PAKISTAN'S ENERGY CRISES AND IT'S CIRCULAR DEPT / PROPERTY TAX

PAKISTAN'S ENERGY CRISES AND IT'S CIRCULAR DEPT:

Pakistan has a big problem with its power sector. The power sector is the part of the economy that makes and delivers electricity. The problem is that Pakistan does not have enough electricity for its people or businesses. The country faces frequent power cuts, high electricity prices, poor service quality, and environmental damage. This problem is caused by many years of bad governance and policies in the power sector.

One of the main causes of this problem is circular debt, which is a type of public debt that builds up in the power sector because of subsidies and unpaid bills. Subsidies are money that the government gives to some consumers to help them pay for electricity. Unpaid bills are money that some consumers do not pay for electricity. Circular debt happens when an entity that has cash flow problems does not pay its suppliers or creditors. Cash flow problems are when an entity does not have enough money to pay for its expenses. Suppliers and creditors are entities that provide goods or services or lend money to another entity. When one entity does not pay its suppliers or creditors, it causes problems for other entities that are also part of the payment chain.

WHAT IS CIRCULAR DEBT?

Circular debt is a situation where one entity owes money to another entity, which in turn owes money to another entity, and so on. This creates a vicious cycle of debt that keeps growing over time.

In Pakistan's power sector, the main sources of circular debt are the electricity-making and delivering companies, such as WAPDA, DISCOs, and GENCOs. They are unable to recover their costs from consumers because of low tariffs, high losses, theft, and inefficiency. Tariffs are prices that consumers pay for electricity. Losses are the electricity that is wasted or stolen during moving or delivery. Theft is when some consumers use electricity without paying for it. Inefficiency is when some entities use more resources than necessary to make or deliver electricity. They also face delays in receiving subsidies from the government, which are often too little to cover their expenses. As a result, they owe a lot of money to independent power producers (IPPs), fuel suppliers, and other creditors. IPPs are private companies that make electricity and sell it to the government or other entities. Fuel suppliers are companies that provide oil, gas, coal, or other fuels to make electricity. Other creditors are banks or other entities that lend money to the power sector entities.

According to the latest data, the circular debt of Pakistan's energy sector has reached a very high level of Rs4.177 trillion ($23.6 billion). The circular debt in the electricity sector is Rs2.277 trillion ($12.9 billion), while Pakistan State Oil’s (PSO) debt is Rs600 billion ($3.4 billion). PSO is a state-owned company that supplies oil and gas to the power sector and other sectors. The circular debt in the gas sector is Rs1.400 trillion ($7.9 billion). The circular debt is increasing by Rs129 billion ($0.7 billion) per year.

HOW CIRCULAR DEBT AFFECTS PAKISTAN'S ENERGY SECTOR?

Circular debt has negative impacts on Pakistan's economy and society. It affects the financial health of the power sector entities, worsens the energy shortage, increases the cost of living, and harms the environment.

Circular debt makes the power sector entities financially weak, reduces their ability to invest in new capacity and maintenance, increases their dependence on expensive and imported fuels, and exposes them to default risks. Financially weak means that they do not have enough money to run their operations or pay their debts. New capacity means new power plants or equipment that can make more electricity. Maintenance means repairing or upgrading existing power plants or equipment to keep them working properly. Default risks mean that they might not be able to repay their loans or obligations.

Circular debt also reduces the confidence of investors and creditors, discourages private sector involvement, and increases the fiscal pressure on the government. Investors and creditors are entities that provide money or resources to another entity in exchange for a return or benefit. Private sector involvement means the involvement of private companies or individuals in making or delivering electricity. Fiscal pressure means pressure on the government's budget or finances.

Moreover, circular debt worsens the energy shortage, lowers the quality and reliability of service, increases the cost of production and living, and affects the welfare of consumers and businesses. Energy shortage means not having enough electricity to meet the demand or needs of people and businesses. Quality and reliability of service mean how well or consistently electricity is delivered to consumers without interruptions or fluctuations. Cost of production and living means how much money it takes to make goods or services or to buy basic needs. Welfare means well-being or happiness.

Circular debt also has environmental consequences. It forces the power sector entities to rely on inefficient and polluting sources of energy, such as oil and coal. This increases greenhouse gas emissions and contributes to climate change. Greenhouse gas emissions are gases that trap heat in the atmosphere and cause the Earth's temperature to rise. Climate change means changes in the Earth's weather patterns and conditions that affect people and nature negatively. It also causes air pollution and health problems for the people.

WHAT CAN BE DONE TO SOLVE CIRCULAR DEBT?

To solve the circular debt problem, Pakistan needs to make major reforms in its power sector. Some of the important steps include:

• Adjusting tariffs to reflect costs and eliminating subsidies
• Improving billing and collection efficiency to reduce losses and theft
• Improving governance and accountability of power sector entities
• Promoting competition and private sector involvement
• Diversifying energy sources and increasing renewable energy share
• Improving energy efficiency and conservation
• Strengthening regulatory framework and enforcement
• Mobilizing domestic and external resources for investment

These reforms require strong political will, institutional capacity, stakeholder consensus, and public support. They also need to be in line with the broader economic and social policies of the government. Only then can Pakistan overcome its power problem and achieve sustainable development.

CONCLUSION:

Circular debt is a big problem that plagues Pakistan's power sector. It is a result of poor governance and policies that have been followed for decades. It affects the financial health of the power sector entities, worsens the energy shortage, increases the cost of living, and harms the environment. To solve this problem, Pakistan needs to undertake comprehensive reforms that can improve the efficiency, reliability, affordability, and sustainability of its power sector.

PROPERTY TAX:

Property tax is a type of tax that you pay on the value of your property, such as land or buildings. It is usually calculated by a local government where your property is located and paid by you as the owner of the property. Property tax is used to fund public services and improvements that benefit the community, such as roads, schools, libraries, fire protection, etc.

In Pakistan, property tax is a provincial tax, which means that each province has its own rules and rates for property tax. Property tax is based on the annual rental value of your property, which means how much rent you could get if you rented out your property. Property tax rates and valuation tables vary by province and by type of property. Generally, residential properties have lower tax rates than commercial properties, and urban properties have higher tax rates than rural properties. Property tax rates also depend on whether the property is rented out or self-occupied, with rented properties having higher tax rates than self-occupied properties.

Property owners have to pay property tax every year to the provincial excise and taxation department. They can pay their property tax online or through designated banks. Property owners can also apply for exemptions or discounts for the property tax if they meet certain criteria, such as being senior citizens, widows, disabled persons, etc.

TYPES OF TAXES:

Types of taxes related to property in Pakistan that are collected by the Federal Board of Revenue (FBR). These include:

Capital Value Tax (CVT): This is a tax that you pay when you buy a property. It is 2% of the recorded value of the property.

Capital Gains Tax (CGT): This is a tax that you pay when you sell a property and make a profit. The tax rate depends on how long you have owned the property and how much profit you have made. The tax rate ranges from 5% to 20%.

Withholding Tax (WHT): This is a tax that both the buyer and the seller pay when they transfer a property. The tax rate depends on whether they are income tax filers or not. The tax rate for filers ranges from 1% to 2%, while the tax rate for non-filers ranges from 4% to 5%.

These taxes are part of the income tax system in Pakistan and are used to fund federal government expenditures.

Changes and Updates in Property Tax System in Pakistan in 2023

In 2023, there are some changes and updates in the property tax system in Pakistan that you need to be aware of. These are:

Deem Tax: This is a new tax that is imposed on unused or additional properties worth more than Rs. 25 million. The government assumes an income of 5% of the fair market value of such properties and taxes it at 20%. This means that you have to pay 1% of the value of your extra properties as deem tax every year. This does not apply to your first property whether house or plot. This measure aims to discourage hoarding of properties and encourage productive use of land.

Capital Gain Tax Period: The period for capital gain tax has been increased from 4 years to 6 years. This means that if you sell your property within one year, you have to pay 15% tax on your profit; if you sell it after two years, you have to pay 12.5% tax; if you sell it after three years, you have to pay 10% tax; if you sell it after four years, you have to pay 7.5% tax; if you sell it after five years, you have to pay 5% tax; if you sell it after six years, you have to pay 2.5% tax; and if you sell it after seven years or more, you don't have to pay any capital gain tax.

Advance Tax Rate: The rate of advance tax on sale and purchase of property has been increased for both filers and non-filers. For filers, the rate has been increased from 1% to 2%; for non-filers, the rate has been increased from 4% to 6%. This means that both the buyer and the seller have to pay more advance tax at the time of transfer of property.

These changes are expected to generate more revenue for the government and also to regulate the real estate sector in Pakistan. However, they may also have some negative impacts on the property market, such as reducing the demand and supply of properties, increasing the cost of transactions, and discouraging investment and development.

Reasons and Impacts of Changes and Updates in the Property Tax System in Pakistan in 2023

The main impacts of these changes and updates in the property tax system in Pakistan in 2023 are:

Positive impacts: These changes and updates may have some positive impacts on the property market and the economy, such as:

Increasing tax revenue for the government: These changes and updates may increase tax revenue for the government, which can be used to finance public services and improvements that benefit the community.

Curbing tax evasion and corruption: These changes and updates may curb tax evasion and corruption in the real estate sector, which can improve governance and trust in the system.

Promoting economic growth and development: These changes and updates may promote economic growth and development in the country, which can improve living standards and well-being of the people.

Negative impacts: These changes and updates may also have some negative impacts on the property market and the economy, such as:

Reducing demand and supply of properties: These changes and updates may reduce demand and supply of properties, as they increase the cost of transactions and discourage investment and development. This may lead to lower sales volume, lower prices, lower profits, lower returns, lower growth, etc.

Increasing inflation and interest rates: These changes and updates may increase inflation and interest rates, as they increase the money supply and demand in the economy. This may lead to higher costs of living, higher costs of borrowing, higher risks of defaulting, lower savings, lower investments, etc.

SOLOW MODEL AND ECONOMIC OVERVIEW

SOLOW MODEL:

The Solow model is a way of thinking about how an economy grows over time. It says that the economy produces one good using machines and workers. The more machines and workers there are, the more the economy can produce. But machines wear out over time and need to be replaced, and workers also increase over time as the population grows. So the economy needs to save some of its production to invest in new machines and keep up with the growing population. The Solow model tries to figure out how much the economy can produce, save, invest, and consume in the long run when everything is stable and does not change. It also tries to see how changes in technology, saving rate, population growth, and depreciation affect the long-run outcomes of the economy.

GRAPHICAL REPRESENTATION:

 

 

The horizontal axis shows how many machines each worker has. This is called capital per worker. The more machines each worker has, the more they can produce and save. But machines also wear out over time and need to be replaced. And more workers are born over time and need more machines to work with. So, the economy needs to balance between having enough machines and having too many machines.

The vertical axis shows how much each worker can produce and save. This is called output per worker and saving per worker. The more each worker can produce and save, the more the economy can grow and improve its living standards. But producing and saving also require using up resources and sacrificing consumption. So the economy needs to balance between producing and saving enough and producing and saving too much.

The curved line shows how much each worker can produce with different numbers of machines. This is called the production function per worker. It shows how productive the economy is with different levels of capital per worker. The production function is curved because each additional machine adds less and less to production. This is called diminishing returns to capital. It means that having more machines is good, but not as good as having fewer machines.

The straight line that goes up shows how much each worker can save with different numbers of machines. This is called the saving function per worker. It shows how much of the output per worker is saved and invested in new machines. The saving function is straight because it depends on a fixed percentage of output per worker. This is called the saving rate. It means that the economy saves the same fraction of its production regardless of how many machines it has.

The straight line that goes down shows how much each worker needs to save to keep the same number of machines over time. This is called the depreciation plus population growth function per worker. It shows how much of the capital per worker is lost due to machines wearing out and workers increasing. The depreciation plus population growth function is straight because it depends on a fixed percentage of capital per worker. This is called the depreciation rate plus the population growth rate. It means that the economy loses the same fraction of its machines regardless of how many machines it has.

The point where the two straight lines cross is called the steady state. At this point, each worker has enough machines to produce and save the same amount over time. The steady-state shows the long-run equilibrium of the economy, where everything is stable and does not change. The steady-state depends on the saving rate, the depreciation rate, the population growth rate, and the production function. It means that the economy can reach a certain level of output per worker and consumption per worker in the long run, but not more than that.

Economic overview

Pakistan's economy depends on several sectors, including agriculture, industry, and services.

Here is a breakdown of the sectors:
 
1. Agriculture:
Agriculture accounts for 21% of Pakistan's GDP.
Sustainable growth of the agriculture sector is vital for food security and rural development in Pakistan.

2. Industry:
Industry accounts for 19% of Pakistan's GDP.
 
3. Services:
Services account for 60% of Pakistan's GDP.

According to provisional estimates, Pakistan's economy in FY2022 has witnessed an estimated GDP growth of 5.97%. The projected real GDP growth rate for Pakistan in 2023 is 3.5%.
Pakistan's economy has been in crisis for months, predating the summer's catastrophic floods. Inflation is high, the rupee's value has fallen sharply, and its foreign reserves have now dropped to the precariously low level of $4.3 billion, enough to cover only one month's worth of imports, raising the possibility of default. An economic crisis comes around every few years in Pakistan, borne out of an economy that doesn't produce enough and spends too much, and is thus reliant on external debt. Every successive crisis is worse as the debt bill gets larger and payments become due. This year, internal political instability and the flooding catastrophe have worsened it. There is a significant external element to the crisis as well, with rising global food and fuel prices in the wake of Russia's war in Ukraine.

Analysis of why GDP IS all-time low:

Precarious economic situation: Pakistan's economy has been in crisis for months, predating the summer's catastrophic floods. Inflation is high, the rupee's value has fallen sharply, and its foreign reserves have now dropped to the precariously low level of $4.3 billion, enough to cover only one month's worth of imports, raising the possibility of default.

Reliance on external debt: Pakistan's economy is reliant on external debt, and every successive crisis is worse as the debt bill gets larger and payments become due. This year, internal political instability and the flooding catastrophe have worsened it.

Significant external element: There is a significant external element to the crisis as well, with rising global food and fuel prices in the wake of Russia's war in Ukraine.

Political instability: Politics has consumed much of Pakistan's time and attention, and the country's turn to political instability has worsened the economic situation.

Lack of production: Pakistan's economy doesn't produce enough and spends too much, leading to a reliance on external debt.

In conclusion, Pakistan's economy is dependent on several sectors, including agriculture, industry, and services. The current GDP of Pakistan is not mentioned in the search results. The GDP growth rate for Pakistan in 2023 is projected to be 3.5%, and the projected consumer prices growth rate is 19.9%. The reasons for the all-time low GDP include a precarious economic situation, reliance on external debt, significant external elements, political instability, and a lack of production.