Mahnoor Saghir, 261

Current Affairs, lecture 2

Budget Deficit Problems

Circular Dept
Expenditure
Debt Servicing
Subsidies
Defence Budget

Budget Deficit Problems

1. Circular Dept
2. Expenditure in form of flawed taxation system
3. Debt Servicing
4. Subsidizing
5. Defence Spending.

*****(Qx will appear in PAK affairs) Circular Dept

Circular Dept
There are energy importing companies: Oil and gas importers.
● 2018-19: Import above $17 billion​. The Oil we import goes to the transport
sector but mostly electricity generation.
● Who are the Importers?​ PSO (Pakistan State Oil). If they are not importing then
they issue licences to Shell, Attock.
● Who are the Producers of Electricity?​ ​ IPPs (independent power producers)
and HPPs - Hydro power producers
● IPPS produce from OIL & Gas​. Private
● HPPs from Water such as Wapda (Govt)​, private sectors. They are also called
GENCOs (producers).
● Distributors​: Distributors… PEPCO - Peshawar, Keltric (Producers and
Distributors), Wapda, Iesco.
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● Bill collectors​:​ mostly the distributors are Bill collectors such as Lesco, Wapda
● Circular Dept​:​ Collection is less and expenditure is more. Resultantly the
remaining amount:
○ Remaining amount of IPPS (producers)
○ Remaining amount of Importers on State
○ Private and commercial banks remaining amount on State
● The cost of electricity is huge and the collection amount is less. Resultantly the
IPPS don’t get the amount they have spent.
● Importers don’t get the amount they have spent on Oil and Gas.
● Loans provided to IPPS and importers by Banks. Banks are also not getting their
money back.
● Oil imported and given to PSO. Once PSO gets it they refine it and then transport
it to the transport sector, electricity and industries. PSO also gives oil to Shell and
Attock.
● Problem is not in the transport or in the industrial sector. The problem is in the
electricity sector where it’s generated.

● Why this huge Circular Dept?

○ Expensive Agreements​ ​with IPPS​:​ Installed in 1991 then the second

2002, third 2011, 2014 (Strategic blunders). It would be a rare example in
the world energy decision making process where the same blunder is
repeated four times.
○ 1991​: We didn’t have the capacity to produce electricity from Water.
Instead of cheaper sources, local sources or Hydro, we established Oil
based generators.
○ 2002​: Repeated the same mistake and same in 2011 and 2014. Mistake
by design not by default. Whether it’s an elected or dictator government
the will was missing to move to long term projects.
○ How​?​ Expensive source of Generation/Agreements such as: All the IPPS
would be paid off in dollars even the Pakistani based IPPS would be paid
in dollars.
○ Principal amount would be paid at any cost whether they produce the
electricity or not.
○ In ​2011​ an agreement was made. Bangladesh and India as well with an
American based company.
○ India agreement: 3.2 cents per unit
○ Bangladesh agreement: 3.7 cents per unit
○ Pakistan: 13 cents per unit
○ Either it was criminal negligence or kickbacks.
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○ Expensive Generation of our electricity​: Collection is less
○ The production cost of electricity is huge. ​How​? 65% of electricity is
produced from thermal sources (oil & gas) out of 100%.
○ 28% is produced from Hydro. The expensive source is selected for
production.
○ Old & turned out distribution system​: line loss of 17%. Even
Afghanistan didn’t have 17%; It's 8%.
○ China line loss is less than 3%. India is less than 5%. Bangladesh it’s 6%.
○ Automatically the electricity would be expensive due to the 17% line loss.
○ Electricity Theft​: Punjab has the most electricity theft. Then Sindh and
then KP and Balochistan. The most common system for theft is Kuda. But
Kuda is in pheriperies (rural areas).
○ The other way is collusion with WADPOA authorities. Who does this? Big
Industrial sectors, Domestic consumers & agriculturists.
○ Pending Bills of Government Departments​: Why because they don’t
have money.
○ Because of all these reasons collection is less leading to a ​Circular Dept
of 2.3 trillion PKR​.

○ Implications
○ Burden over the Consumer​: ​How​? Expensive electricity. (PM Imran
Khan) One of the most expensive electricity in the world & the most
expensive in Asia is in Pakistan.
○ Trickle down effects on the industries, agriculture, domestic consumers.
Our overall life is affected because of the expensive electricity. Everything
is linked to it.

○ Solutions​:
○ Short Term solutions:
○ Renegotiate agreements with IPPS​. PM Imran Khan has renegotiated
two of the agreements: 1991 & 2002.
■ Terms​: Principal amount will not be given unless electricity is
produced
■ Local IPPS will be paid in PKR. PKR fluctuates against dollars so
they will be paid PKR against the price of dollar.
○ 2011 & 2014 haven’t been renegotiated since the 10 years time period
hasn’t been up yet.
○ Electricity Theft​: Stop the theft. We will have to improve the governance.
The Minister of Power and Water said that they have recovered 120 billion
PKR. ​How​? Through stopping the electricity theft.
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Current Affairs, lecture 2

○ Long Term solutions

○ Cheaper electricity generation​. The cheapest is Hydel. We are
producing 15,000+ megawatts in 2027. (ongoing projects are) Under
constructions projects to be completed in 2027:
■ Suki Kinar 890
■ Kohala 1100 mw
■ Karrot 700 mw
■ Pir mahal 300 nmw
■ Dasu 43000
■ Diamer Bhasha 4800 mw
○ Local Coal​:
■ Thar.
■ 2 projects are completed and are operational 330 MW EACH.
■ 660 project under installation.
■ Sindh
■ Balochistan
■ Engro Company
○ Revamp the electricity transmission line​: How? Use plastic coated
wires in the cities because the line loss will be maximum 3%. Maximum
will take 3 years
● Conclusion: ​To reduce circular dept, we should use cheaper electricity
generation, work on electricity theft, renegotiate the terms with IPPS and move
towards HPPs and local generators. This way there will be more collection, less
burden over consumers and our industries, agriculture, and domestic consumers
will not be affected either.

● Budget Deficit problems​: If Circular Debt is paid off, then they’ll have to
increase the price of electricity which people can’t afford. If they don’t increase it,
it will create problems for the economy.

****QX will appear****

Expenditure
● Lesser collection is the problem. There are two parts of Budget:
○ Collection and Expenditure.
● Expenditure​: Lesser collection. Why is PKR less collected? Lesser collection of
taxes because of flawed taxation systems. ​How​?
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○ Flawed Taxation system​: ​1) Tax evasion: happening in real estate,
hoteling and restaurants, private education sectors, private hospitals,
retailers, goldsmiths, businessmen especially importer & exporters & small
shopkeepers.
Why is this happening​?
○ Non Documentation and Impartial documentation​: Because the
economy of Pakistan is not documented. The economy is either not
documented at all or partially documented. The State is not aware of the
financial units and if there are what are the capacities of those financial
units. Non documentation and impartial documentation are the real
problems why tax evasion in our country is common.
○ Administrative Issues​: Problems are:
1. FBR is overburdened​. In 1999, there were 23,000 employees who collected tax
of 297 billion PKR. In 2019, there were 23,000 employees who collected tax of
more than 4.1 trillion PKR because of corona 1 trillion is less. If there was no
corona we would have easily crossed over 5 trillion PKR.
a. FATF is a completely new department and is under FBR. FBR has nothing
to do with this and it should have been with the State Bank of Pakistan,
FIA, SECP & NAB. FATF is dealing with terror finance and money
laundering. This should have been with SBP and FIA but they don’t have
the capacity so it’s given to FBR.
b. The long and tedious process of tax return files. It takes about 3 hours to
fill out the form.
c. FBR & Pak Custom, & Excise is not linked properly because the State
hasn’t taken the initiative. The easiest solution is to link everything with
NADRA ID cards.
d. Benani properties in the form of real estates, businesses etc.
e. FBR is a tax collecting body not a budget formation body. It is not a fiscal
body. That is the work of the Finance Ministry. This government is for the
first time removing the fiscal body from FBR.
f. No automation in regards to computerization, documentation of the data.

Debt Servicing
● Another major Problem of Budget is Debt Servicing​. Internal and External
Loans.
○ In the year 2019-20​: 4.1 trillion collection of PKR through tax. Overall
collection was 4.8 trillion PKR. We paid more than 3 trillion PKR of loans.
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○ 2018-2019-2020: (​Two fiscal years): Total collection is 7.2 trillion PKR in
the form of tax. ​“In debt servicing we have returned above 5 trillion PKR”
(as per the advisor to PM finance)​.
○ As per SBP​: More than 50% of the earnings in the form of tax collection
goes back in the services of debt services.
○ *Notes 14th Oct* ​Acquire Loans: ​PKR is not stable & to save it we got
loans. 2007-2008; total volume of loan was 6 trillion PKR out which foregin
loan is $37 billion.
○ 2012-2013: Loan: 12 trillion PKR; Foregin loan was $62 billion.
○ 2017-2018: loan was 30 trillion PKR; Foregin loan was $102 billion.
○ 2020; 40 trillion PKR out of which Foregin loan is $113 billion.
○ Where do we get the loans from? ​Internal sources: SBP, commercial
banks; when we need to meet the Budget deficit.
○ External sources: IMF, World Bank, Asian Development Bank, Islamic
Development, Saudia Arabia, Bank of UAE → To meet the dollar deficit.
In foregin account, current account, finance project i-e CPEC.
○ When the external sources are exhausted: 1) because of the current
account deficit Nawaz took a $19.3 billion deficit. 2) Had to pay off loans
so got more loans. We have to pay off min/return $12 Arab minimum
every year. 3) Trade Deficit (2017-2018) is $35 billion.

Implications of taking loans

○ Pakistan is stuck in dept services; to pay off loans we have to acquire
more loans.
○ Government has to abide by the conditionalities of the loan provider (e.g
IMF. To depreciate rupee and if IMF doesn’t give loans, no other Bank
does.)
○ Didn’t participate in the Kuala Lumpur Summit (Turkey, Malaysia, Qatar,
Iran) even though PM Imran Khan committed that Pakistan would
participate. This is due to the Arab allies such as UAE & Saudia Arabia
because we are getting loans from them.
○ PKR rupee goes down from the market. To pay off loans, dollars are
bought by the federal government through rupees resulting in rupee
depreciation. You buy dollars from rupees to pay off external forces.

Solutions
○ Reduce the Trade Deficit​: Put higher tariffs on foreign products. 2017
onwards more than 3000 products have been imposed tariffs heavily.
Foreign Remittances which is the most stabilizing factor in the economy of
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Pakistan. Because in 2019-2020 Trade deficit was almost $40 billion
shortfall. Remittances were more than $8 billion.
○ Production Sector Promotion​: rescue agriculture & industries. Give bail
out packages i-e decrease the pricing of electricity which will result in
circular debt but we will have to rescue our production sectors. Reduce
custom duties on raw materials. Bail out on agriculture in form of lesson
interests not just for crops but for livestocks as well. Reset agricultural
priorities and give priority to cotton, wheat, fruits instead of rice and sugar.
○ Tax Reforms

Subsidies
● Subsidies; another problem of Budget: ​Annually more than 1 trillion PKR are
given as subsidies. The most subsidies are given to the electricity sector. More
than 200 bn PKR are given as subsidies to industries, agriculture, & domestic.
○ The second is Gas Tariff: ​2013-18​ 107 billion PKR subsidies given to the
Gas sector. Sui Northern and Sui Southern.
○ Third are a series of State owned enterprises SOEs; We have to give
subsidies to: PSO, Pakistan Railway, Pakistan post, PIA, National Steel
Mills Karachi etc.

Defence Budget
● Defence spending: ​Pakistan is the country that is faced with multiple existential
security threats both externally and internally. It has to have massive defence
spending.
○ Our defence budget is 1.28 trillion PKR in 2019-2020. Our defence budget
for now is frozen in the past two years because of the economic situations.

Solutions​: How to address the issue of Budget Deficit?

1. Tax Reforms​ - didn’t explain. Get that from the magazine he publishes :(

2. Revenue collection​: Documentize the economy of Pakistan so the State is not

aware of the financial units and their capacities.
a. Remove burden from the FBR by giving FATF to the State Bank of
Pakistan, FIA, SECP & NAB since FATF is dealing with terror finance and
money laundering.
b. Tax returns files process should be shortened.
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c. Link FBR with Pak Custom & Excise by linking everything with NADRA ID
cards.
d. Budget formation should be given to the Finance Ministry to reduce the
burden on FBR which this government is doing right now.
e. Automize everything by computerization of the data/documentations.

3. Prioritization​ - less subsidies to PSO, Pakistan Railway etc. Pensions should be

privatized so the burden is not on the government and a time limit should be set
on pensions as to for long should pensions be given out.

4. Circular Debt​: ​Short Term Solutions are​:

● Renegotiate agreements with IPPS​. PM Imran Khan has renegotiated
two of the agreements: 1991 & 2002.
Terms​: Principal amount will not be given unless electricity is produced
○ Local IPPS will be paid in PKR. PKR fluctuates against dollars so
they will be paid PKR against the price of dollar.
○ 2011 & 2014 haven’t been renegotiated since the 10 years time
period hasn’t been up yet.
● Electricity Theft​: Stop the theft. We will have to improve the governance.
The Minister of Power and Water said that they have recovered 120 billion
PKR. ​How​? Through stopping the electricity theft.

Long Term solutions are​:

○ Cheaper electricity generation​. The cheapest is Hydel. We are
producing 15,000+ megawatts in 2027. (ongoing projects are) Under
constructions projects to be completed in 2027:
■ Suki Kinar 890
■ Kohala 1100 mw
■ Karrot 700 mw
■ Pir mahal 300 nmw
■ Dasu 43000
■ Diamer Bhasha 4800 mw
○ Local Coal​:
■ Thar.
■ 2 projects are completed and are operational 330 MW EACH.
■ 660 project under installation.
■ Sindh
■ Balochistan
■ Engro Company
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Current Affairs, lecture 2
○ Revamp the electricity transmission line​: How? Use plastic coated
wires in the cities because the line loss will be maximum 3%. Maximum
will take 3 years.