Muneeb ur Rehman

The gap between the federal government's revenue and expenditure contributes to the economic challenges the country is facing. To bridge it, the government needs to rationalize the fiscal expenditures by reducing the regressive subsidies currently in place. Talking to WealthPK, Faizan Iftikhar, senior researcher economist at Karachi-based Applied Economics Research Centre (AERC), said only targeted subsidies whose economic efficiency in terms of real growth overweighs their own value are economically feasible. In contrast, the country is engaged in extending subsidies predicated on popular decisions.

According to a report by the Ministry of Finance, an amount of Rs1100 billion has been allocated for subsidies in FY2024. The current fiscal framework exhibits a lack of coherence in expenditures, constituting a significant 19.7% of the GDP, while revenue generation lags behind at only 10.5% of the GDP. While the country grapples with a recurrent fiscal deficit that restricts its capacity to finance development projects, the persistent tradition of providing unproductive subsidies to various businesses and the influential class continues, he asserted.

Mentioning some of the key sectors taking unnecessary benefit from the state subsidies, he said, "Tax exemptions given to the energy sector projects, real estate enterprises, and corporate entities that primarily benefit the wealthy, including the corporate sector, influential landholders, and the political elite, amount to $17.4 billion. This figure is equivalent to roughly 6% of the nation's economic output. Faizan added that targeted subsidies would ensure that assistance reaches those who genuinely need it, avoiding wasteful spending on influentials or entities that do not deserve financial support.

As mentioned in the annual budget document, expenditures within the existing fiscal framework seem unsustainable, representing a significant 19.7% of the GDP, while revenue generation falls behind at a mere 10.5% of the GDP.Top of Form Only upon the directions of IMF, subsidies to the petroleum sector have been slashed, he said. "The subsidies allocated to the petroleum sector for the Fiscal Year 2023-24 have been reduced by 47.4% to Rs53.6 billion. Within this allocation, Rs12.6 billion is earmarked for PSO and APL and Rs30 billion for the domestic consumers on the SNGPL network."

Additionally, Faizan opposed the extension of subsidies to the loss-making public sector enterprises (PSEs)."State-owned enterprises (SOEs) pose an ongoing fiscal challenge, as the leading 14 SOEs report losses amounting to Rs458 billion and incur circular debts, placing a strain on the annual budget. Therefore, in order to address the fiscal challenges, the government should streamline fiscal spending by cutting down on the existing regressive subsidies," he added.

Credit: INP-WealthPk