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Prime Institute

Published Date: Oct 26, 2017

The 4th National Debt Conference on “Debt, Spending, and Resource Allocation”

The 4th National Debt Conference was held in Islamabad on the 26th of October 2017. The topic of the Conference was Debt, Spending, and Resource Allocation.
Dr. Almut Besold of the Friedrich Naumann Foundation for Freedom called for greater discussion and debate on the improvement of fiscal management mechanisms in Pakistan. She said that the National Debt Conference was held not just to focus public attention on the risks of public debt, but to also enhance understanding of fiscal policy through credible analysis.
The first Session of the Conference narrowed in on the twin problems of escalating debt and government spending.
4th National Debt conference Panel 1
The panel of Experts on Debt Sustainability and Spending. From Left to Right, Ali Salman, Dr. Waqar Masood Khan, Dr. Ishrat Husain, and Dr. Vaqar Ahmed
Noted Economist, Dr. Ishrat Husain in his keynote address categorically rejected the notion that Pakistan faces any risk of defaulting on its debt liabilities. Dr. Husain noted that a great deal of confusion regarding the public debt exists in mainstream thought.
He was of the view that the most important and relevant way to assess the public debt would be to analyze it in terms of the Nation’s debt servicing capacity, especially of the external debt. The former Governor of the State Bank cautioned that lumping domestic and international debt together leads to incorrect analysis, as both types of debt have different effects.
Dr. Ishrat Husain said that all the major currency crises globally were triggered by solvency and liquidity problems in servicing foreign currency loans and prescribed improving the management and state of the foreign exchange reserves through export development.
Dr Ishrat Husain’s Presentation
Dr. Waqar Masood Khan, a former Federal Finance Secretary, and a key negotiator in successful multilateral deals of recent past claimed that the economy of Pakistan stood on its own strength and the current economic conditions were some of the best in history for growth.
Dr. Khan noted that in the previous year, it appeared as though many of the economic gains made in the preceding two years had been reversed. He blamed the rapid increase in imports as the main culprit draining foreign exchange reserves and expressed concern over the scale of the fiscal deficit.
In his presentation, Dr. Vaqar Ahmed of the Sustainable Development Policy Institute stressed upon the importance of checks and controls on the external debt. Dr. Ahmed noted that through 2017, most of the external borrowing was procured on floating interest rates, which he felt was putting the country at undue risk.
Dr. Vaqar Ahmed also highlighted the fact that all solvency indicators of external debt and sustainability had worsened in 2017. He was of the opinion that the government’s inability to manage a growing fiscal deficit resulted in a high proportion of short-term debt. Dr Vaqar Ahmed also expressed his disappointment at the fact that the debt management regime continues to ignore the General Finance rules of the government which most notably sanctions the principal accounting officer to manage the debt borrowed sum. He said that such a disregard for process practically allowed any government to arbitrarily change basic accounting concepts.
Dr Vaqar Ahmed’s Presentation
Economist Ali Salman argued that during the last 17 years, the accumulation of public debt had grown twice as fast as the economy. He shared IMF and government projections of the fiscal economy, which were indicative of recovery, and stronger performance in coming times.  He, however, pointed out that noted Pakistani economists such as Hafiz Pasha, Sakib Sherani, and Dr. Ashfaque of NUST, were highly critical of the debt management policy of the government. He said that the key to improving fiscal management lay in a commitment to curb the scope and scale of public spending, and reducing the size of the government itself.
The Second Session of the Conference was centered on Tax Revenues and the Resource Sharing formula under the National Finance Commission Award.
Dr. Idrees Khawaja stressed that the current structure of the National Finance Commission was not a good mechanism for dealing with the technical and political intricacies of resource distribution. He proposed an alternative two-tiered structure for the National Finance Commission. The Dean of management Sciences at Auscom explained that under his proposal an independent body of experts including members of the finance ministry, and fiscal experts (academics and practitioners), would provide public recommendations for an intergovernmental forum consisting of political members for approval and adoption. He suggested that all income taxes should be shared between the province and the center.
Dr Idrees Khawaja’s Presentation
Journalists 4th National Debt Conference
Abdul Wajid Rana noted that the National Finance Commission was a mechanism which transferred resources both vertically and horizontally, and argued that it created imbalances which in recent times was disproportionally in favor of the provincial governments. The former Federal Finance Secretary said that the federal government was bound from pursuing countercyclical policies when required because the respective provincial resource shares cannot be reduced under the law.
Participants 4th National Debt Conference
He proposed several changes to the tax code to boost revenues but suggested that the current mechanism may be retained until revenues could be increased. Mr. Rana suggested the replacement of the General Sales Tax with a single tier Value Added Tax. He recommended that the Federal Government should create for itself fiscal space, by pursuing revenues from nontax sources which are non-divisible. He also suggested that the provinces harness the potential of their taxes, to create fiscal space for their themselves, instead of seeking a greater share from the vertical transfer of Resources of the Federal Government. He said it was imperative for both the Federal and respective provincial governments to improve their tax administrations and introduce Public finance management laws to regulate the Federal and Provincial Consolidated Funds, as required under the constitution. The provincial governments must exercise fiscal responsibility, by introducing regulations setting limits on fiscal spending. Mr. Rana proposed that local governments should have the power to levy local taxes.
Abdul Wajid Rana’s Presentation
In his presentation, Dr. Kaiser Bengali explained that revenues contributing to the divisible pool of resources had changed greatly over time. He described all previous resource sharing formulas under the National Finance Commission as static mechanisms and proposed instead to develop a more dynamic approach towards revenue generation and resource sharing within the Federation. Dr Bengali, who is the incumbent technical member of the Balochistan Government, in the National Finance Commission,  and has previously also represented Sindh on two commissions claimed that the current tax regime had largely had a highly regressive effect, noting that if withholding Taxes were to be reclassified as indirect taxes, the contribution of direct taxes towards the national exchequer would actually be minimal, as low as 12 percent. Dr. Kaiser Bengali suggested that net income tax (directly collected Income Taxes) be excluded from the divisible pool of the National Finance Commission. He said that by channeling Direct Tax revenues wholly to the Federal Government, the Federal Bureau of Revenue would have greater incentive to focus on broadening the tax base and to improve collections from direct income taxes. Dr. Bengali also suggested the inclusion of non-tax revenues in the divisible pool. He also proposed that the subject of the Income Tax on agricultural income be transferred from the provinces to the Federal Government, claiming that large agriculture-related businesses had successfully circumvented potential tax liabilities by using the constitutional exemption for agricultural incomes from taxation.
Dr Kaiser Bengali’s Presentation
In closing, Dr. Manzoor Ahmed, President of PRIME Institute, and Former Pakistani Ambassador to the WTO expressed his satisfaction at the non-partisan nature of the discussions held in the 4th National Debt Conference. He lauded the role of economic journalists present during the conference in the handling of the subject matter and called for greater sensitivity on resolving the resource sharing mechanism under the National Finance Commission Awards.
 
Source: http://primeinstitute.org/4th-national-debt-conference/