Chapter 4

Fiscal Policy

Increase in tax revenues and restraint on non-interest current spending

underpinned a reduction in fiscal deficit to 7.1 percent of GDP during
FY21, from 8.1 percent last year. This improvement for the second year in
a row was also helped by a combined provincial surplus that exceeded the
budget target for FY21. The seasonal spending pressures during the last
quarter of the year pushed the primary surplus seen during Jul-Mar FY21
into a deficit during FY21. However, the recovery in revenues kept the level
of primary deficit at a two-year’s low. The increase in tax revenue was
contributed by both federal and provincial governments. The growth in FBR
tax revenues was driven by a rebound in economic activity, surge in
imports, tax administration efforts, and the impact of a low base of last year.
On the spending side, federal non-interest current expenditures remained
contained, while development spending posted a recovery during FY21,
after a consistent decline in last three years. The government was able to
create fiscal space for undertaking spending on social safety nets, Economic
Stimulus Package (ESP) and provision of targeted support to various
sectors of the economy to mitigate the recessionary impact of the pandemic.
At the same time, the country made payment to partially settle the circular
debt of Independent Power Producers (IPPs) and Power Holding Private
Limited (PHPL), while loss making Public Sector Enterprises (PSEs)
continued to strain fiscal accounts during the year.

1
2
 4 Fiscal Policy
4.1 Fiscal Policy Review FY20. To put things into perspective, FBR
taxes posted 6.5 percent YoY increase during
The country successfully continued to Jul-Feb FY21, however a 49.3 percent YoY
implement fiscal consolidation during FY21 surge in tax collection during Mar-Jun FY21,
and witnessed a notable reduction in the fiscal pushed the growth to 18.4 percent for the
deficit to 7.1 percent of GDP from 8.1 percent whole year.
last year (Figure and Table 4.1). This
improvement was driven by a large increase in The expansion in provincial revenue collection
tax collection and a slowdown in non-interest stemmed from the increase in GST collection
current spending. Moreover, a greater than on services and higher profits from hydro-
target provincial surplus of 0.7 percent of GDP electricity. The non-tax revenues, on the other
further supported this outcome.1 hand, declined in FY21. This fall primarily
came from lower SBP and PTA profits
Tax revenue edged up by 19.5 percent during compared to last year. To partially offset the
FY21, compared to 4.3 percent last year. This decline in non-tax receipts, the authorities
improvement was contributed by both the resorted to increase the rates of petroleum
federal and provincial governments. development levy (PDL) during the year,
Specifically, FBR taxes posted a five years’ which rose to a historic high in November
high growth of 18.4 percent and surpassed the 2020, before edging down with an increase in
revised target by Rs 41.0 billion. This growth the international oil prices. However, since
was underpinned by a sustained recovery in non-tax revenues are not necessarily recurring
economic activity, along with a strong increase items with constant growth, they are not
in imports, FBR’s administrative efforts to considered a stable source for financing
streamline the audit procedures, anti- expenditures.
smuggling measures, and steps taken to
reduce informality. In overall terms, these On the expenditure side, the government
reforms led to a slight uptick in FBR tax-to- created fiscal space for undertaking spending
GDP ratio during FY21, in the absence of any on social safety nets, Economic Stimulus
major increase in tax rates (Figure 4.2). The Package (ESP) and provision of targeted
impact of these measures was compounded by support to various sectors of the economy by
the effect of a low base from the Covid-led restraining non-interest current spending.
contraction during the last four months of Specifically, the expenditures on running of
civil government and pensions contracted in
Fiscal Indicators Figure 4.1 FBR Tax to GDP Ratio Figure 4.2
percent of GDP percent
0.0 12.0

-2.0 -1.4 10.0 11.1

-1.6 -1.8 10.7 10.5
-2.2 10.1 9.9
9.6
-4.0 8.0
-3.6
-6.0 6.0
-5.8
-6.5 4.0
-8.0 -7.1
-8.1
-10.0 -9.0 2.0
FY18

FY20
FY17

FY19

FY21

0.0
FY16 FY17 FY18 FY19 FY20 FY21
Fiscal balance Primary balance
Source: Ministry of Finance Source: Ministry of Finance

1 The target for provincial surplus was set at 0.5 percent of GDP at the start of the year.
77
State Bank of Pakistan Annual Report 2020-2021

Consolidated Fiscal Indicators Table 4.1

billion Rupees, growth in percent
YoY growth Q4
FY20 FY21 FY20 FY21 FY20 FY21
1. Total revenue (a+b) 6,272.17 6,903.37 28.0 10.1 1582.3 1910.8
(a) Tax revenue 4,411.54 5,272.70 4.3 19.5 1046.0 1507.7
Federal 3,997.92 4,764.30 4.4 19.2 953.6 1369.4
Provincial 413.617 508.397 2.9 22.9 92.4 138.3
(b) Non-tax 1,860.63 1,630.67 177.9 -12.4 536.3 403.1
Federal 1,758.24 1,480.40 201.5 -15.8 513.5 335.0
Provincial 102.389 150.275 18.6 46.8 22.8 68.1
2. Total expenditure (a+b+c) 9,648.49 10,306.6 15.6 6.8 3272.4 3662.1
(a) Current expenditure 8,532.02 9
9,084.01 20.1 6.5 2920.5 2998.6
Of which : Mark-up payments 2,619.74 2,749.73 25.3 5.0 740.0 645.9
Non-markup expenditure 7,028.75 7,556.96 12.4 7.5 2532.4 3016.2
Defense 1213.281 1316.418 5.8 8.5 410.8 532.5
Subsidies 359.9 425.0 84.2 18.1 n.a. 220.8
(b) Development expenditure & net lending 1203.741 1315.7 -1.3 9.3 190.4
422.3 592.7
(c) Statistical discrepancy -87.273 -93.0 - - -70.4 70.8
[Link] budget balance -3,376.32 -3403.3 -2.0 0.8 -1690.1 -1751.3
percent of GDP -8.1 -7.1 -4.1 -3.7
[Link] balance -756.6 -653.6 -44.1 -13.6 -950.1 -1105.4
percent of GDP -1.8 -1.4 -2.3 -2.3
5. Revenue balance -2259.9 -2180.6 2.6 -3.5 -1338.2 -1087.8
percent of GDP -5.4 -4.6 -3.2 -2.3
6. Financing (a+b) 3,376.3 3,403.32 -2.0 0.8 1690.1 1751.3
(a) External (Net) 895.5 1338.090 114.9 49.4 213.1 775.9
(b) Domestic (Net) 2,480.8 9
2,065.23 -18.1 -16.8 1477.0 975.3
Non-Bank 540.2 196.189 -29.4 -63.7 138.2 -95.9
Bank 1,940.6 1869.041 -14.3 -3.7 1338.7 1071.3
Source: Ministry of Finance

FY21, compared to last year. On the other primary balance for FY21 slipped into a
hand, development expenditures staged a deficit, after remaining in surplus during Jul-
recovery after showing a consistent decline Mar FY21. Similarly, revenue deficit that
during the past three years. This rebound shows the difference between total revenues
primarily came from a hike in provincial PSDP and current expenditures also remained at an
spending, while federal expenditures elevated level in FY21.
remained muted. Interest payments stood at
57.7 percent of FBR tax revenues, despite Fiscal Indicators Figure 4.3
witnessing a slowdown amid lower interest percent of GDP
rates during the year. 1.0
0.0
The quarterly analysis indicates a seasonal
increase in the fiscal deficit during the fourth -1.0
quarter of the year (Figure 4.3). This increase -2.0
was seen despite a large expansion in -3.0
revenues (Rs 328.5 billion) during the quarter,
-4.0
which was outpaced by a yet strong increase
(Rs 389.7 billion) in expenditures. This -5.0
Q4
Q1

Q2

Q3

Q1

Q2

Q3

Q4

spending pressure mainly came from a

recovery in development expenditures, FY20 FY21
substantial increase in subsidies to the power Fiscal Balance Primary Balance Revenue balance
sector, sustained burden of interest payments, Source: Ministry of Finance
and social protection grants. With this
expansion in spending in Q4-FY21, the
78
 Fiscal Policy

Addition in Fiscal Deficit in 2021 Change in Expenditure in 2021 Change in Revenue Figure 4.4
in 2021
percent of GDP percent of GDP percent of GDP
Avg. of EMEs Avg. of EMEs India
Avg. of EAEs Pakistan Pakistan
Sri Lanka Avg. of EAEs Bangladesh
Pakistan Avg. of LIDC Avg. of LIDC
Avg. of LIDC Sri Lanka Avg. of EAEs
Bangladesh Bangladesh Avg. of EMEs
India Sri Lanka
India
-4.0 -2.0 0.0 2.0 4.0 6.0 -1.0 0.0 1.0 2.0
-4.0 -2.0 0.0 2.0 4.0 6.0
AE:Advanced economies; EMEs: emerging market economies; EAEs: Emerging Asian economies; LIDC: Lower income
developing economies. Note: The data is reported on calendar year basis for all countries except India,Bangladesh, and
Pakistan. Projections are used for 2021 except Pakistan.
Source: IMF Fiscal monitor, MoF

Specifically, the disbursement of power sector The fiscal performance of the country,
subsidies increased considerably during the remained strong compared to some of the peer
year compared to the budget estimates set at economies and other regional averages during
the start of the year. This was in addition to FY21 as seen from the change in fiscal deficit,
the fiscal burden stemming from the need to tax revenues and expenditures in terms of
cover losses of Public Sector Enterprises (PSEs) GDP during the year. (Figure 4.4). The country
was able to contain fiscal deficit, because of
during the year. However, the accompanying
reduction in non-priority current spending in
recovery in tax revenues helped to contain the
FY21.
level of fiscal and primary deficit for FY21 –
lower than the last two years. While the government’s efforts to implement
fiscal adjustment measures remained on track
In overall terms, the improvement in the fiscal during FY21, there is a need to address some
account stemmed from both the revenue and emerging risks to fiscal sustainability.
the expenditures side. The increase in tax Specifically, subsidies to power sector rose
revenues was driven by a large base effect sharply during FY21. This, in addition to the
from last year along with the economic fiscal support to some large loss making PSEs
rebound and FBR policy efforts. On the other such as PIA, Pakistan Steel and Pakistan
hand, the prudent management of non-interest Railways reached 0.9 percent of GDP in FY21,
current spending amid fiscal pressures arising compared to 0.8 percent last year. The fiscal
from power sector subsidies, provision of burden of these entities reached close to half of
economic stimulus, and pandemic
Fiscal Indicators and Power Sector Figure 4.5
management was instrumental in achieving a Non-development Spending
reduction in the fiscal imbalance. (FY19-21)
percent of GDP
A large part of the deficit financing 10.0
requirements were met through domestic 8.1
8.0
commercial banks in FY21. However, external
financing also rose sharply particularly in the 6.0
fourth quarter as country tapped funds from
4.0
international capital markets, Naya Pakistan 2.2
Certificates (NPCs) in addition to the loan 2.0 0.8
inflows from bilateral and multilateral 0.0
creditors. Fiscal deficit Primary deficit Power and PSE
spending
Source: Ministry of Finance
79
State Bank of Pakistan Annual Report 2020-2021

Tax Expenditure as Percent of Figure 4.6 widen the tax base through elimination of
GDP exemptions, improvement in tax design, etc. A
percent
3.0 sustained increase in tax collection is
2.5
instrumental in ensuring sustainability of the
country’s fiscal position.
2.0
1.5
Interest Expenditures Figure 4.7
1.0
as percent of GDP in 2021
0.5 6.0
0.0 5.0 5.8
4.0 3.1
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
3.0 1.9
2.0 1.3 1.2
Income tax Sales tax 0.8 0.6
1.0 0.3
Custom duty Tax expenditure
0.0
Source: Economic Surveys, Ministry of Finance

Thailand
Indonesia
India

Sri Lanka

Bangladesh
Malaysia
Pakistan

Turkey
the primary deficit seen during FY19-FY21 on
average (Figure 4.5). This highlights the need Note: For Pakistan, India, and Bangladesh: Fiscal
to expedite reforms in the power sector and year basis; for rest of the countries projections on
PSEs to contain pressures on scarce fiscal calendar year basis
resources. The process may also include Source: IMF Fiscal Monitor; MoF, Government of
Pakistan and India
advancing the process of privatization of the
loss making entities.
In addition, Pakistan’s debt servicing
Furthermore, there is a need to fast-track payments are considerably high compared to
implementation of Public Financial some peers (Figure 4.7). During FY21, the
Management (PFM) reforms such as transition ratio of interest payments-to- FBR tax
to Treasury Single Accounts (TSA) to improve revenues stood at 57.7 percent. This implies
spending efficiency. The adoption of TSA will that over half of the tax revenue collections are
enhance cash management of the government utilized for debt servicing, squeezing the space
by providing consolidated information on the for undertaking development expenditures. A
availability and movement of funds and will consistent strain on development spending
lower the cost of borrowing. This will has dampened the country’s growth prospects
strengthen the government’s control over as well as its debt repayment capacity.
budget execution, and lower transaction costs
by eliminating delays emerging from the 4.2 Revenues
involvement of commercial banks for
collection of tax and non-tax revenues.2 The overall revenues grew by 10.1 percent in
On the revenues side, the ongoing reforms FY21 compared to 28.0 percent last year. This
aimed at broadening of the tax base such as growth entirely came from tax collections,
stepping up tax administration efforts, while the non-tax revenue (NTR) declined due
phasing out of income tax exemptions have to lower SBP profits and absence of one-off
helped strengthen tax receipts. However, GSM license renewal fee. The collection from
despite these policy efforts the volume of tax petroleum levy showed a marked increase
exemptions as measured by tax-expenditures- compared to last year, which partly
to-GDP, has remained at an elevated level for neutralized the decline in NTRs during the
the past few years (Box 4.1 and Figure 4.6). year. The increase was driven by an uptick
This hints at the need to pace up the efforts to

2I.F. Yaker and S. Pattanayak (2010). Treasury single account: concept, design and implementation issues. Working
Paper/10/143. Fiscal Affairs Department. Washington D.C.: IMF.
80
 Box 4.1: Tax Policy Reform to Mobilize Additional Revenues Amid Covid Pandemic
Governments across the globe prompted unprecedented policy support to mitigate the economic and health fallout of the Covid pandemic. The ability of various countries
to continue this policy support and its magnitude hinges on the availability of fiscal space. Countries with limited fiscal resources will need to strengthen revenue
generation capacity to ensure fiscal and debt sustainability, amid persistent financing needs for large-scale vaccinations and provisions of targeted support. In this
backdrop, a brief survey of literature presents several tax policy reforms to ensure high revenue mobilization amid the Covid pandemic. To address the issues of widening
fiscal imbalance and declining tax-to-GDP ratio Pakistan has initiated tax policy reforms since past few years. These efforts were further streamlined under the IMF-EFF
program in FY20. In overall terms, the ongoing tax policy reforms in the country, like eliminations of preferential GST rates, phasing out income tax exemptions, using third
party data sources, etc., are in line with the best practices identified in the literature. However, there is a need to widen the scope of these efforts to ensure a sustained
increase in tax base, as discussed in the following.
Taxes Literature Pakistan’s Tax Reforms
Corporate (i) Excess profit taxes may be imposed; (ii) do not use CIT Corporate incomes tax reforms. To improve the base for direct taxes, Pakistan introduced wide ranging
Income Taxes as an investment incentive; (iii) use CIT for providing reforms in CIT in March 2021. These included: (i) withdrawal of tax exemptions on 36 categories; (ii)
(CIT) R&D incentives, implemented through tax credits; (iv) reversal of reduced tax rates to normal rates on various categories; and (iii) conversion of investment and
avoid special tax incentives for SMEs as these restrict firm income tax exemptions to tax credits, for instance, persons engaged in coal mining, start-ups certified by
growth; (v) to encourage investment, countries may Pakistan Software Export Board, export of computer software or IT exports etc. These measure are likely to
resort to measures like investment tax credits, accelerated add around Rs 140 billion in the overall FBR taxes in FY22. To give further support to revenues, excess
depreciations, etc. profit taxes may be imposed on selected sectors on the basis of profitability.
Personal (i) Adopting a progressive PIT rate schedule; (ii) setting Personal income taxes: PIT in Pakistan are collected through progressive rates on various income slabs.
Income tax exemptions threshold below per capita income or average The tax rates on salaried and non- salaried individuals were also increased in FY20 and were kept
(PIT) wage, as a high PIT threshold reduces the tax base; (iii) unchanged in FY21. The revenue in this category may be propped up by increasing the tax rates on highest
introducing temporary surcharge. slabs or by introduction of temporary surcharge.
Consumption (i) Reduce exemptions and preferential rates; (ii) improve Consumption taxes: FBR has introduced various reforms aiming at Simplification of GST, and elimination
Taxes FED design and enforcement; (iii) introduce/ raise carbon of preferential rates including: (i) replacing GST zero rating regime on five export oriented sectors (textile,
taxes; (iv) introduce a single VAT rate; (v) implementing leather, carpets, sports goods and surgical goods) with normal tax rates in FY20; (ii) eliminating
VAT on e-commerce. preferential GST rates for sectors like sugar and steel in FY20; (iii) extending GST to e-commerce sales
transactions through Finance Act 2021. This step was taken after the surge in sales through e-commerce
platforms during the lockdowns. Although currently the contribution of this head in total collection is
negligible, this is expected to grow with expanding size of digital transactions.1 The tax base can be further
enhanced by curtailing exemptions and improving tax design. Specifically, the tax incentives given during
Covid can be gradually rolled back once the economic recovery takes hold.
Capital (i) Neutral taxation of all corporate incomes (interest, Capital income taxes: To minimize tax evasion, FBR has initiated use of third party data sources through
Incomes Taxes dividends and capital gains), as differential treatment of Maloomat Tax-Ray from September 2020. This system collects third party information (such as banks) for
corporate incomes creates distortions; (ii) can be imposed individual’s assets and withholding deductions, which help in determining accurate tax liabilities.
in withholding tax form; (iii) reasonable rate to improve Moreover, it also facilitates the tax-payer in evaluating the accurate tax liability while filing the tax returns.
equity; (iv) can use third party information to discourage
evasion.
Property Taxes (i) Raise property tax rates; (ii) update property values to Property taxes: Need to expand revenue by aligning the property values with market prices. In this
market prices; (iii) strengthen administration, gift and regard, FBR has revised the valuation of immovable property rates in July 2019 for various cities. There is a
inheritance taxes.; (iv) strengthening property registry need to ensure continuity in this exercise to remove disparity between the property values and market
and administrative capacity rates
Sources: De Mooji., FenoChiotto R., Hebous S., Leduc S., Osorio Buitron C. (2020); IMF Fiscal Monitor (April 2021); A summary of the Responsible Tax roundtable discussions on
potential tax policy responses to the COVID-19 pandemic – KPMG; Tax Laws (Second Amendment), 2021

1 Non-filers to be charged 2 percent of tax on gross value of supplies by the online retailer (effective from the date as notified by the FBR).
Fiscal Policy

81
State Bank of Pakistan Annual Report 2020-21

YoY Growth in Overall Revenue YoY Growth in FBR Taxes YoY Growth in Non- Figure 4.8
Tax Revenue
percent percent percent
50.0 50.0 250.0
40.0 40.0 200.0
30.0 30.0
150.0
20.0
20.0
100.0
10.0
10.0
0.0 50.0
0.0
-10.0 0.0
-10.0 -20.0
-50.0
Q1-FY20
Q2-FY20
Q3-FY20
Q4-FY20
Q1-FY21
Q2-FY21
Q3-FY21
Q4-FY21

Q1-FY20
Q2-FY20
Q3-FY20
Q4-FY20
Q1-FY21
Q2-FY21
Q3-FY21
Q4-FY21

Q4-FY20
Q1-FY20
Q2-FY20
Q3-FY20

Q1-FY21
Q2-FY21
Q3-FY21
Q4-FY21
Source: Ministry of Finance

in PDL rates and a surge in sales of POL Growth in FBR Taxes Figure 4.9
products during the year. Notably, most of the percent
25.0
increase in revenues (52.0 percent of total) was
seen in H2-FY21, because of a surge in tax 20.0
collection during the last four months of the 15.0
year (Figure 4.8). This increase came from a
10.0
low base of last year when the outbreak of the
pandemic halted economic activities amid 5.0
strict lockdowns. 0.0

FBR Tax Collection Table 4.2 -5.0

billion Rupees, growth in percent FY16 FY17 FY18 FY19 FY20 FY21
Growth FBR taxes actual Revised target
Collection Growth Cont.
Source: Ministry of Finance
FY20 FY21 FY20 FY 21 FY20 FY21
Direct taxes 1,523.4 1,726.0 5.4 13.3 2.0 5.1 4.2). The actual collection stood at Rs 4.73
Indirect taxes2,474.0 3,008.3 3.8 21.6 2.4 13.4 trillion during FY21.
Custom
duty 626.6 747.3 -8.6 19.3 -1.5 3.0
Sales tax 1,596.9 1,981.0 9.4 24.1 3.6 9.6 The growth pattern of FBR taxes can be
Imports 876.3 1,118.2. 8.1 27.6 0.5 6.1 distinguished in two phases during FY21: (i)
Domestic 720.5 863.2 7.6 19.8 1.6 3.6 an average monthly YoY growth of 6.5 percent
FED 250.5 276.6 5.2 11.6 0.3 0.7
during Jul-Feb FY21; and (ii) a significant
Total taxes 3,996.7 4,734.2 4.4 18.4 4.4 18.4
Cont.: contribution growth of 49.3 percent during Mar-Jun FY21.
Source: Federal Board of Revenue, The increase in FBR taxes during Jul-Feb FY21
was driven by a rebound in economic activity,
surge in imports, FBR efforts to strengthen tax
FBR Taxes
administration, and higher prices in some
FBR taxes registered a 5-years’ high growth of categories such as sugar and electricity. The
18.4 percent in FY21 and surpassed the revised impact of these factors became more
collection target by a slight margin (Figure pronounced during the last four months of the
4.9). The tax collection target was set at Rs 4.96 year because of a substantial low base effect
trillion at the start of the year, which was (Figure 4.10). Importantly, this surge was
revised down to Rs 4.69 trillion, in March 2021 achieved despite no major increase in the tax
amid the third wave of the pandemic (Table rates, rationalization of custom duties on

82
 Fiscal Policy

Monthly FBR Tax Collections Figure 4.10

billion rupees percent
800.0 80.0

600.0 60.0

400.0 40.0

200.0 20.0

0.0 0.0
Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun

FY20 FY21 FY21 T FY21 (YoY growth - rhs)

Source: Federal Board of Revenue

various tariff lines, 3 and higher payments of smuggled goods. Specifically, during FY21
tax refunds during FY21.4 FBR seized smuggled goods worth Rs 57.7
billion, compared to Rs 36 billion in FY20; (iii)
In terms of composition, the expansion in FBR to improve formality and increase the tax base,
taxes mainly came from indirect taxes during FBR initiated integration of the tier-I retailers
FY21, with major share of sales tax on imports. with the centralized database of FBR. 6 For this
This was attributed to a surge in imports as purpose 11,000 Point of Sales (POS) terminals
well as higher commodity prices globally. 5 were integrated during FY21, in the first
phase; iv) to encourage filing of income tax
FBR scaled up tax administrative efforts returns, FBR revised the rate of penalties.7
during FY21. Consequently, income tax returns during FY21
FBR’s efforts were largely aimed at scaling up increased to 3.01 million from 2.67 million in
tax regulations, procedures and evaluation FY21. While the tax deposited with returns
processes to broaden the tax base. Some of the increased to Rs 52 billion during the year
important measures introduced during FY21 compared to Rs 34.3 billion in FY20; and (v) to
included: (i) improvement in audit comply with Financial Action Task Force
procedures, for which FBR approved a new (FATF) recommendation, FBR filed 71
audit policy in August 2020. This policy complaints under Anti Money Laundering Act
focused on ensuring transparency and fairness involving a sum of Rs 62 billion.
while conducting audit of taxpayers. Some of Indirect taxes grew mainly due to increasing
the major reforms included electronic imports
balloting of taxpayers to be audited,
introduction of e-hearing portal for tax audit Indirect taxes witnessed a broad-based growth
and assessment cases to minimize the of 21.6 percent in FY21, compared to 3.8
interaction of the officials with the taxpayers; percent last year.
(ii) intensification of crack-down against

3 These tariff lines include materials used in chemical, leather, textile, and fertilizer industries.
4 Faster Plus system was introduced to ensure quick transfer of refunds to the export oriented sectors, to improve
liquidity position of the exporting firms. The amount of refunds disbursed stood at Rs. 222.6 billion in FY21,
compared to Rs. 173.5 billion paid last year.
5 Domestic prices of non-energy and energy products increased by 22.7 and 9.7 percent respectively during FY21.
6 Tier-I retailers include: retailer operating as a unit of a national or international chain of stores, or operating in

air conditioned malls, or having a cumulative (12 months) electricity bill of Rs. 1,200,000, or operating in shop of
1000 square feet or more.
7 Chargeable late filing penalty was increased to Rs 5,000 for the taxable income of up to Rs. 800,000 in FY21,

from 0.1 percent of the taxable income earlier.

83
State Bank of Pakistan Annual Report 2020-2021

Import Related Taxes Table 4.3 Direct Taxes Table 4.5

billion rupees, growth in percent billion rupees, growth in percent
Growth Grow Growth
FY20 FY21 Growth
Cont. FY20 FY21 th Cont
Sales tax 876.3 1,118.2 27.6 27.6
Collection on demand 60.8 80.1 31.8 1.3
POL 231.3 255.7 10.6 2.8
Voluntary payments 404.6 465.8 15.1 4.0
Iron and steel 82.9 110.8 33.7 3.2
Withholding taxes 1,091.7 1,237.1 13.3 9.5
Vehicles 42.9 81.4 89.6 4.4
Imports 199.7 218.5 9.4 1.2
Edible oil 52.0 75.2 44.7 2.7
Salaries 129.4 151.8 17.3 1.5
Plastic 55.2 70.9 28.5 1.8
Dividends 55.1 63.7 15.6 0.6
Machinery 52.0 55.6 6.9 0.4
Bank interest and
Custom duty 626.6 747.3 19.3 19.3
securities 128.3 134.8 5.1 0.4
Vehicles 56.9 110.9 95.0 8.6
Contracts 237.4 272.1 14.6 2.3
POL 83.2 94.3 13.3 1.8
Export 38.5 42.2 9.9 0.2
Iron and steel 45.4 55.6 22.3 1.6
Cash withdrawals 15.2 15.1 -0.2 0.0
Machinery 59.9 59.7 -0.3 0.0
Electric bills 45.4 51.3 12.8 0.4
Edible oil 29.4 34.4 17.0 0.8
Telephone 54.6 63.2 15.6 0.6
Cont.: Contribution
Source: Federal Board of Revenue NET DT 1,523.4 1,726.0 13.3 13.3
Cont.: Contribution
Source Federal Board of Revenue
Import related taxes (sales tax on imports and
custom duty) contributed the most in the addition, the strict enforcement of anti-
indirect taxes during FY21. The revival in smuggling measures switched the demand for
economic activity translated into higher certain categories such as cigarettes to
imports of POL, iron & steel, vehicles, edible domestic substitutes that bolstered the
oil and machinery, which augmented these collection from this category.
receipts. The increase in global commodity
YoY Growth in Imports and Sales Figure 4.11
prices further inflated tax receipts (Table 4.3 & Tax Collection (Imports)
percent percent
Sales Tax (domestic) Table 4.4 100.0 100.0
billion rupees, percent 80.0 80.0
Growth 60.0 60.0
FY20 FY21 Growth Cont 40.0
40.0
Electrical energy 91.8 127.2 38.6 4.9 20.0
20.0
POL 231.4 300.9 30.1 9.7 0.0
-20.0 0.0
Sugar 39.8 62.8 57.8 3.2
-40.0 -20.0
Cement 20.8 37.3 71.2 2.5
-60.0 -40.0
Cotton yarn 25.8 44.1 317.1 1.7
Nov-19

Nov-20
Sep-19

Aug-20

Jun-21
Aug-19

Dec-19

Dec-20
Apr-20
Jun-20

May-21
Jan-20
Jul-19

Mar-20

Jul-20

Oct-20

Feb-21
Mar-21

Motor cars 3.8 15.7 19.8 0.1

Beverages 12.9 15.4 19.8 0.4
Cigarettes 20.3 27.9 37.2 1.1 Imports (Rs Value) Taxes - rhs
Others 250.8 199.1 -20.6 -7.2
720.5 863.2 Sources : FBR and PBS
Total 19.8 19.8
Cont.: Contribution
Source: Federal Board of Revenue
A broad-based increase was witnessed in
direct taxes.
Figure 4.11).
Direct taxes also posted a significant increase
Similarly, the GST on domestic sales propped of 13.3 percent in FY21 compared to 5.4
up with a revival in domestic demand for percent last year. This growth mainly came
POL, automobiles, cement, electricity, etc. The from withholding taxes followed by voluntary
increase in prices of some categories such as payments and collection on demand (CoD)
electricity, sugar, power tariffs provided (Table 4.5).
further impetus to collection (Table 4.4).8 In

8 Prices of electricity and sugar surged by 10.8 and 23.4 percent in FY21, respectively.
84
 Fiscal Policy

Number of Subscribers Figure 4.12

Within WHT, major contributors were telecom
services, imports, bank interest & securities millions
200.0
and contracts. The increased usage of telecom
services due to online educational activities 160.0
and virtual meetings during the pandemic,
helped increase the collections from telecom 120.0
services (Figure 4.12). Similarly, the rebound
80.0
in construction activities, increased saving
deposits and surge in imports shored up WHT 40.0
receipts.
0.0
Voluntary payments showed a notable Cellular Broadband
increase during the period. As mentioned
FY19 FY20 FY21
earlier, FBR revised the penalty structure for
Source: Pakistan Telecommunication Authority
non-filers, which prompted an increase in the
number of filers. The deposited amount with seen last year. The sharp reduction in interest
the returns increased to Rs 52 billion during rates that was announced in Mar-June 2020
the year compared to Rs 34.3 billion in FY20. and maintained through FY21 was mainly
responsible for this contraction. Moreover, the
4.3 Non-Tax Revenue Declined due to government debt stock with SBP also edged
Lower SBP and PTA Profits down by 0.6 trillion during FY21 amid its
commitment of zero borrowing from SBP that
The overall non-tax revenues witnessed a 12.4 further dampened these earnings. 9
percent contraction in FY21 compared to a
large increase last year. This decline was seen PTA profits declined to Rs 39 billion in FY21,
main categories of non-tax revenues with from Rs 127 billion in FY20, in the absence of
major contributions from transfers of SBP and the one-off payments for GSM license renewal
PTA profits during the period. The markdown fees. It may be recalled that last year telcos
of Rs. 372.9 billion in these two components made payments for the renewal of the GSM
more than offset the expansion of Rs. 131.0 licenses (half of their total renewal fee). The
billion in collection from PDL during FY21 remaining amount has to be paid in 5-year
(Figure 4.13). installments in a staggered manner. Taking
into account this factor, the government had
The transfer of SBP profits posted 30.5 percent envisaged a target of only Rs. 36 billion in the
decline in FY21, compared to a large increase

The State of Non-Tax Revenue for Last 5-Years Figure 4.13

2000.0 billion Rs

1600.0 351
294 400
1200.0 127
105 425
800.0 370 39
229 188 76
149 34 167 34 179 16 936
400.0 94 18
58 100 88 651
206
228 228 233
0.0 13 36
FY16 FY17 FY18 FY19 FY20 FY21
SBP profits Mark-up payments Dividends
PTA profits PDL Others
Source: Ministry of Finance

9 However, SBP witnessed Rs 13.3 billion profits on loans under Covid-19 schemes.
85
State Bank of Pakistan Annual Report 2020-2021

budget estimates for FY21, compared to Rs. It is important to note that the fiscal
136 billion last year. authorities have changed the practice of
adjustment in local oil prices (with
Mark-up receipts fell by 27.5 percent in FY21 international oil prices) from monthly basis to
against a large increase last year. 10 The fortnightly, from September 2020. This step
contraction in payments by National Highway
has enhanced the alignment of local POL
Authority was mainly responsible for this
prices and PDL rates with the international
decline. The government had set a target of Rs
41.2 billion in the form of mark-up payments trend.
from NHA, however only Rs 13.1 billion was
PDL Rates on Petrol during FY21 Figure 4.14
realized, according to the revised estimates for
FY21. This can be attributed to inability of this Rs/liter Dollars/barrel
40.0 80.0
organization to generate adequate stream of
revenues to support debt servicing.11 30.0 60.0

Similarly, the dividend income of the 20.0 40.0

government fell short of target by 28.0 percent
10.0 20.0
in FY21. This shortfall mainly came on account
of lower payments by OGDCL that constitutes 0.0 0.0
over 60 percent share in the total receipts in

1-Oct-20

1-May-21
1-Nov-20

1-Mar-21
1-Jul-20

1-Feb-21
1-Sep-20

1-Dec-20
1-Jan-21

1-Apr-21

1-Jun-21
this head.12

OGDCL witnessed a lackluster financial PDL rate Oil prices

performance during Jul-Mar FY21, with 20.1 Source: State Bank of Pakistan
percent YoY decline in profits that led to a
slump in dividend payments.13 This slack 4.4 Federal Expenditures14
mainly came from a respective 3.4 and 5.6
percent YoY fall in crude oil and gas extraction The federal expenditures rose by 4.7 percent
by this entity during the period. Receipts from during FY21 compared to 21.8 percent last
PDL almost doubled during FY21, on account year. This slowdown emanated from a
of higher PDL rates as well as a strong revival restraint on non-interest current spending,
in the sales of POL products. Specifically, to while development expenditures & net
benefit from the lower international oil prices lending posted a recovery during the year.
fiscal authorities increased the PDL rates
during first few months of FY21, which
Federal Current Expenditures
reached an all-time peak of Rs. 30 per liter in
November 2020 (Figure 4.14). The federal current spending grew by 4.2
percent during FY21, compared to 26.8 percent
However, with the recovery in international last year. Major contribution in this increase
oil prices, the PDL rate was revised came from the higher domestic markup
downwards to minimize the adverse impact of payments, defense, and subsidies, while the
the price increase on consumer in the domestic expenditure on running of the civil
market.
government, pensions and grants declined

10 Federal government advances loans to the public sector enterprises, local bodies and others to carry out their
development and social initiatives. A mark-up rate is charged on these advances, determined by Finance
Division every year. The interest earning from this is being reflected in NTRs.
11 MoF (2021). State-Owned Enterprises Triage: Reforms and Way Forward. Islamabad: MoF

12 Dividend represents return on the federal government’s shareholding of commercial enterprises. This vary

each year based on the profitability of these enterprises.

[Link]/sites/default/files/Chronology%20of%20Dividends%20updated%[Link]
14 The discussion in this section is based on federal expenditures excluding statistical discrepancy.

86
 Fiscal Policy

Growth Contribution in the Figure 4.15 Share of Interest Payments in Figure 4.16
DetailCurrent
Federal of Disbursements under
Expenditures Figure 4.18
Economic Fiscal Indicators
percent Stimulus Package (ESP)
during
16.0 FY21 percent
75.0 66
12.0
Medical equipment 55 58
8.0 8.9%
4.0 17.2% 50.0 44 43 43
40 39 39 39
Emergency relief
0.0 13.0%
fund
-4.0
Power and gas 25.0

Civil govt.

Subsidies
Foreign markup

Grants
Domestic markup

Defence

Pension
susidy
23.4% Relief to SMEs
37.5%
0.0

FY17

FY18

FY19

FY20

FY21
Relief to agriculture

FBR taxes Federal current expenditures

FY20 FY21
Source: Ministry
Source: Ministry of
of Finance
Finance Source: Ministry of Finance

during FY21 (Figure 4.15). However, in terms Spending on Economic Stimulus Package
of GDP, federal current expenditures fell from (ESP) in FY21
14.5 percent in FY20 to 13.1 percent in FY21.
To mitigate the recessionary impact of Covid,
Interest payments stood at 57.7 percent of the government announced an Economic
FBR taxes Stimulus Package worth Rs 1.2 trillion in the
The interest payments grew by 5.0 percent second half of FY20. This was primarily
during FY21 as compared to 25.3 percent last designed to help the most vulnerable sectors
such as daily wage earners and small
year. The country benefitted from lower
businesses by providing cash assistance, lock
interest rates and debt relief under the Debt
down management and emergency relief for
Service Suspension Initiative (DSSI) during the purchase of Covid vaccine, management of
FY21. 15 Despite this slowdown, the ratio of hospital services. In addition, the package also
interest payments-to-FBR taxes stood at 57.7 provided relief to various segments of
percent during FY21. On average, more than economy including exports, SMEs and
half of the FBR taxes are utilized for interest agriculture.
payments since past three years (Figure 4.16).
During FY20, the government spent Rs 700.0
billion under this package, and the remaining
Disbursements under Economic Figure 4.17 amount was carried forward to FY21. Out of
Stimulus Package (billion Rs) this amount, Rs 175.0 billion were spent in
FY21 (Figure 4.17). The focus areas were lock
FY21 down administration during the second and
third waves of the pandemic, purchase and
FY20 administration of Covid vaccine, awareness
campaigns, and provision of hospital
0.0 200.0 400.0 600.0 800.0
equipment and services for the Covid patients.
a. Emergency response
b. Relief to citizens
c. Support to business and economy Furthermore, government provided relief to
d. Non-cash assistance various sectors such as the power sector,
a. Funds released for National Disaster Management Authority
(NDMA), health sector, and emergency relief fund; b. Relief SMEs, and agriculture for reviving economic
provided to the daily wage workers and poor families and support activity (Figure 4.18).
was provided in terms of food and energy sectors; c) Support to
exporters, SMEs, and sagricutlutre sectors; d) Tax exemptions and
guarantees for the food, health, energy, and agriculture sectors.
Source: Ministry of Finance

15 For details, see Chapter 5 on “Domestic and External Debt.”

87
State Bank of Pakistan Annual Report 2020-2021

initiated in the beginning of FY21

Detail of Disbursements under Figure 4.18
Economic Stimulus Package (ESP) encompassed a complete ban on the purchase
during FY21 of all vehicles (except motorcycles) in current
expenditures; the creation of new vacancies;
Medical equipment
8.9% and restrictions on other official protocols –
17.2%
Emergency relief
such as the entitlement of magazines and
13.0%
fund newspapers; rationalization of utility
Power and gas consumption; and constrictions on other
susidy
23.4%
operational expenditures.17
37.5% Relief to SMEs
Power sector subsidies rose during the year
Relief to agriculture
The government provided Rs 339.0 billion
Source: Ministry of Finance subsidies to power sector during FY21 in
various heads, compared to Rs 269.8 billion
Social protection spending in FY21 last year and a budget estimate of Rs 139.5
billion for FY21. This amount also included
The government introduced Ehsaas
Emergency Cash Program under the ESP and payment made to Independent Power
provided immediate financial support to the Producers (IPPs) and Power Holding Private
vulnerable, covering 15 million households all limited (PHPL) to partially settle some of the
across the country with the total disbursement payments related to circular debt. Because of
of almost Rs 179.2 billion.16 this payment, the spending on power sector
subsidies increased considerably compared to
Furthermore, the spending on social the budget estimates (Box 4.2).
protection (under BISP) for helping the
vulnerable, stood at Rs 194.9 billion in FY21, Federal Development Expenditures
compared to 242.3 billion in FY20.
The federal development expenditures ticked
Spending on running of civil government up by 1.0 percent during FY21 as compared to
declined during the year a 6.0 percent decline last year. Federal
development spending remained downbeat
The running of civil government spending for most part of Jul-Mar FY21. This slack
posted a decline of 3.5 percent during FY21, in emerged from a number of factors including
contrast to a rise of 3.2 percent increase last the government efforts to contain fiscal deficit,
year. This reduction was helped by various Covid-led disruptions in economic activity,
measures introduced by the fiscal authorities and implementation of Public Financial
to keep a lid on spending by the federal Management (PFM) reforms.
ministries. The austerity drive which was

Box 4.2: Fiscal Burden of the Power Sector and Public Sector Enterprises (PSEs)

Subsidies, grants, and loans to PSEs constituted a major share in the non-interest current expenditures of the
federal government during FY21 (Figure 4.2.1). This share has been increasing overtime, adding increasing
burden on the fiscal account (Figure 4.2.2). The major part of the subsidies is directed to power sector, capturing
around 80.0 percent share in total subsidies (Figure 4.2.3). As a result, the share of power sector subsidies, loans
and grants to PSEs reached close to half of the primary deficit in terms of GDP for the last three years, on
average. In addition, the fiscal support to PSEs has also been increasing in terms of GDP (Figure 4.2.4).

16 Poverty Alleviation and Social Safety Division ([Link]/NewsDetailWerFf65%5ES23d$gH2a3c9cbf -

2f66-47d3-a386-4ce516d8bdc30ecFf65%5ES23d$Pdf).
17 Circular No. 7(1) Exp. IV/2016-430, dated August 6, 2020, Expenditure Wing, Finance Division.

88
 Fiscal Policy

Composition of Figure 4.2.1 Trends in Non-interest Figure 4.2.2 Composition of Figure 4.2.3 Current Spending Figure 4.2.4
Non-interest Current Spending Subsidies on PSEs
Current Expenditure billion Rs percent of GDP
during FY21 5000 1.0 1.0 0.25 percent of GDP
Pension, 4000 0.8 0.8
10.0 0.20
Others, 38.5
3000 0.6 0.6
Defence 2000 0.15
0.4 0.4
, 30.0
1000 0.2 0.2 0.10 0.19 0.21
0.17
0 0.0 0.0 0.18 0.12
Civil govt. , Subsidies, FY16FY17FY18FY19FY20FY21 0.05
FY17 FY18 FY19 FY20 FY21
11.5 grants, & PSE
loans, 10.0 Defence Subsidies Others 0.00
Civil govt. Pensions Food and agri

FY17

FY18

FY19

FY20

FY21
Grants Others Power
Data source: Minstry of Finance Loans to PSEs Total subsidies (rhs)

The Circular debt of the power sector rose to Rs 2,280.2 Net Profit/Loss of State Owned Figure 4.2.5
billion in FY21,18 amounting to 4.8 percent of GDP. The Enterprises
major drivers of the accumulation of arrears included
billion Rs
delays in adjustment of power tariffs, DISCO’s operation 300.0 204
losses, and un-paid subsidies. To arrest the accumulation
of power sector arrears and ensure a sustained decline in 150.0 61
the circular debt stock, the government has prepared a
Circular Debt Management Plan (CDMP) in consultation 0.0
with the World Bank, ADB and the IMF. The plan -150.0
included short and medium term measures to achieve the -143
reduction in the debt stock such as automatic quarterly -187
-300.0 -237
adjustment of power tariffs; rationalizing subsidies by -286
improving targeting; and renegotiating power purchase -450.0
FY14

FY15

FY16

FY17

FY18

FY19
agreements with IPPs.

The inefficiencies in PSEs are emerging from governance Source: Ministry of Finance
issues, political interventions and other administrative
factors. In overall terms, PSEs are showing consistent losses since FY16 (Figure 4.2.5), with the sum of the losses
of top-10 loss-making PSEs contributing around 90 percent to the total losses each year. NHA, Pakistan Railways,
PIA and power sector DISCOs are among the major, top 10 loss-makings PSEs.

Expediting reforms in power sector and PSEs is crucial to lower the fiscal burden arising from their inefficiencies.
These reforms should aim at improving governance, transparency and efficiency, strengthening monitoring,
advancing privatization, enhancing legal/ regulatory framework, by m inimizing government’s interference in
PSEs’ operation, etc. Moreover, the power sector reforms should aim at rationalizing subsidies, boosting
antitheft and collection efforts, upgrading generation and transmission infrastructure, expediting privatization of
loss making DISCOs.

During FY21 as a part of transition towards with the commercial banks and shift their
Treasury Single Account (TSA), the balances to these accounts with the underlying
government introduced some reforms in the objective of consolidation of cash resources by
procedure of release of development funds to maintaining single account with SBP. The
ministries. Specifically, the government ministries received disbursements from the
introduced a system where various ministries federal government for undertaking
were required to open Assignment Accounts development projects in these accounts.
with the National Bank of Pakistan, which is a However, anecdotal evidence suggests that
part of non-food account of the Government of delays in adopting to these new procedures
Pakistan maintained by the central bank. The led to slowdown in the disbursement of funds
ministries were advised to close all accounts to various ministries, which in turn hampered

18 NEPRA (2021). State of Industry Report. Islamabad: NEPRA.

89
State Bank of Pakistan Annual Report 2020-2021

the pace of development spending during Jul-

Mar FY21. However, these restrictions were Average PSDP Release Figure 4.19
relaxed towards the last quarter of FY21, Authorization of the Major
leading to a 6-years high increase in PSDP Projects since FY15 (billion Rs)
Power
development spending during Q4-FY21. 100.0
Others 75.0 Infrastructure
An analysis of the last five years reveals that 50.0
the composition of PSDP projects was mainly 25.0
tilted towards infrastructure spending such as Transport 0.0 Education
construction of road, dams, bridges and
programs aiming at social and regional
Water and
development (Figure 4.19). However, various Health
sanitation
structural and administrative bottlenecks have Development
This analysis is conducted on 70 percent of the PSDP
hindered the timely completion of these goals
projects for the last five years.
projects (Box 4.3). Source: Planning Commission

Box 4.3: Delays in Execution of Public Sector Development Program (PSDP) in Pakistan

Public sector spending is instrumental for the development of human and physical capital of a country.
Sustained increase in public investment scale up productivity growth and crowd in private investment [Bivens
(2012)]. However, these benefits are contingent upon efficient execution of various development projects within
stipulated timeframe. The timely completion of projects not only provides fiscal space for new development
priorities, this also prevents additional burden on the fiscal resources by avoiding cost overruns, caused by
project delays. In this context, Pakistan’s performance during the past few years highlights delays in the timely
completion of PSDP projects. The experience of some recent years shows a consistent decline in the budget
allocation for PSDP expenditures. However, the actual development expenditures could not keep pace even with
the reduced allocations (Figure 4.3.1). This is particularly true for the infrastructure projects such as roads,
bridges, and dams and the national development goals including achievement of Sustainab le development goals
(SDGs) and population welfare programs. The frequent delays result in the accumulation of throw forward
liabilities, which squeeze the availability of fiscal resources for executing newer projects.
A number of challenges can be identified including dearth of financial resources, inadequate project management
skills and lack of coordination between various government institutions, which has hampered the timely
completion of various PSDP projects. The continued gap between the budgeted, released, and actual funding for
Federal PSDP - Budget Allocation versus Actual Expenditure Figure 4.3.1
percent of GDP
3.0
3.0 2.9
2.5
2.4 2.5
2.0 2.3
2.1 2.1
2.0 1.9 1.8 1.9
1.5 1.8 1.8 1.7
1.6 1.6 1.6
1.5 1.6 1.5 1.5
1.0 1.3 1.4 1.4

0.5

0.0
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21

PSDP Budget allocation Actual PSDP expenditure

Source: Ministry of Finance and Planning Commission

PSDP projects highlights the need to reform the PSDP implementation process to ensure achievement of planned
development agenda of the government. The delays also highlights issues in funding and the impediments in the
implementation procedures such as procurement processes, appointment of contractors, land acquisition, etc.
Moreover, lack of adequate project execution capacity particularly in the special areas and line ministries also
affects the timely completion of the projects [Pasha et al (2012)].

90
 Fiscal Policy

Bottlenecks of Monitored Projects during 2011-2018 (Sector wise Number of Projects) Table 4.3.1:
Sr. No. Major Issues Others Social Infrastructure Total
1 Delay in release of funds 113 164 176 453
2 Management capacity 32 236 90 358
3 Delay in procurement 47 35 56 138
4 Co-ordination issues 11 47 40 98
5 Land acquisition 51 27 18 96
6 Delay in recruitment 13 33 47 93
7 Law and order situation 38 12 27 77
8 Governance issues 1 58 12 71
Delays in consultants'
9 27 28 8 63
appointment/designing
10 Lack of decision making 5 37 11 53
11 Contractor's problem 11 35 4 50
12 Turnover of project director/staff 9 23 15 47
13 Non-existence of PMUs* 0 32 5 37
* PMUs: Project Management Units. Note: The above-mentioned 13 issues have been identified from around 500 projects for
the time period 2011-2018
Source: Shah, S.A. (2018). Appraisal of PSDP Projects’ Implementation.
Major factors underlying delays in the completion of PSDP projects19
Lags in the release of funds: During 2011-2018, delay in release of funds led to a slowdown in completion of
around 453 projects out of a total 500 (Table 4.3.1) [Shah (2018)].
Issues in land acquisition: Lack of collaboration between various government agencies, and governance issues
lead to delays.
Lack of project management and implementation capacity: Weak project management and implementation
capacity arising from lack of decision making, mismatch between the required and actual skill set of human
resources, governance issues, coordination issues, delay in recruitment, absence of Project Management Un its
(PMUs), are some impediments in the timely completion of projects. The problems regarding management
capacity exist particularly in the social sector projects (Table 4.3.1).
Lack of coordination between federal/provincial/local leads to wastage of considerable time for settlement of
such issues.
Delay in procurement. Insufficient knowledge about Public Procurement Rules (PPR) leads to delay in
procurement of the machinery and other inputs.
Weak project design: Abrupt changes in the planned PSDP program, for instance, by introduction of new projects
in the middle of the year also affects the functioning of overall projects.
Other issues: Generic problems on the part of project directors and interrelated ministries like, fulfillment of
formalities, preparation of progress reports, unexpected delays in procurements, and non-availability of human
resource are some other reasons explaining the gaps between authorized/released funds and their actual
realization.
Nonetheless, the bottlenecks in the timely and efficient completion of infrastructure PSDP projects can be
partially removed by considering the following aspects: (i) various stakeholders across federal, provincial, and
local governments should be taken on board to devise some principles for the execution and handling the mega
projects, which require higher funds and time. This cooperation should aim to ensure insulation of the project
design and implementation from the negative administrative and political influences, guidance of the projects
through research based motives and clearly defined goals and targets, well defined alternatives, involvement of
citizens support, and establishment of the research organizations for the collection, research, and monitoring of
the projects [Haque et al (2020)]; (ii) As suggested by United Nations Department of Economic and Social Affairs
(UNDESA), developing guidance material 20 for the local and subnational governments is helpful for

19This analysis draws heavily from our discussion with the concerned government representatives.
20 Theterm refers to the procedures which are used to improve monitoring and reporting capacities,
strengthening data utilization, data informed decisions and improvement in the knowledge and awareness of
policy makers.
91
State Bank of Pakistan Annual Report 2020-2021

operationalizing the existing projects and facilitating their timely completion; (iii) The implementation of Public
Financial Management (PFM) reforms will help streamline PSDP projects’ identification and implementation by
facilitating PSDP release strategy, technical approvals, etc.; (iv) The quality of project management should be
improved by providing training to the relevant staff and by ensuring appointment of project managers with the
required skills and expertise; and (v) Simplification of land acquisition process. The government has already
introduced various reforms for improving the ease of doing business. The continued thrust of these reforms in
simplification of land acquisition process will introduce efficiency in the implementation of PSDP projects.
References
Bivens J. (2012). Public Investment: The Next New Thing For Powering Economic Growth.
([Link]/publication/bp338-public-investments/)
Pasha, H., Imran, M., Iqbal, A., Ismail, Z., Sheikh, R., & Sherani, S. (2012). Review and Analysis of Pak istan’s
Public Investment Program: Phase-I Report on Macro-Fiscal and Development Framework. IGC.
Shah, S.A. (2018). Appraisal of PSDP Projects’ Implementation
([Link]/uploads/pub/Appraisal_of_PSDP_Projects_Implementation.pdf)
Shah, S.A. (2018). Framework for Optimization of Projects Implementation
([Link]/uploads/report/project_opt.pdf)
Haque, N. U., Mukhtar, H., Ishtiaq, N., & Gray, J. (2020). Doing Development Better. PIDE Books.
UNDESA (2019). Capacity Development for 2030 Agenda Implementation: Needs and Gaps from Voluntary
National Reviews. Geneva: UNDESA

4.5 Provincial Fiscal Operations The provincial revenues rose by 15.0 percent
in FY21 as compared to 8.2 percent last year
Provinces posted a combined surplus of Rs (Table 4.6). All provinces recorded a double-
313.6 billion during FY21, exceeding the digit growth in total revenues except
annual target of Rs 242.0 billion. Major Balochistan.
contribution came from Punjab and KP. This
was achieved by a higher growth in total Provincial own revenues remained upbeat
provincial revenue that surpassed the increase during FY21
in total expenditure during the year (Figure
4.20). The provincial own revenue collection went
up by 27.7 percent during FY21 compared to
Provincial Revenue 5.7 percent last year. The major impetus came
from GST on services, and motor vehicle tax
Provincial Surplus Figure 4.20 (Figure 4.21). A revival in the economic
activity, higher imports, and turnaround in
billion Rs
400.0 automobile sales primarily explain this
increase.
300.0
This improvement was seen despite tax relief
200.0
measures announced by the provincial
100.0 governments in the FY21 budgets to support
the economic activity. Specifically, Punjab
0.0 government reduced GST on services from
16.0 percent to 4.0 percent for around 20
-100.0
FY17 FY18 FY19 FY20 FY21 services including hotels, wedding halls, IT
Punjab Sindh KP Balochistan
service providers, property dealers,
agriculture service providers, and tax
Source: Ministry of Finance
consultant agents etc.21 Furthermore, the

21 Tax Relief Measures by Punjab Revenue Authority ([Link]).

92
 Fiscal Policy

Provincial Fiscal Operations Table 4.6 Sindh during FY21. The categories with major
billion Rupees; growth in percent contributions were port, airport, and terminal
YoY operations followed by franchise, banking,
Growth
FY20 FY21 FY2 FY2 telecom, and insurance services.
A. Total revenue 3241.0 3728.0 0
8.2 1
15.0 Provincial non-tax revenues increased by 46
(a+b+c)
a. Provincial share in 2504.0 2741.9 4.4 9.5 percent in FY21 compared to 18.6 last year. KP
fed.
b. Fedrevenue
loans and 221.0 327.5 100.9 48.2 had the largest contribution in this growth
transfers
c. Provincial own 516.0 658.7 5.7 27.7
revenue emanating from higher hydel electricity
Taxes 413.6 508.4 2.9 22.9
Non-taxes
generation that led to an increase in profits.
102.4 150.3 18.6 46.8
B. Total expenditures 3163.9 3614.4 10.7 14.2 Provincial Expenditures
(a+b)
a. Current 2541.9 2844.2 8.1 11.9
b. Development 621.9 770.2 22.9 23.8
Provincial current spending rose by 11.9
Statistical discrepancy -147.8 -200.0 - -
percent during FY21 compared to 8.1 percent
Overall balance (A-B) 77.06 313.62 -44.5 307.0
last year. Major areas of spending were
Source: Ministry of Finance
general public service including transfers to
services for health insurance, medical district and local governments, financial,
consultation, and bedroom charges for fiscal, and legislative affairs; economic affairs
hospitals were tax exempted in the budget for which mainly covers agriculture, food,
FY21. Similarly, Sindh government provided construction, transport; and health (Figure
GST exemptions to various services such as 4.22).
export of call centers, health insurance
services. The provincial development expenditures
surged by 23.8 percent during FY21 compared
The tax collection in Punjab grew by 18.3 to 22.9 percent last year. Broadly, all provinces
percent in FY21, against a1.5 percent reduction contributed to this upswing during the year.
last year. The collection primarily came from
GST on services and motor vehicle tax. Provincial health spending saw a significant
Moreover, cross-input tax adjustment between expansion for facilitating measures to handle
FBR and the Punjab Revenue Authority pandemic induced disruptions. These
during FY21 also contributed to the province’s expenditures were mostly directed towards
tax revenue collection. improvement of hospital and public health
services.
Sindh’s revenue performance also remained
strong during FY21. The recovery in imports KP government focused on higher health
and telecom sector mainly explains the spending during the year by providing better
increase in collection from GST on services in hospital services (Figure 4.23). The ‘Sehat

Growth Contribution of Provincial Figure 4.21 Growth Contribution of Figure 4.22

Own Revenue Collection Provincial Current Expenditures
percent
percent
15.0 4.5
12.0 3.0
9.0
1.5
6.0
0.0
General public service

Health

Others
Economic affairs

3.0
Public order

Education

0.0

-3.0
GSTS Excise Stamp Motor Other
duties duties vehicles
FY20 FY21 tax
Source: Ministry of Finance
Source: Ministry of Finance
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State Bank of Pakistan Annual Report 2020-2021

Provincial Development Priorities during FY21 (billion Rs) Figure 4.23

Punjab Sindh KP Balochistan

General public service Public order Economic affairs

Environment Housing Health
Culture Education Social protection
General public services includes the financial, legislative, and fiscal affairs of the provincial governments. Economic affairs
constitute transport, construction, food,, agriculture, energy, and other industries.
Source: Ministry of Finance

Sahulat Program’ was initially launched in KP last year. Following KP’s experience, Punjab
in 2015 to provide health insurance services to also launched ‘Sehat Sahulat Program’ in FY21
the masses. The coverage of this program was with coverage across the whole province
enhanced in the subsequent years and was (registered with NADRA), aiming at
transformed into a universal health coverage providing free health facilities.
in FY21.
Sindh also showed a growth of 19.6 percent
The development priorities of Punjab during the year compared to a reduction last
remained uniform across sectors such as year. Social protection, food and agriculture
housing, health, education, social protection constituted a major portion of development
during the year. The province’s development expenditures. The main focus of social
expenditures grew by 35.0 percent in FY21 protection was on women and childhood
against 9.4 percent last year. Specifically, the development. The development spending in
health spending of the province doubled to Rs Balochistan mainly focused on education,
53.8 billion in FY21 compared to Rs 26.1 billion culture, housing, and social protection.

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