Amir Khan

Pakistan is grappling with economic difficulties as it endeavours to attain fiscal sustainability. The significant fiscal imbalances prompt concerns about the country's economic stability. In March 2024, Pakistan is set to receive a portion of the IMF standby arrangement, aimed at stabilizing the nation's financial situation and addressing the increasing challenges related to debt. Talking to WealthPK, State Bank Memorial Chairperson Dr Waseem Shahid said a significant contributor to Pakistan's fiscal imbalance was the low tax-to-GDP ratio compared to other developing nations, standing at approximately 10 percent. The federal government shoulders the majority of tax collection responsibilities, leaving only a meagre 10 percent to the provincial contributions. With just 4.2 million active taxpayers compared to a labor force of 67 million, poor tax compliance remains a pervasive issue.

He added that to enhance revenue generation and fortify Pakistan's fiscal foundation, it was imperative to address the underlying causes of tax revenue deficiency, including a narrow tax base, exemptions for influential sectors, a substantial informal economy, weak tax machinery, and an inadequate tax structure. “The government also faces challenges aligning expenditures with available resources, as debt-servicing obligations, civil government costs, untargeted subsidies, and losses from state-owned enterprises contribute significantly to government spending,” he said. In Fiscal Year 2022-23, the government generated a total revenue of Rs9.64 trillion, equivalent to 11.4 percent of GDP. However, consolidated expenditure soared to Rs16.2 trillion, accounting for 19.1 percent of GDP, resulting in a substantial fiscal deficit of Rs6.5 trillion, or 7.7 percent of GDP.

A noteworthy portion of the expenditure was allocated to debt servicing, reaching Rs5.7 trillion or 6.7 percent of GDP. This deficit forced the government into costly borrowing, exacerbating the already mounting debt levels and adding to the economic challenges. Additionally, Pakistan experienced a primary deficit of 1 percent of GDP during the same period, indicating that even excluding debt servicing, the government couldn't cover its expenditures solely from its revenues. The situation becomes more precarious when factoring in a current account deficit of $2.24 billion and depleting foreign reserves, painting a concerning picture of Pakistan's fiscal health. As of June 30, 2023, Pakistan's gross debt has surged to Rs62.9 trillion, equivalent to 74.3 percent of its GDP, with total debt and liabilities reaching Rs76.1 billion, constituting approximately 90 percent of GDP. Managing this extensive financial burden is critical, especially with the need to repay approximately $73 billion in external loans within a tight three-year window from July 2023 to June 2026.

 Talking to WealthPK, Dr Idrees Khawaja, an economic researcher from the Pakistan Institute of Development Economics (PIDE), emphasized the importance of addressing fiscal mismanagement to attain a sustainable and well-balanced budget. He added that streamlining expenditures in areas under the provincial jurisdiction and enhancing coordination between the federal and provincial authorities could contribute to a more efficient allocation of resources, reducing dependency on the costly borrowed funds. Achieving fiscal sustainability in Pakistan requires comprehensive structural reforms, including broadening the tax base, eliminating exemptions in key sectors, and simplifying tax compliance procedures to elevate government revenue to at least 15 percent of GDP.

Credit: INP-WealthPk