EDITORIAL: The World Bank’s senior macroeconomist Derek Chen while briefing journalists suggested measures that would address Pakistan’s unsustainable fiscal deficits, averaging more than 7 percent in the past five to six years.
Meanwhile, politicians continue to bicker over which administration is responsible for the current state of affairs – the Pakistan Tehreek-e-Insaf (PTI) claiming the flawed policies of the Pakistan Muslim League-Nawaz (PML-N) (2013 to 2018) are to blame which heavily relied on external borrowing (payable in dollars) and foolishly using the bulk of these borrowed funds to prop up the rupee value to understate the annual debt servicing and principal as and when due in the budget; and the PML-N accusing the PTI government of signing a deal with the International Monetary Fund (IMF) that lacked empathy with the poor and vulnerable while continuing to borrow from abroad for budget support (rather than slash current expenditure) and upping reliance on domestic borrowing from 16.5 trillion rupees in 2013 to around 27 trillion rupees in 2022.
In this context, it is relevant to note that Chen rightly noted that not only is Pakistan’s fiscal deficit persistent but growing and debt has been adding over the years. The deficit was 7.9 percent of GDP in 2021, the highest in our history, but added that half of the deficit accrued after 2010 due to accumulation of public debt.
Pakistani finance ministers, the perennial four since 2010, notably Dr Sheikh, Shaukat Tarin, Ishaq Dar and the interim Dr Miftah Ismail, defend the rise in debt by maintaining that Pakistan’s debt to GDP ratio at 84.8 percent (2023) is lower than that of other countries, including Japan’s at 266 percent, Singapore’s at 131 percent, Italy’s at 135 percent, United States’ at 107 percent yet what this argument ignores is that our debt is largely in dollars, a currency in short supply given that the crisis in our trade imbalance is subject to the vagaries of a very short cycle which accounts for the country being compelled to repeatedly go on an IMF programme (the ongoing programme is the country’s 23rd in its relatively short history).
Sadly, lenders have by and large focused on raising revenue to sustain rising expenditures – a focus that accounts for the government upping the targeted tax collections by the Federal Board of Revenue (FBR) from the budgeted 7,004 billion rupees to 8,709 billion rupees (after the announcement of the mini-budget in February).
The provincial share from the divisible pool of taxes and straight transfers was budgeted at 4,099 billion rupees in the current year, which leaves an amount with the federal government that is barely enough to meet debt servicing (domestic and foreign) and defence expenditures for the year.
Two observations are in order. First, the reliance on indirect taxes (whose incidence on the poor is greater than on the rich) has risen to over 70 percent of all collections, a reliance followed by all previous administrations, which implies rising poverty levels.
There is therefore an urgent need to reform the tax structure and make direct taxes premised on the ability to pay principal rather than legitimizing non-filers by differentiating with the filers on payment of sales tax on certain purchases.
And second, there has been a raise in reliance on another indirect tax with direct implications on inflation notably petroleum levy but by itemizing it as other taxes/non-FBR tax; this does not form part of the divisible pool and the federal government gets to keep it in its entirety.
Chen further suggested that the government can cut 328 billion rupees from its annual expenditure by allowing devolved subjects as per the 18th Amendment passed with consensus by the parliament in 2010 to actually be devolved. His suggestion: “let the provinces invest and develop health, sports, education and similar areas so that the federal government can take care of its core responsibilities.”
In addition, he noted that 315 billion rupees from the federal government is invested in provincial development programmes which must end with Higher Education Commission receiving 70 billion rupees annually even though this is a devolved subject.
In this newspaper’s view, Chen, along with some other noted economists, has raised a number of diverse problems, and problems which undoubtedly need consideration. Whatever he has said must red-flag the incumbent government that something is terribly wrong insofar as the country’s economy is concerned.
Copyright Business Recorder, 2023