Pakistan - Public Expenditure Management : Strategic Issues and Reform Agenda

Abstract

This report focuses principally on three
 key dimensions of better public expenditure management in
 Pakistan. First, it is paramount to continue financial
 discipline and reduce the overall size of the public sector
 deficit, including the sizable losses of public enterprises.
 The modest progress made in reducing the government's
 fiscal deficit during the past few years has been undermined
 by the persistence of high level of losses of public
 enterprises, especially Water and Power Development
 Authority (WAPDA), and Karachi Electricity Supply Company
 (KESC). To reduce the unsustainable burden of public debt,
 the fiscal deficit, which has averaged 5.5 percent of GDP
 (excluding grants) and 3.4 percent (including grants) during
 the past three years, must be brought down further.
 Provision needs to be made for the large and continuing
 public enterprise losses and unfunded contingent liabilities
 of the public sector. A strong and successful government
 revenue mobilization effort, which will gradually raise the
 ratio of revenues from 17 percent of GDP (FY02) to say 20
 percent over the next decade, remains central to restoring
 Pakistan's fiscal health. But as the experience of the
 past few years shows, the structural weakness in the
 taxation structure (relatively heavy dependence on trade
 taxes) and the institutional weaknesses in the tax
 collection machinery (especially on the income tax side)
 will continue to dampen revenue growth for some time. Thus
 it will be prudent to assume, at best, only moderate growth
 in the ratio of government revenues to GDP over the next
 five years. Even on the assumption of a steady increase in
 the ratio of government revenue to GDP, the growth in
 overall public spending in real terms will be modest over
 the next few years because of the need to reduce the deficit
 further and to fund public enterprise losses and contingent
 liabilities. Indeed, in the medium term overall public
 spending as a proportion of GDP is unlikely to increase from
 the level of 22 percent witnessed in recent years, even if
 grant assistance remains at a relatively high level.