An Analysis of Budget Deficits, Debt Accumulation, and Debt Instability

In Pakistan all the macro indicators have been adversely affected by the persistently high deficits and the strategy adopted to finance them in the last two decades. The excessive domestic borrowing at high rates to finance deficits without any attempts at domestic resource mobilisation and controlling of the deficits over extended periods absorbed all available domestic and external resources. The resulting debttrap led to increased external borrowings at high rates with short-term maturity. This, coupled with massive exchange rate depreciation throughout the last two decades, resulted in rapid debt accumulation. The recent fiscal space created in the wake of events of 9/11, resulting in high reserves, follows considerable debt relief and availability of massive funds on very soft terms. However, the decline in budget deficit continues to occur at the expense of development expenditure, along with some increase in tax revenues. This trend in expenditure needs to be reversed if serious progress in debt reduction is the aim.

Elasticity and Buoyancy of the Tax System in Pakistan

This paper examines the elasticity and buoyancy of the tax system for the period 1974-75–2003-04. The elasticity of the total tax revenue both with respect to the total GDP and the non-agricultural GDP base is less than unity. Overall, sales tax takes the lead by way of improving revenues. The high coefficient of income tax inclusive of withholding tax, which is an indirect tax, is high. Excluding the withholding tax leads to a lower coefficient. Sales tax with respect to imports and manufacturing also takes care of loss of revenue due to lowering of tariff and excise duties. However, the sales tax coefficient with respect to the GDP base reflects the inclusion of service sector and utilities in the sales tax net, which has serious implications for the poor. The estimates of buoyancy suggest that tax changes did not lead to significant revenue augmentation. The low buoyancy of income tax exclusive of the withholding taxes implies that imposition of massive withholding taxes coupled with an increase in the taxable income limits is working at cross purposes.Taxation, Tax Revenues Pakistan

Civil Servants’ Salary Structure

The paper looks at the trends in nominal and real salaries of the Federal Government employees over the period 1990-2006. It examines the structural defects in the existing salary structure and the anomalies in the allowances structure to show that appropriate remuneration for the civil servants requires serious and urgent consideration. The widening gap in the emoluments of government employees versus the public sector corporations and private sector employees has a strong bearing on the motivation and ability to work. The paper makes serious recommendations to overhaul the existing structure of salaries and perks to make the public sector employment competitive and cost-effective.nominal and real salaries, salary, public sector

Inflation in Pakistan: Empirical Evidence on the Monetarist and Structuralist Hypotheses

In the light of the debate between the monetarists and the structuralists regarding the explanation of inflation- in the LOCs this paper tests the monetarist and structuralist hypotheses to determine the possible factors affecting the inflationary process in Pakistan. After examining the two hypotheses the study concludes that in addition to monetary factors, the structural factors peculiar to the economy of Pakistan also have to be considered for a better understanding of this phenomenon

Elasticity and Buoyancy of the Tax System in Pakistan

This paper examines the elasticity and buoyancy of the tax system for the period 1974-75–2003-04. The elasticity of the total tax revenue both with respect to the total GDP and the non-agricultural GDP base is less than unity. Overall, sales tax takes the lead by way of improving revenues. The high coefficient of income tax inclusive of withholding tax, which is an indirect tax, is high. Excluding the withholding tax leads to a lower coefficient. Sales tax with respect to imports and manufacturing also takes care of loss of revenue due to lowering of tariff and excise duties. However, the sales tax coefficient with respect to the GDP base reflects the inclusion of service sector and utilities in the sales tax net, which has serious implications for the poor. The estimates of buoyancy suggest that tax changes did not lead to significant revenue augmentation. The low buoyancy of income tax exclusive of the withholding taxes implies that imposition of massive withholding taxes coupled with an increase in the taxable income limits is working at cross purposes

Determinants of Money Multipliers

In the present day world of fairly well-developed banking systems where money stock in an economy is jointly determined by the policies of .the Central Bank, the scheduled banks and the non-bank public, the determination of money stock is an important variable in the formulation of an appropriate monetary policy. In Pakistan however very, frequent and significant changes in money supply during the fiscal year suggest strong arbitrariness in the formulation and implementation of the monetary policy. There are various approaches to the process of money stock determination, one approach is through money multipliers. Changes in money multipliers reflect the portfolio decisions of the commercial banks, non-bank public and the monetary authority. Extensive developments in the theory and applied research in the formulation of money multipliers by Friedman and Schwartz (1960); Brunner and Meltzer (1964); Hosek (1970); Bomhoff (1977) and others have estimated money _ multipliers for the industrialised ecOnomies but with the exception of Hosek they treat the determinants of the money multipliers as exogenous and are taken as given. However the determinants of money multipliers depend on various interest rates and measures of economic activity which are not constant

An Analysis of Budget Deficits, Debt Accumulation, and Debt Instability

In Pakistan all the macro indicators have been adversely affected by the persistently high deficits and the strategy adopted to finance them in the last two decades. The excessive domestic borrowing at high rates to finance deficits without any attempts at domestic resource mobilisation and controlling of the deficits over extended periods absorbed all available domestic and external resources. The resulting debttrap led to increased external borrowings at high rates with short-term maturity. This, coupled with massive exchange rate depreciation throughout the last two decades, resulted in rapid debt accumulation. The recent fiscal space created in the wake of events of 9/11, resulting in high reserves, follows considerable debt relief and availability of massive funds on very soft terms. However, the decline in budget deficit continues to occur at the expense of development expenditure, along with some increase in tax revenues. This trend in expenditure needs to be reversed if serious progress in debt reduction is the aim

P-Star Model: A Leading Indicator of Inflation for Pakistan

The P-star inflation model is based on the long-term quantity theory of money and puts together the long-term determinants of the price level and the short-run changes in current inflation. The P-star model-based indicator has replaced the previous monetary policy procedures in a number of countries because it offers by far more information and predictive power than monitoring movements in money supply and the rate of monetary growth. In this paper we used the P-star model to calculate the leading indicator of inflation, and also to test the forecasting performance of the P-star model-based leading indicator of inflation. The results of the study show that compared to the simple autoregressive model and the M2 growth augmented model, the P-star model can be used to obtain the leading indicator of inflation in Pakistan because it has additional information about the future rate of inflation. Therefore, this paper provides a useful tool to the policy-makers to assess the future movement of inflation in Pakistan.

P.R. Brahmananda. Growth/ess Inflation by Means of Stockless Money: A New Classical Treatise on Rising Prices. Bombay: Himalaya Publishing House. 1981. pp.xvi+471. Price: Rs.9S.00.

Traditionally inflation has been seen as a purely economic problem. In recent years studies have emphasized that the present day inflation is more than an economic problem. It has deep roots in the political and social systems which have strong connections with the economic mechanism of society. Inflation is analysed and conceptualized as :I problem in political economy. It is a worldwide phenomenon but it has become most pertinent in the case of developing countries where the socio-economic fabric of the society is far removed from that of the developed countries on whose experience the prevalent economic theories of inflation are based. As such when the theories completely divorced from reality are applied in the developing economies they aggravate the situation further. The book under review is free from this blemish as it examines the problem of inflation with reference to the socio-economic and political set-up of the developing countries in general and to the Indian situation in particular