Debt servicing and high government expenditure are the two biggest challenges that confront the fiscal management of Pakistan. In 2018 and 2019, expenditure amounted to over 21 percent of GDP. On account of debt servicing in FY 2018, actual expenditure was Rs 1,987 billion against the budgeted figure of Rs 1,620 billion. Amount allocated to debt servicing for the current fiscal year is Rs 2,891 billion, 78% higher than last year. Even if Federal Board of Revenue (FBR) collects Rs 5000 billion against originally fixed target of Rs 5,503 billion, after share of provinces under 7th National Finance Commission (NFC) Award(mechanism for the distribution financial resources between the federal government, and the provinces)net tax collection available to the federal government will be around Rs 2,400 billion, that would be short by Rs 491 billion for debt servicing of Rs 2,891 billion alone. This shows the severity of the fiscal crisis faced by the federal government.
The historic high fiscal deficit (i.e. the shortfall between the government’s revenues and its expenditures) of 8.9% of GDP for fiscal year 2018-19 posed enormous challenge for the Government of Pakistan Tehreek-I-Insaaf (PTI) when it assumed the government. Government had no choice but to seek yet another bailout from the International Monetary Fund (IMF) and resort to massive rupee devaluation along with austerity measures as well as high interest rate to deal with soaring inflation; all this led to what many categorized as stagflation.
According to Economic Survey 2018-19, during the last five years, total revenue as percent of GDP on average reached to 14.9 percent, whereas it stood at 15.1 percent in FY2018. The total expenditures as percent of GDP on average reached 20.5 percent, while during the FY2018-it was the highest at 21.6 percent. Resultantly, fiscal deficit on average stood at 5.5 percent, while during the last year it was recorded at 6.5 percent. In FY2016, fiscal deficit was brought down to 4.6 percent of GDP but the low trajectory could not be maintained and increased to 5.8 percent and 6.5 percent during FY2017 and FY2018, respectively.
Besides the fiscal deficit and high expenditure, tax collection has also been a serious problem in Pakistan. FBR has perpetually failed to meet assigned targets over the past years. In 2018-19, it was assigned the target of Rs 4,435 billion that was later cut down to Rs 4013 billion and then to Rs 3,935 billion. FBR collected only Rs 3,828.5 billion which was 0.4% lesser than the collection of 2017-18. This year the target of Rs 5,503 billion is an arduous task and there is news that this targeted amount would be lessened after revision. Let alone the originally assigned figure in the budget estimates, every year, FBR fails to collect even the downward revised target. This widens fiscal deficit resulting in more borrowing and cutting away large part of the budget for debt servicing.
Another problem in Pakistan is that the privileged classes pay no or scanty taxes on their gigantic incomes and wealth, but the poor are made liable to all kinds of oppressive taxes. To make the matter worse, they get nothing in return and are even deprived of protection to their lives and property, what to speak of basic facilities of health, education, transport and housing.
Adding insult to injury, Pakistan still hasn’t been able to completely implement FATF’s 27 action points that were due to be implemented till February 2020. For exiting the grey list, Pakistan needs to show full compliance on all the action points. FATF blacklisting may affect Pakistan’s capital inflows. “Also, a potential blacklisting by the FATF could result in a freeze of capital flows and lower investment to Pakistan”, stated the staff-level report that was finalized during the visit of the IMF team to Pakistan.
There is a need to need to frame an efficient economic/tax policy aimed at incentivizing investment, encouraging savings and facilitating capital formation in the private sector for job creations, innovations and rapid economic development. Our policymakers have miserably failed to achieve these goals-for them taxation means raising more money and nothing else. Overemphasis on regressive taxation by the successive governments could not avert record fiscal, trade and current account deficits.
The flawed economic policies ,reckless borrowing, huge extravagant expenses, higher collection figures through heavy taxation on imports, no measures for export-led growth, rather anti-export actions, especially blocking of refunds of exporters, and regressive taxation damaged the economy and we witnessed record trade and current account deficit coupled with fiscal deficit of 8.9% of GDP in 2018-19. The last fiscal year was a disaster as highlighted by State Bank in Annual Report 2018-19-The State of Pakistan’s Economy.
Pakistan’s economic affairs, like the past, are being administered by retired technocrats of the World Bank, International Monetary Fund (IMF) or Asian Development Bank, who seem to lack the fervor, ideas and capacity to deliver. The country needs a young, dynamic team of economists who understand the relationship between fairness and efficiency and value the public input.