2% in 2000- 01. It has further progressed towards a targeted revenue surplus
of 0.6 percent of GDP in 2006-07.The revenue surplus has significance in inter-
generational distribution of debt burden. Fiscal Responsibility and Debt Limitation Act
2005 envisages a revenue surplus starting from 2007-08. The structure of taxation has
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undergone considerable changes since the1990s. Firstly, the share of direct taxes in total
taxes(collected by the CBR) has increased from 18 percent to over 38.5 percent in July-
April 2006-07. The share of indirect taxes declined from 82 percent to 61.5
percent during the same period. Even within the indirect taxes, dramatic changes
have taken place. The collection from custom duty used to account for 45 percent of total
tax collection and 55 percent of indirect taxes in 1990-91, its share has now been reduced
to 18.6 percent and 32.3 percent, respectively. This is the consequence of the tariff reform
implemented by successive governments since 1990-91. The share of sales tax increased
at a relatively faster pace from 14.4 percent to 41 percent of total taxes and from 17.6
percent to 60.3 percent of indirect taxes during the same period. Central excise as a tax is
losing its importance and gradually being faded out. Its shares in total taxes and indirect
taxes were 22.5 percent and 27.5 percent, respectively in 1990-91. These have now been
reduced to 8.3 percent and 12.3 percent, respectively during the same period.
The total expenditure remains more or less stable in a narrow band of 17 to 18.8 percent
of GDP during the last seven years. Substantial decline in interest payments from as highas7.5 percent of GDP in1998- 99 to2.7 percent of GDP in 2006-07, has provided fiscal
space to re-orient expenditure in favor of development expenditure. Resultantly the
share of current expenditure in total expenditure declined from 89 percent of
total expenditure in1998-99 to72 percent in 2006-07. In addition, the share of
development expenditure more than doubled from 11 percent to 28 percent in the
same period. The development expenditure bore the brunt of structural adjustment of
the 1990s as it declined from as high as 7.5 percent of GDP in 1991-92 t 2.5 percent of
GDP by 1999-2000. During the last seven years the development expenditure
improved from 2.2 percent of GDP in 2000-01 to 4.9 percent of GDP in 2006-07. Second
largest component of the current expenditure, namely, defense spending remained
stagnant at around 3.1 percent to 3.3 percent of GDP during the last seven
years. This shows strong focus of the government on removing infrastructural
bottlenecks and building physical assets. Non-defense-non- interest expenditure has
improved from 7.8 percent of GDP in 1999-2000 to 11.9 percent of GDP in 2006- 07.
Total revenues are budgeted at Rs. 1163.1 billion in 2006-07 compared to Rs 1087.0
billion in 2005-06, showing an increase of 7.0%. The Central Board of Revenue (CBR)
is targeted to collect Rs. 835 billion in 2006-07, which is 17.1 percent higher than last
years collection. CBR has exceeded the revenue target of Rs. 645.2 billion fixed for the
first ten months of current fiscal year (July-April 2006-07) by Rs. 11.3 billion. The netcollection stood at Rs.656.5 billion As against Rs.547.0 billion in the comparable
period of last year, thereby showing an increase of 20 percent. The direct taxes
contributed most of the increase as they have surpassed the target by Rs.52.4 billion and
recorded massive growth of 50.9 percent. This increase has compensated much of the
revenue shortages on account of sales tax and customs duties by Rs. 22.5 billion and Rs.
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19.0 billion, respectively owing to slowdown in imports. The massive than the anticipated
slowdown in imports growth from 30.6 percent to 10.3 percent during July-
April 2006-07, resulted in negative growth in dutiable imports with adverse
implications for import related taxes. Pakistan continues to maintain fiscal discipline for
the last several years. Total expenditure is targeted at Rs. 1536.56 billion or 17.4 percent
of GDP for the fiscal year 2006-07. Total expenditure was projected to be 8.6 percent
higher than last year (2005-06). During the first nine month (July-March) of
the current fiscal year total expenditure is estimated at Rs.1168.5 billion or 76 percent of
the annual target. Current Expenditure is targeted at Rs. 1126.19 billion for the current
fiscal year (2006-07) which means it would remain almost stagnant at the level of 2005-
06. During July-March 2006-07, provisional estimates show current expenditure of
Rs.925.3 billion which is 83.6 percent of the target. The higher increase in current
expenditures during the last two years is mainly on account of earthquake-related
spending amounting to 0.5 percent to 0.8 percent of GDP. Development expenditure is
targeted at Rs.435 billion for the year 2006-07.
During the first nine months (July-March) of 2006-07, development expenditure
amounted to Rs.242 billion or 58 percent of the yearly allocation. This expenditure is
likely to pick up in the last quarter the overall fiscal deficit is targeted at Rs. 373 billion or
4.2 percent of GDP for 2006-07. The Government is well placed to meet this target as
fiscal deficit during the first nine months remained at 3.1 percent of GDP or 73 percent of
the yearly target. On the basis of the developments on revenue and expenditure front, the
overall fiscal deficit during the first nine months (July-March) of the current fiscal year
stood at Rs.272.8 billion or 3.1 percent of GDP. Earthquake accounted for sizeable
amount of fiscal deficit and underlying fiscal deficit excluding earthquake expenditure is
targeted at 3.7 percent of GDP for 2006-07. Public debt burden continues to declinesharply for the seventh year in a row on account of prudent fiscal management. Public
debt was 85 percent of GDP in 1999-2000 but has declined sharply to 53.4 percent in
end-March 2007 a decline of 32 percentage points in just seven years is one
of the significant achievements of the government. During the year, public debt has
declined from 56.9 percent in 2005-06 to 53.4 percent of GDP a decline of 3.5 percentage
points in one year. Since public debt is a charge on the budget, its burden must be
viewed in relation to government revenue. Public debt was 627 percent of total
revenue in 1999-2000 but has declined to 400 percent in end-March 2007 a decline of
227 percentage points in seven years is not a mean achievement. External Sector Pakistan
has recorded a laudable export performance during the last several years, with exports
growing at an average rate of almost 16 percent per annum over the last
four years (2002-06). Beside sound macroeconomic policies pursued by the
government the strong and sustained growth in world economy also contributed
to impressive export growth. Despite further improvements in the international
trading environment, Pakistans export growth witnessed abrupt and sharp deceleration to
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less than 4 percent in the first ten months of the current fiscal year after growing at an
impressive rate of 16 percent per annum until June 2006. Pakistans import growth on the
other hand, slowed to a normal level in the current fiscal year after surging at an average
rate of 29 percent per annum during the last four years. Four years of strong economic
growth strengthened domestic demand which triggered a consequential pick up in
investment. The rise in investment demand led to a massive surge in imports. Though
Pakistan continued to maintain its strong growth momentum in the current fiscal year,
import growth has decelerated to a trend level for a variety of reasons including the
pursuance of tight monetary policy during the year. The slower growth imports are likely
to improve trade deficit as percentage of GDP compared to last years. Exports were
targeted at $ 18.6 billion or 12.9 percent higher than last year. Exports during the first ten
months (July-April) of the current fiscal year are up by 3.4 percent rising from $ 13.46
billion to $ 13.9 billion in the same period last year. Export of food group declined by 3.5
percent. This decline is caused by a 2.6 percent and 14.3 percent decline in exports of rice
and fruits. Export of rice declined due to lesser production caused by adverse weather
condition which kept the domestic price higher. It was more profitable to sellwithin the country than to export.
Exports of textile manufactures grew by 6.2 percent. Prominent among these are
export of knitwear (13.9%), readymade garments (6.8%), made up articles (8.9%),
cotton yarn (4.6%), and towels (2.6%). Exports of other textile materials registered a high
double digit growth of 17.2 percent. Export of raw cotton, cotton cloth and bed
wear on the other hand registered a decline. Exports of engineering goods increased by
6.7 percent while exports of petroleum products declined by 2.7 percent. In other
manufactures categories of exports, all items including carpets, rugs & mats, sports
goods, leather products, surgical equipments and chemical & pharmaceutical productsregistered negative growth. Exports of most of these items have been on the decline for
quite some time. In absolute term the overall exports posted an increase of $ 452.1
million in the first ten months of the current fiscal year over the same period last year. Of
this increase, 114.1 percent or$ 516.1 million was contributed by textile manufactures
while all other items increased by 64.8 percent or $ 293.2 million. This increase
of $ 809 million was offset by a decline of exports of rice ($ 59.3 million) and other
manufacturers ($ 296.6 million) leaving a net increase of $ 452 million. The less than
satisfactory export performance of textile manufacturers can be attributed to a variety of
factors.First; it appears that Pakistans textile exporters could not compete with its
traditional competitors. Second, the discriminating and tied-dumping duty of 5.8
percent on the bed linen export also affected Pakistans competitiveness. Third, poor
quality of cotton on account of contaminated cotton issue has also adversely affected the
export of spinning industry. Fourth, the rise in prima cotton price (a genetically
modified version) which is imported from the US is a critical input for
producing higher quality bed wear and fabrics, has made these items less
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competitive in the international market. Pakistans export suffers from serious structural
issues which need to be addressed primarily by textile manufacturers with government
playing its role of facilitating and providing some financial support on temporary basis.
Pakistan textile products are low value added and of poor quality therefore fetches low
international price. The machinery installed in recent years are old relative to
Pakistans competitors therefore, these machines are power intensive, less productive
and carry higher maintenance cost. Increased wastage of inputs also adds to their costs.
Pakistans labor is less productive because little or no efforts have been made to impart
training or improving their skills. Pakistans exporters spend little money on research and
development. Pakistan export houses lack capacity to meet bulk orders as well as they are
unable to meet requirements of consumers in terms of fashion and design. It is generally
argued that Pakistans exporters are uncompetitive in terms of adherence to contracted
quality and delivery schedule. Pakistans competitors are investing heavily and creating
better economies of scale. These are structural issues and must be addressed by
the industry itself with government playing its role of a facilitator and providing
some temporary financial assistance to address short term issues mentioned earlier.Pakistan's exports are highly concentrated in a few items namely, cotton, leather, rice,
synthetic textiles and sports goods.
These five categories of exports account for 77.2 percent of total exports during the first
nine months of 2006-07 with cotton manufacturers alone contributing 61.5 percent,
followed by leather (4.5%), rice (6.6%), synthetic textiles (3.0%) and sports goods
(1.6%).The degree of concentration has changed little from last fiscal year. Pakistans
exports are highly concentrated in few countries including the US, UK, Germany, Japan,
Hong Kong, Dubai and Saudi Arabia. These countries account for one-half of Pakistans
exports with US alone accounting for 28 percent. Pakistan needs to diversify its exportsnot only in terms of commodities but also in terms of markets. Heavy concentration
of exports in few commodities and few markets can lead to export instability.
Fiscal Development 07-08:
Fiscal Policy: Fiscal year 2007-08 proved to be a difficult year for Pakistan, with several
political and economic events transpiring unexpectedly. These events include heightened
political tensions, soaring global oil prices, the international and domestic food inflation
phenomena, a slowdown in global economic activity, and the troubled law and order
situation prevalent in the country. However, the most important aspect was the non-responsive stance on account of political expediency, that is, not responding to the policy
challenges emerging on Pakistans economic scene during most part of the fiscal year
2007-08. All these events have had adverse consequences for fiscal discipline. Because of
the instability experienced at the onset of 2007-08, the fiscal deficit is expected to miss
the target of 4.0 percent of GDP this year by a wide margin.
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Total revenues collected during the current year stood at Rs 1545.5 billion, higher than
the targeted level of Rs 1476 billion. This increase of Rs 69.5 billion from the budgeted
revenues was mainly due to higher than targeted non-tax revenues. There are expectations
that the FBR may fall short of its targeted level with total tax collections of Rs 1.0
trillionRs. 25 billion less than the original target. It is also anticipated that the
government may receive an additional Rs. 103 billion from non-tax revenues, reaching to
Rs. 483 billion. Slippages in provincial tax revenues amounted to Rs. 8 billion. Pakistans
tax revenue-to-GDP ratio stood at only 9.5 percent of GDP during 2007/08 as compared
to an average of 18 percent for other developing countries, indicating that substantial tax
policy reforms are still needed to broaden the tax base. The indirect tax-to-GDP ratio
stood at around 6 percent, while the direct tax-to-GDP ratio was calculated to be 4
percent. The government recognizes the need to broaden the tax base and reduce marginal
tax rates which would stimulate investment and production. The overall services sectors,
including wholesale and retail trade, as well as agriculture, are potential candidates for
broadening of the tax bases. Gross and Net tax collection has increased by 12.3% and
16.3% respectively. In absolute terms, these collections have gone up by Rs. 89.9 billionand 107.1 billion, respectively. Among the four federal taxes, the highest growth of
28.9% was recorded in the case of federal excise receipts, followed by sales tax (19.5%),
direct taxes (12.5%) and customs (11.4%). The collection of direct taxes has suffered a
substantial shortfall during July-April FY 07-08. The total expenditure for 2007-08 was
budgeted at Rs. 1875 billion11.9 percent higher than last year. Current expenditure on
the other hand was budgeted at Rs. 1378 billion which was atprevious years level.
Development expenditure was targeted at Rs 496 billion16.7 percent higher than last
year. On the basis of revenue and expenditure projections, the overall fiscal deficit was
targeted at Rs 398 billion or 4 percent of Gapes against 4.3 percent last year. However,large slippages have occurred on the expenditure side mainly on account of subsidies on
oil, power, fertilizer, wheat and other foods. Two factors had a significant impact on the
budgetary outlook. Firstly, oil prices continued to rise at a greater pace, reaching as high
as $ 115 per barrel in May 2008 an increase of over 116 percent during the fiscal year.
Secondly, the lack olfaction on the part of the government aggravated the fiscal situation
as the high international price of oil was not passed on to the domestic consumers.
Consequently, the oil subsidy is projected to rise to Rs 175 billion over shooting the
targeted level by Rs 160 billion. Hoarding, smuggling and mismanagement of wheat
operations forced the government to import 1.7 million tons of wheat at all time high
prices. Interest payments surpassed their targeted level by a significant margin. A sum of
Rs. 375 billion was budgeted for interest payments in 2007-08 whereas they are estimated
at Rs. 503.2 billion, thereby surpassing the targeted level by staggering Rs 128.2 billion.
The adverse developments on the revenue and expenditure sides resulted in massive
slippages in the overall fiscal deficit for the year 2007-08. Against the target of Rs 398
billion or 4 percent of GDP the overall fiscal deficit is likely to be Rs 683.4 billion or 6.5
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percent of GDP the highest in the last ten years. In order to counter massive gaps
between budgeted and estimated targets in current expenditure, the government made
efforts to mobilize more resources on the one hand, and postpone development spending
on the other. An adjustment of Rs 100 billion was made in development expenditure.
Domestic and external shocks not only increased the size of the fiscal deficit but they also
changed the composition of financing. The borrowing requirements increased from Rs
324 billion to Rs 683.4 billionan increase of 111 percent. External resource inflows
were adversely affected by these shocks and against the budgeted level of Rs 193 billion,
only Rs 119.4 billion is likely to materialize. In addition to this, Pakistan could not
complete the transaction of Global Depository Receipts (GDRs) of the National Bank of
Pakistan and could not launch sovereign and exchangeable disbursements of multilateral
banks and privatization proceeds were not materialized. These developments had
adversely impacted the external resource inflows which remained below the budgeted
level. Thus, the brunt of adjustments on the financing side fell on domestic sources.
Against the budgeted financing of Rs 131 billion from domestic sources, it increased to
Rs 564 bonds. Furthermore, some of the expected billion. Within domestic sources, thebulk (82.2 percent) of financing came from banks while the remaining Rs 100 billion or
17.8 percent came from non-bank sources. Most importantly, the borrowings from the
State Bank of Pakistan (SBP) reached an alarming level. Consequently, the money supply
growth for the year 2007-08 is expected to breach the target of 13.7 percent.
Public debt as a percentage of GDP (a critical indicator of the countrys debt burden),
which stood at 85 percent in end-June 2000, declined to 55.2 percent by end-June 2007
a reduction of almost 30 percentage points of GDP in seven years. The declining trend in
public debt is likely to be reversed in 2007-08, mainly on account of yawning fiscal and
current account deficits and a sharp depreciation of the rupee vis--vis the US dollar. Byend-March 2008 the public debt as percentage of full year GDP stood at 53.5 percent.
However, more damage has been done to public debt in the last quarter (April-June) of
the current fiscal year which means a further widening of the fiscal and current account
deficits, increased borrowing from domestic and external sources to finance the deficits,
and a sharper adjustment to the exchange rate. The year 2007-08 is likely to end with
public debt at around 56 percent of GDP marking the first time in a decade to see a
reversal in trends. Public debt in rupee terms has increased by 15.8 percent in the first
nine months (July-March) of the fiscal year 2007-08. By end-June 2007 total domestic
debt stood at Rs. 2610.2 billion which was estimated at 30 percent of GDP. The
outstanding stock of domestic debt rose by Rs 409.9 billion and stood at Rs. 3020.1
billion by end-March 2008 or 30.3 percent of GDP. The domestic debt had increased by
15.7 percent by end-March 2008 over end-June 2007. The increase in domestic debt
mainly emanates from floating debt (27.1%) while the other two components, unfunded
and permanent, witnessed a modest growth of 6.1 percent and 9.4 percent, respectively.
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Fiscal Development 08-09:
The government has decided in the economic stabilization program to adhere to the fiscal
deficit target reverently and during the first nine months (July-March) the fiscal deficit
hovered around 3.1 percent of the projected GDP for 2008-09 which is consistent with
annual fiscal deficit target of 4.3 percent. The fiscal improvement in the first nine months
(July-March 2008-09) has largely based on reduction of oil subsidies and a cut in
development spending. All meaningful efforts to expand revenues particularly by
broadening the tax base will only work in the medium-term. The financing patterns of
fiscal deficit remained dominated by the banking system which financed 85 percent of the
fiscal deficit and only 15 percent were financed by the non-bank sources. The
government remained well ahead of the SBP financing limit allowed by the Economic
Stabilization Program. The overall FBR tax collection remained less than satisfactory and
actually witnessed deceleration in real term. Resultantly, the FBR tax collection to GDP
ratio is likely to deteriorate around 9 percent of GDP as against the target of bringing it in
to the vicinity of 10 percent of GDP. Tax Revenue collected by the FBR amounted toRs.898.6 billion during the first ten months (July-April) of the current fiscal year, which
is 17.7 percent higher than the net collection of Rs.763.6 billion in the corresponding
period of last year. The net Direct tax collection was estimated at Rs. 332.5 billion
against the target of Rs 496 billion which implies a growth of 16.9 percent during Jul-
April 2008-09. Indirect taxes grew by 18.2 percent during Jul-April 2008-09 and
accounted for 62 percent of stake in overall tax revenue.
The sales tax collections grew by 22.2 percent and stood at Rs.358.9 billion as against
Rs.293.6 billion in comparable periods last year. The net customs duty collection has
inched up from Rs.114.9 billion in 2007-08 to Rs.117.2 billion in 2008-09, therebyshowing modest growth of 2.1 percent. The net collection of federal excise stood at Rs
90.0 billion during Jul-April 2008-09 as against Rs. 70.6 billion in the corresponding
period of last year thereby, showing an increase of 27.5 percent. Despite a decline in
fiscal deficit in the first nine months of 2008-09, the growth in domestic reaccelerated
reflecting non-availability of financing through external sources. The stock of domestic
debt grew by Rs.484.1 billion during July-Marc2008-09. This strong growth in the
domestic derelicts non-realization of privatization proceed and reduced availability of net
external financial nude to increase in external debt repayments maturing stock of foreign
currency bonds. The main contribution came from 17.5 percent rise floating debt which
increased by Rs.286 billion the stock of permanent debt has increased bRs.44 billion.Unfunded debt witnessed a grow to 15.1 percent or Rs.154.2 in Jul-March 2008-0mainly
because of uncertainty in the financial market and very attractive rates offered by NSS
schemes.
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Fiscal Development 09-10:Pakistans public finances have come under increasing strain over the past two years
due, in large part, to substantial outlays on electricity subsidies. Despite a sharp
upward adjustment over the past two years, amounting to over 60% for some
consumer categories, electricity tariffs have still not reachedcost-recovery for thepublic sector utilities. In large part, this is due to two adverse developments in
operation for much of the last over one year. First, lower rainfall reduced power
generation from the dams. Second, the adverse shift in the energy generation mix
towards fuel oil, has been accompanied by a near-doubling of international oil prices
between January 2009 and April 2010. The continued hemorrhaging of fiscal resources
by the power sector is also partly a result of unchanged end-user tariffs between 2003 and
2007. Lower than budgeted external assistance pledges also compounded
difficulties in fiscal management during 2009-10. It led to sharp cutbacks in outlays
for the public sector development program, which had been pitched at an
unrealistically high level. The heavy recourse by the government to borrowing fromthe domestic banking system led to fears of crowding out of the private sector.
However this was obviated by weak credit demand from the private sector, as well as
improved liquidity in the banking system. Nonetheless, there was an unintended
consequence: interest rates moved upward as a result. After a sluggish start, however, and
despite a difficult economic situation, tax collection has risen nearly 14% for July to
April 2009-2010, as compared to the corresponding period of 2008-09.
As a percent of GDP, however, tax collection remains low. All told, the developments
outlined above are likely to result in a moderate over-shoot of the budgeted target for
the overall fiscal deficit. Against a budgeted 4.9% of GDP, the revised outturn in2009-10 is projected to be 5.1%. During the outgoing year, the basis was laid for
two fundamental, potentially game-changing, developments in public finances.
First, the Seventh National Finance Commission (NFC) Award was successfully
concluded after a lapse of 19 years, with a fundamental shift in the basis for
determining the vertical (from Centre to Provinces), as well as horizontal (between
Provinces) distribution. Effective the from July 1, 2010, the 7NFC Award will more
than double the quantum of annual resource transfer to Constitutional the Provinces.
With the devolution of expenditures to the Provinces under the 18Amendment set
to become effective from 2011-12, the interim period is likely to cause a degree
of strain on federal finances. Second, in a major policy effort to broaden the tax base,legislation was laid before the national as well as provincial assemblies to introduce
an integrated, broad-based and modernized system of the GST (leading to a Value
Added Tax (VAT)) as originally intended in 1990. Key elements include concerns
about the lacunae introduced in the legal framework over time. This requires
needed amendments to the law at both national and provincial levels. In addition,
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modernization of the tax administration to ensure arms length dealing with
taxpayers, with verifiable and timely refunds, and addressing concerns with rent
seeking and governance in the FBR. It is estimated that the move to VAT could
yield up to 3 percent of GDP in additional revenue over a period of three to five years,
although the estimates for the coming year by leading tax experts are appropriately
modest at around 0.7 percent of GDP. Looking ahead, easing the budget constraint
assumes even greater urgency. Addressing two decades of under-investment in critical
sectors of the economy social sector, water reservoirs, physical infrastructure,
including the increasing need for maintenance of existing capital stock cannot be
postponed for much longer and will require vast resources. Catering to a rapidly
rising population, inconjunction with the need to put in place targeted socialsafety nets, will further add to the resource requirements. Meeting the expected
expenditure requirements in the medium term will require redressing the
fundamental weaknesses in the structure of public finances. These perennial weak
links have remained unaddressed in the past, and include a low, and declining, ratio of
tax collection to GDP; weak incentives for improvements in provincial finances,which could possibly have been weakened further by the new NFC award; and,
leakages in public sector expenditure.
Economic reform:
Cognizant of the limitations of the growth strategy followed in the past, which has
inevitably produced boom-bust cycles followed by a balance of payments crisis, the
government has embarked on a fundamental change of the development paradigm.
The new development strategy seeks to foster sustainable and more equitable
growth by means ofstructural improvements in the productive sectors of Pakistans
economy, involving a broad range of policy actions across sectors. The current status
of some of the important reforms is as under: Raising the Tax-to-GDP ratio is a key
pillar of the governments economic strategy. To this effect, a proposed law to
implement a broad-based Value Added Tax (VAT) with minimal exemptions from
July 1, 2010 has been presented to Parliament. In addition, other measures such as
improving tax administration and reinstating tax audits have been taken. The
cumulative effect of these policy measures is expected to be an increase of
Pakistans Tax-to-GDP ratio to 13 percent by 2013 (from 8.9 percent in 2008-09). Under
Social Protection, the government has launched the Benazir Income Support
Program (BISP). An allocation of Rs 70 billion has been made in the Federal Budget2009-10, with the aim of targeting 5.5 million poor and vulnerable Households in
Pakistan with a cash transfer of Rs 1,000 per month to each. The size of BISP
makes it the largest social protection scheme in the countrys history, and it works in
conjunction with other safety nets such as Bait-ul-Maal, Zakat Fund, and provincial
programmers such as the Sasti Roti scheme. A Cabinet Committee on Restructuring
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(CCoR) has been formed to restructure key Public Sector Enterprises (PIA, PEPCO,
Railways, TCP, USC, Pakistan Steel Mills, NHA) with a view to stop leakages
caused by annual losses amounting to approximately 1.5% of GDP. The eventual aim is
to turnaround these PSEs into profitable, self-sustaining ventures under Public-
Private Partnership mode. Under reform of the power sector, electricity tariffs have
been raised between 40-55% in less than two years, in an effort to reduce the
level of subsidies absorbed in the budget, while simultaneously moving to a full
cost-recovery tariff for the power utilities. Under a new Act of parliament,
adjustment in tariff for changes in fuel prices for power generation has been made
automatic. The government successfully concluded the Seventh National Finance
Commission (NFC) Award only the fourth in Pakistans entire history, and the
first for the last 19 years. This Award greatly augments the quantum of resource
transfer from the Centre to the Provinces. In conjunction with the higher resource
transfer to the provinces, the Centre will also devolve some major
functions/expenditure heads to the sub-national governments in line with the
provisions of the 1973 Constitution.
Fiscal Development 10-11:
FISCAL DEVELOPMENTS: Fiscal performance both revenues and expenditures
have been affected by the floods and the policy adjustments in the face of global rise in
prices of energy. The original estimates had to be revised in the light of these
unprecedented happenings. Preliminary data suggests that the fiscal deficit is likely to
remain between 4-4.5 percent of GDP in the first nine months of the current fiscal year.
Part of the increase in the fiscal deficit is explainable on account of higher security related
expenditures and the floods, however significant contribution to this increase came fromhigher subsidies, delay in adoption of tax measures, non-realization of auction of 3-G
license and several petroleum related incomes which were affected due to non-resolution
of circular debt problem in full. The emerging fiscal situation has reinforced the urgent
need to broaden the tax base, rationalize expenditure and to better insulate the economy
from shocks. Although, initially a relatively higher reliance had to be placed on bank
borrowings, particularly from SBP, over time this imbalance has been corrected and the
share of non-bank borrowings has been significantly increased. Beginning with the Jan-
March quarter, the constraint of zero SBP borrowing on a quarterly basis has been fully
adhered to. At the End of March, SBP borrowings were recorded at minus Rs.16 billion
compared to the level outstanding at end June, 2010. A number of steps were adopted toimprove debt management which essentially focused on reducing reliance on bank
borrowings. Government now aims to restrict banks investment in government securities
only to the extent required for meeting statutory requirements. For this purpose extensive
marketing efforts are taken to encourage sell-down by banks of government securities to
non-bank institutions and individuals while the system of national savings schemes is
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strengthened for mobilization of non-bank resources from the individuals. The delayed
taxation measures led to the revision of FBR target from Rs.1667 billion to Rs.1588
billion. However, with slowed economic activities, including a decline in the real growth
rate, the growth in revenues in the first nine months was below expectation. Accordingly,
a need for mid-course adjustment was felt. Accordingly, as part of fiscal consolidation a
major effort was launched in March whereby three tax measures with a revenue potential
of Rs.53 in a quarter were adopted. These included the imposition of a one-time flood-
surcharge on income tax, an additional excise duty of 1% on some selected luxury items
and removal of exemptions on many goods subject to sales tax. With these measures part
of the revenue lost in the first three quarters due to delay in tax measures will be recouped
and the impact of reduced revenues on fiscal deficit. The revised FBR target of Rs.1588
billion, though formidable, remains on track.
Fiscal Indicators:
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Fiscal Indicators: 2011:
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PUBLIC SECTOR DEVELOPMENT PROGRAMME: 2006-07
Review of the PSDP 2005-06The Public Sector Development Programme (PSDP) 2005-06 was approved by the
National Economic Council (NEC) in its meeting held on May 27, 2005 at Rs 272
billion(3.9% of GDP) with a Federal Programme of Rs 204 billion, including foreignassistancecomponent of Rs 41 billion. The allocations of the federal programme
included Rs 100.8billion (49.4%) for infrastructure, Rs 98.9 billion (48.4%) for the social
sectors and balanceddevelopment and Rs 4.3 billion (2.2%) for the production sectors. It
was also assessed thatprovinces would spend Rs. 68 billion through their Annual
Development Programmes.
Public Sector Development Program me 2006-07:The PSDP 2006-07, being the 2nd year of Medium Term Development Framework
(MTDF) 2005-10, has been formulated to achieve national objectives envisaged in theMTDF such as reducing poverty, achieving Millennium Development Goals (MDGs),
equitable development of regions and social groups, minimizing wastages and ensuring
sustainable development. Its strategic thrust is to facilitate the development of human
capital and private sector as the engines of growth. To this end adequate investments have
been proposed in human resource development and physical and technological
infrastructure. The size of the Federal PSDP 2006-07 is Rs 270 billion (including foreign
aid component of Rs 36.5 billion and operational shortfall of Rs 20 billion) with an
increase of 32% over 2005-06.
The provinces are expected to spend Rs 115 billion including foreign aid component ofRs.26.7 billion through their ADPs. The WAPDA is likely to spend Rs.30 billion from its
own resources outside the PSDP. The NHA has also been asked to raise additional Rs. 6
billion through securitization of toll revenues and other receipts. In addition, the
Earthquake Reconstruction expenditure would be Rs 50 billion. Thus the total investment
including outside PSDP by WAPDA & NHA would be Rs 470 billion. 4.7 The federal
size of PSDP of Rs. 270 billion for financial year 2006-07 represents 4.3 % of projected
GDP (mp) which is higher than the last years PSDP / GDP ratio of 3.9 %. The
PSDP/GDP ratio would be gradually increased and at the end of terminal year of MTDF
2009-10 it would reach 6.3% of the GDP. The Ministry-wise summary of PSDP 2006-07
is at Annex- 4.1. The overall position is given in Table -4.1
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PUBLIC SECTOR DEVELOPMENT PROGRAMME: 2007-08
Public investment is made for provision, expansion and modernization of socio-economic
infrastructure, employment generation, poverty reduction, good governance, removing
regional disparities and improving quality of life of the people both by the Government
entities and public sector corporations. For this purpose, the funds are allocated by the
federal, provincial and local governments to development projects and programs, as per
fiscal space available with the government, in the national budgets. The public sector
corporations mobilize their own resources. The Public Sector Development Program
(PSDP) is the main instrument for providing budgetary resources for development
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projects and programs. As a percentage of GDP, the PSDP has declined sharply from 7.5
percent in 1991-92 to 2.5 percent in 1999-2000 (Figure 5.1). By continued efforts of the
government through strong economic management, sufficient fiscal space has emerged
which led to the stability of macro-economic framework. Through consistent increase in
the PSDP size, a level of 4.3 percent of GDP has been achieved in the year 2006-07. The
MTDF emphasizes greatly on PSDP and seeks to increase the PSDP as a percentage of
the GDP from 3.1 percent in 2004-05 to 6.3 percent by 2009-10.
The PSDP 2007-08 has laid due emphasis on maintaining momentum of growth,
realization of core MTDF objectives, such as reducing poverty, achieving the MDGs,
ensuring equitable distribution of development funds across regions and various social
groups, empowering women and minimizing wastages. The PSDP 2007-08 has been
formulated with a view to avoiding a thin distribution of resources and the following
principles have guided the resource allocation in the PSDP:
completion of on-going projects;
initiation of important new approved projects;
initiation of un-approved but crucial projects;
implementation of public commitments made by the President and the Prime
Minister
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equitable/fair distribution of funds among the provinces; and
preparation of projects conducive to creating environment ofknowledge economy
PUBLIC SECTOR DEVELOPMENT PROGRAMME: 2008-09
The PSDP 2008-09 marks an important shift in Government priorities by layingemphasis on poverty alleviation while maintaining the momentum of growth. The five
major priority areas are:
comprehensive support program for poor and vulnerable groups; overcoming water and energy crises; uplift of Baluchistan, NWFP and Special Areas; reviving growth in agriculture and manufacturing; and Building up human resources to compete in the global economy.
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PUBLIC SECTOR DEVELOPMENT PROGRAMME: 2009-10
The strategic thrust of the Annual Plan and PSDP 2009-10 has been derived from Nine
Points Economic Agenda of the government. Major elements of the strategy are:
Ensure economic recovery consistent with stabilization. Maintain momentum of agriculture growth together with support policies
for revival of industries;
Address critical infrastructure gaps in water, power and transport forenhancing competitiveness;
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Increase reliance on indigenous energy resources, Achieve Millennium Development Goals and reduce poverty through a
comprehensive social protection system with an exit strategy;
Facilitate balanced development in the country by reducing regionaldisparities; and
Rehabilitation and reconstruction of conflict affected areas. In allocationof funds across sectors and projects for PSDP 2009-10, following guiding
principles in order of priority were adopted by the APCC.
Maximum allocation to projects which can be completed during 2009-10followed by projects that are likely to be completed in the next two years.
Initiation of important new approved projects. Social sector allocation should be protected as far as possible. Only unavoidable bricks and mortar projects be started. Un-approved important projects should only be financed with token
allocation.
Directives/announcements would be honored. Keeping in view of theabove principles the APCC finalized its recommendations and proposed
the total size of PSDP at Rs 595 billion. Out of this the federal
government programs amount to Rs 395 billion with an operational short
fall Rs 20 billion. The development requirements of provinces were
estimated at Rs 200 billion. In addition to this Rs 25 billion would be
spent by ERRA for rehabilitation and reconstruction of Earthquake
affected areas. The NEC on the recommendation of the APCC
subsequently approved the total size of PSDP 2009-10 at Rs 621 billion
(including foreign loan of Rs 72.0 billion) with an operational short-fall of
Rs 21 billion; which is higher by 14.8% than PSDP 2008-09.
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PUBLIC SECTOR DEVELOPMENT PROGRAMME: 2010-11
The total national development outlay stood at Rs 714 billion (4% of GDP) with federalprogram me of Rs 296 billion (including Rs 16 billion for ERRA) with foreign
exchange component of Rs 38 billion and Rs 424 billion (initial budgeted size was Rs
373 billion) for provincial programmers to be undertaken through ADPs. Broad sect oral
breakup of federal PSDP of Rs 296 billion for 2010-11 is indicated in Table 4.1 where
infrastructure and social sector received major shares respectively at 44% and 53%. The
catastrophic floods of July - August, 2010 wrecked havoc on people of Pakistan almost
in all parts of the country that has caused heavy damages to life and property. Physical
and social infrastructure, agricultural land & products, livestock, houses in both the rural
and urban areas, were badly damaged across the country. The rural economy particularly
agriculture sector was affected. For reconstruction and rehabilitation works, the
government took various measures for financing flood related works including support
from international donors. Accordingly, the provinces slashed their development
programmes from Rs 424 billion to Rs 266 billion. Federal PSDP 2010-11 was also
reduced from Rs 280 billion to Rs 180 billion. However, budget for ERRA was increased
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from Rs 10 billion to Rs 16 billion during 2010-11. To manage this reduction, PlanningCommission took the following steps to rationalize the development expenditure.
All executing agencies were advised not to initiate new projects unless veryimportant with prior approval of the Planning Commission.
Ministries / Divisions / Executing agencies were advised to prioritize theirprojects for priority and protection as under:
Projects which are fairly at advanced stage of completion Projects of less-developed areas (Baluchistan, AJ & K, FATA, GilgitBaluchistan) and HEC Maximum possible protection to social sector projects. Contractual obligations at international level be honored. Bricks and mortar projects be discouraged Slow moving projects with less than 30% expenditure be deferred
As a result of the above, revised sectoral allocations of federal PSDP 2010-11 arePresented in Table 4.1.
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OUTLOOK OF UBLIC SECTOR DEVELOPMENT PROGRAMME FOR 2011-12
Federal PSDP 2011-12 has been formulated in line with objectives of Economic Growth
Framework. It articulates strategy where private sector investment could greatly be
encouraged by reforming and strengthening economic governance through reforms ininstitutions like taxation system, civil services, judicial system, commercial,
modernization of cities being locomotives of growth. The thrust of strategy is to focus on
software of economic growth (increase competitiveness to increase total factor
productivity, generate maximum demographic dividends, addresses economic
governance issues, reforms in institutions, innovations and technical know-how,
incentives based entrepreneurships, skilled human resources) so as to provide an
environment in which the hardwareof economic growth (physical infrastructure) could
work productively. Besides, the federal Government has also adopted three year Medium
Term Budgetary Framework (MTBF 2011-14). MTBF has been adopted with a view to
maximize utilization of constrained public funds for PSDP focusing on out-put based
budgeting system. Under this system, federal budget has been projected for medium
term period of three years. Accordingly, current as well as development budgets are
estimated as Indicative Budget Ceilings (IBCs) against the requirements of various
Ministries/Divisions. Advance indication of resources help to plan economic activities
during each Fiscal Year. Under restructured procedure, Ministries / Divisions have been
empowered to enhance efficiency and effectiveness of Governments spending. The
role of Ministries/Divisions has since been enhanced to focus on service delivery. Their
development programmes should reflect the highest sectoral policy priorities. The
Finance Division indicated the total development budget size of Rs 280 billion for federalcomponent for financial year 2011-12. Indicative Budget Ceilings (IBCs) of each
Ministry/Division were discussed by the high powered Priorities Committee co-chaired
by the Secretaries, Finance, Planning & Development and Economic Affairs Divisions
from 22nd April, 2011 to 26thApril, 2011. The Priorities Committee stressed on need to
focus on rational spending of public funds preferably against on-going projects for
delivery of speedy socio-economic benefits to the people. Keeping in view the increased
throw-forward of approved projects and reduction in the size of PSDP 2010-11 by Rs
100.00 billion, the Planning Commission estimated the requirement of Rs 365 billion for
the next year PSDP. Federal PSDP 2011-12 also emphasizes division between
provincial and federal subjects. For productive outcome under PSDP investment,
development priorities have been shifted from financing local nature projects of
provinces/districts to national level projects of Infrastructure in back-drop of 18th
Amendment and 7th NFC Award. To control looming energy crisis, substantial resources
are needed to be injected into this sector to realize targets of other sectors of the economy
such as agriculture, manufacturing and services. Programmes and initiatives have been
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encouraged for bringing innovations, technological know-how, entrepreneurship, andregularization of business and modernization of cities as locomotives of economic
growth. To finalize the PSDP 2011-12 on more realistic grounds, Priorities Committee
issued the following guidelines to Ministries / Divisions for setting priorities while
allocating funds to their projects within the indicative budget ceilings:
Projects nearing completion be fully protected Contractual bindings in projects with foreign donors be obliged Development Packages be protected Only new approved projects falling in governments priorities Projects with 30% expenditure may be deferred unless very critical
In view of squeezed financial envelope of federal PSDP with huge throw-forwardliability, the first and second priority of the Government was to allocate funds to the
projects of energy, water conservation and augmentation, roads, railway and ports sectors
being the primary responsibility of the Federal Government which are likely to be
completed by June, 2012 and June, 2013 respectively. Care has also been taken of core
social sector projects of Health, Education, Physical Planning & Housing, Governance,
Special Programmes (PWP-1 and PWP-II) which have direct impact on the socio-
economic conditions of the people, Special Areas Program (AJ & K, Gilgit Baltistan &
FATA) with the aim to bring these areas at par with the developed areas of the country.
Emphasis has also been laid on modernization of Science & Information Technology
infrastructure in the country. From current financial year, after abolishment ofConcurrent Legislative List, provincial projects/programs have been shifted to the
provincial governments. To this effect meetings were held with provincial government
son April 2 & 4, 2011. Three types of projects were placed before them:
Vertical programs Projects by location Projects under directives
Provincial Governments requested that though subject of health and population has been
devolved to the provinces but Federal Government may continue financing verticalprograms and projects/programs being implemented under Directives. This matter was
placed before Council of Common Interests in its meeting of April 28, 2011. It was
decided that Federal Government would finance health sector vertical programs. It was
also decided that Federal Government would finance Population Welfare programme and
projects initiated under directives during the period of current NFC award. Therefore,
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appropriate allocations have been earmarked to cater for the requirement of these
programs/projects. As far as other projects are concerned, these have been transferred to
the concerned provinces with their consent. These projects would be financed by
provincial Governments through their ADPs. The PSDP 2011-12 was placed before the
National Economic Council which approved it in its meeting held on 28th May, 2011 at
total size of Rs 730 billion (3.4 % of GDP), 58% higher than the revised allocation of Rs
462 billion. Of this, federal programme is of Rs 290 billion (including foreign assistance
component of Rs 36.8 billion), with Rs 10 billion allocation for ERRA. The federal
allocation this year is higher by 59% compared to 2010-11. The provincial development
programme is Rs 430 billion, 62%higher than last year revised estimate of Rs 266 billion
Public Sector Development Programme
Public investment is a broader concept which includes the Public SectorDevelopment Programme (PSDP), the investments made by the public
corporations and various authorities and entities of the federal, provincial and local
governments.
The PSDP is financed out of the budgetary resources and corporations normallymobilize their own resources.
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Objectives and Strategy
The Public Sector Development Programme (PSDP) is the main instrument for providing
budgetary resources for development projects and programmes.
Its strategic thrust is to facilitate thedevelopment of human capital and private sector as the
engines of economic growth.
PSDP will act as a catalyst for functioning markets andthe maximum exploitation of
opportunities created by globalization.