1. Expenditure Management & Resource Mobilization Pakistan Development Forum November 15, 2010 Finance Division 1

2. 2 Reform Agenda Stabilization through Structural Reforms while protecting the Poor

3.  Improving Public Expenditure Management  Containing Fiscal Deficit  Elimination of General Subsidies to be replaced by Targeted Subsidies  Restructuring of Public Sector Enterprises  Improving Domestic Resource Mobilization  Introduction of Reformed General Sales Tax ( RGST)  Harmonization of Tax Administration  Strengthening Risk Based Audits 3 Pillars of Reform

4. Review of Previous Years YearRs in billionAs % of GDP TargetActualTargetActual 07-084237784.07.6 08-095826804.75.2 09-107629295.16.3 Containing Fiscal Deficit What went wrong? 07-08:Inherited 08-09:Punjab overshot credit limit 09-10:Additional Power Sector subsidy, enhanced security related expenditures, FBR Revenue short-fall

5. Federal Budget Provincial Budgets Post-flood Budget National Deficit (Federal + Provincial)-685-877-812 % of GDP-4.0%-5.1%-4.7% Federal Deficit-852-835-801 % of GDP-5.0%-4.9%-4.6% Flood relief % of GDP - --0.4% Provicial Surplus167-4261 % of GDP1.0%-0.2%0.3% Flood relief % of GDP - -0.5% Provision for Flood Relief - --150.0 % of GDP - --0.9% Rs billion Containing Fiscal Deficit (2010-11)

6. Containing Fiscal Deficit (2010-11) 4.7% of GDP Rs. Billion Federal Government224 Additional revenue measures60 Expenditure reduction164 Current24* Development140 Provincial Government137 Additional revenue measures6 Expenditure reduction131 Current20 Development111 Total Federal + Provincial361 * Includes freezing of non-salary current expenditure at last year’s level

7.  Limits imposed on Borrowings of Federal and Provincial governments through amendments in the SBP Act  Permanent Committee of Finance Ministers (Fed and Prov.) established for Budgetary Oversight through 18 th Amendment  Austerity Measures for expenditure control approved by Cabinet (Incl. PSEs Re-structuring, elimination of general subsidies) 7 Maintaining Fiscal Discipline Structural Reforms (Implemented) Cont..

8.  Supplementary Grants limited to 10 percent of Budget appropriations with mandatory Cabinet approval  Medium-Term Budgetary Framework with prescribed expenditure ceilings  Sub-Committee of Finance Secretaries (Fed and Prov.) established for Budgetary Oversight 8 …. Maintaining Fiscal Discipline Other Mechanisms

9.  Petroleum subsidies fully eliminated  Expanding role of private sector in commodity operations  Structural reduction in Public procurement of wheat- limited to strategic reserves  Role of Public Sector (TCP) in sugar imports eliminated 9 Elimination of General Subsidies Structural Reforms (Implemented)

10. PSEs burdening the Budget – A Sample 10 Restructuring of Public Sector Enterprises PSESupport Provided out of Budget (FY 10) Nature of Support PIA9Equity PASSCO3Wheat TCP31Commodity Operations USC4Subsidy Railways22Revenue Deficit Pak Steel3Equity PEPCO (Power Sector)147Subsidy Total2191.5% of GDP Rs. Billion

11.  Dissolution of PEPCO by 30 th June 2011  Cabinet approval obtained for restructuring of 8 major PSEs  Cabinet Committee on Restructuring (CCOR) headed by the Finance Minister empowered to appoint professional management Boards, and CEOs  CCOR empowered to approve financial and management restructuring plans  Post-restructuring some PSEs to be privatized  Restructuring of Railways and Pak Steel initiated 11 Restructuring of Public Sector Enterprises (PSEs) Structural Reforms (on-going)

12.  Power sector subsidy limited to Rs.66 b. against a demand of Rs.256 b. (FY 11)  NEPRA Law amended to allow for monthly fuel adjustment  Cabinet decision to cap rental power to ensure affordability  Debt stock of power sector companies (Rs.301 b.) transferred to Holding Company with debt servicing borne by Budget (FY 10: Rs.30 b. FY 11: Rs.40 b.) 12 Power Sector Reforms Structural Reforms (Implemented)

13.  Full cost recovery by June 30, 2011  Periodic increases in power tariff since March 2008 notified (60 percent cumulative increase till November 2010 achieved)  Comprehensive power sector reforms with institutional, regulatory and financial restructuring initiated  Privatization of DISCOs to be fast tracked  Empowerment of NEPRA to notify tariffs 13 Power Sector Reforms Structural Reforms (On-going)

14. 14 Resource Mobilization Improving tax to GDP ratio from existing 9% to 12% in the medium term and 15% by 2015

15.  Reformed GST on Goods and Services in integrated mode  Exemptions minimized  Domestic zero rating & special rates eliminated  Federal legislation introduced in Parliament on Nov. 12, 2010  Harmonized provincial legislation on services being finalized by a representative Technical Committee headed by Federal Finance Secretary  Automated Expeditious Sales Tax Refund System operational 15 Resource Mobilization Key Initiatives

16.  Harmonization of Tax Administration by creating Inland Revenue Service  Tax administration provided with administrative structure and technology to undertake assessments of income tax, sales tax and federal excise  R-GST and Harmonization of tax administration expected to assist in improving tax-to-GDP ratio by 2.4 percent of GDP in the medium term  Re-introduction of risk based audit and enforcement  Customs modernization reforms  simplifying, standardizing and automating customs clearance procedures  strong post-clearance audit controls 16 Resource Mobilization Key Initiatives

17.  Capital Gains Tax (CGT) on trade in equities  Surcharge @ 10 percent of income tax liability (Expected Revenue Rs.31 b.)  1% point increase in special Excise on dutiable items (Expected Revenue Rs.11 b.)  FBR focusing on management by objectives and accountability through performance benchmarks 17 Resource Mobilization – Other Initiatives

18. 18 Pakistan is on the path of reform; We look forward to the continued support of our development partners