Preparing a budget is always a difficult and daunting task for policymakers, especially in a country that relies on foreign borrowing. The challenge lies in managing liquidity due to maturities, rollovers and interest payments, which hampers growth and development, preventing funding for infrastructure and social welfare initiatives.
Additionally, the country is exposed to global influences due to a lack of investor interest, liquidity limitations resulting from associated risks and asset quality, and fluctuations in global interest rates driven by various types of uncertainties. In such circumstances, the nation mostly has to depend on external donors.
This unpleasant reality is a significant contributor to fiscal imbalances. Tax evasion and inadequate tax collection occur because a large portion of the economy operates outside official channels.
Furthermore, the reliance on short-term financing intensifies the burden as funds need to be consistently rolled over for timely payments. Ultimately, this situation increases the risk of currency depreciation and contributes to higher inflation rates.
While lower costs, reduced interest rates, and the use of long-term debt financing or buybacks may serve as temporary fixes, they do not offer a sustainable solution.
Without expanding the tax base, sustained economic growth will not improve the overall tax collection proportionately, which directly impacts the declining tax-to-GDP ratio.
The primary objective should be to decrease dependence on foreign borrowing, which cannot be achieved without substantially increasing both tax revenue and exports simultaneously.
Export growth and economic prosperity are both dependent on providing adequate credit to the banking sector.
The Advance to Deposit Ratio (ADR) in the banking sector is the sole funding source that can effectively boost economic activity, serving as the key indicator that accurately represents growth and economic performance.
However, upon reviewing decades of historical ADR data, we find that it does not align with the deposit growth rate, an issue that must be tackled promptly.
The manufacturing and agricultural sectors, which add value, need a financial injection to boost business operations, generate employment, and increase revenue collection.
On the economic front, despite numerous challenges, some of this year’s economic indicators are quite positive. The budget deficit figures are expected to be favorable, falling short of estimates by nearly 0.5%. Additionally, in the next policy announcement if the policy rate is lowered by 50 to 100 basis points, the cost of debt servicing at the end of the fiscal year will decrease by almost Rs one trillion.
Fiscal and monetary policymakers have effectively managed inflation that has helped the State Bank of Pakistan to significantly decrease its policy rate by 1000 basis points from all time high of 22%.
Remittances, which over the years serve as a vital financial support for the economy, have consistently helped maintain the balance of payments.
This assistance has not only alleviated pressure on the exchange rate but has also played a significant role in ensuring stability.
The contributions of overseas Pakistanis in this regard are particularly worthy of praise for their positive impact on the overall health of economic activity. Remittances are expected to reach a record high of approximately $ 38 billion.
Both the fiscal and monetary policymakers must recognise that the economy is nearing a saturation point.
Budgets should be carefully crafted to align with policy objectives. Enhancing transparency and combating corruption can be effectively achieved through thorough audits and involving pertinent authorities to take necessary actions.
A national budget typically outlines a government’s expected revenue and expenditures for the fiscal year to implement its policies.
However, I want to highlight several key financial indicators and factors that deserve careful consideration and attention. Addressing these issues is critical to alleviating the economic challenges we face.
— The Tax to GDP Ratio should be increased by 3% to 5% each year.
— To boost economic activity, it is essential for the commercial banks to provide adequate credit to the private sector, approximately Rs 6 trillion in the next fiscal year, to stimulate manufacturing sector and enhance crop yields while modernising the agricultural sector.
— Currency in Circulation (CiC) of Rs 10.36 trillion can only reach the desired level if all payments are processed and noted. Consequently, it is important that all banking transactions including cash are reported to tax authorities.
— The total amount of Open Market Operations (OMOs) injections, standing at Rs 13.31 trillion (both Conventional and Islamic), has reached historic highs, surpassing total bank advances of Rs 13.14 trillion, which confirms the reasons behind the economic slowdown.
— Banks’ investments in Government of Pakistan (GoP) securities such as PIBs, treasury bills, and Sukuk total Rs 33.3 trillion or 77.3%, exceeding the total deposits of scheduled banks. To provide more credit to the private sector, this investment and the OMO liquidity injection should be reduced by Rs 10 trillion.
— Funding should be allocated to modernize the agricultural sector and provide subsidies to enhance the growth of essential crops. The emphasis should be on increasing the production of cotton, wheat, sugar and others to reduce imports and conserve foreign exchange.
— Pakistan possesses considerable talent in Artificial Intelligence (AI) and Information Technology (IT). The focus should be on fostering growth in these sectors.
Through venture capital and investments in technology, Pakistan should increase funding for startups and research and development. To attract top AI and IT experts, they should be adequately compensated and encouraged. Government policies need to be consistent, and bureaucratic obstacles should be eliminated.
Infrastructure should be strengthened, and the quality of education in this field should be enhanced. Importantly, access to reliable internet and electricity must also be improved.
Moreover, it is crucial to provide long-term tax incentives to encourage the growth and stability of the industry.
— With a debt to GDP ratio exceeding 70%, deficit financing presents a significant challenge, particularly in meeting external funding obligations. This presents a major threat and is a root cause of many issues, as it directly affects growth, exchange rates, inflation and policy rates. The necessity for austerity measures has severely limited spending capacity, adversely impacting revenue collection, social welfare, and educational initiatives. This situation requires immediate attention.
Copyright Business Recorder, 2025
The writer is former Country Treasurer of Chase Manhattan Bank. The views expressed in this article are not necessarily those of the newspaper
He tweets @asadcmka