Pakistan’s budget deficit is a major concern, with government expenditure soaring. The expenditure to GDP ratio is over 22%, compared to around 15% in Bangladesh. Last year, the budget deficit exceeded Rs13 trillion. This year, it is projected to be around Rs 11 trillion, despite the government’s initial estimate of Rs 6.5 trillion to Rs 7 trillion.
IMF Requirements and Deficit Management
The International Monetary Fund (IMF) requires Pakistan to limit budget deficits to 5% to 6% of GDP and achieve a primary surplus. This is crucial for the 24th IMF program. However, actual deficits have consistently been over 8% to 10% of GDP. These deficits are financed through loans, causing the country’s total debt to rise to over Rs81 trillion — nearly 80% of GDP. Must read: Apply for UK Embassy Paid Internships 2024 for International Students
Debt Trap and Continuous Loans
Pakistan is caught in a debt trap, avoiding sovereign default by rolling over loans from friendly countries and servicing the remaining debt with more loans. This cycle continues with IMF bailout programs. Ronald Reagan once said, “There are simple answers to our nation’s problems but not easy ones.” This reflects the situation Pakistan faces. Many have suggested ways to cut expenditures and increase revenue for years. However, no significant progress has been made to curtail huge fiscal deficits.
Issues with Government and Governance
The biggest issue with our governments, both federal and provincial, is maintaining the status quo and a lack of political will to try new approaches. Consequently, there has been much talk of reforms but no progress. Poor governance at all levels undermines good decision-making, the adoption of suitable macro-economic policies, and their implementation. Governance depends on the quality of people at the top — the cabinet, the bureaucracy, and key institutions. Must apply here: Jiangsu University Presidential Scholarship 2024-25 for International Students
Unproductive Expenditure
A significant issue is very high unproductive expenditure due to the ceaseless expansion of governments. Pakistan’s economy, when compared to Bangladesh, shows a tax-to-GDP ratio of around 11%. However, our government expenditure-to-GDP ratio is over 22%, compared to 15% in Bangladesh. This escalates the fiscal deficit to 10%. We have too many ministries, departments, and government agencies filled with too many people. This results in wasted time and resources without producing useful outcomes. We need to drastically cut the size of governments, closing down at least one-third of ministries, departments, and agencies at both federal and provincial levels.
18th Amendment and NFC Award
After the 18th Amendment and the 7th National Finance Commission (NFC) Award in 2010, significant functions and resources were transferred from the federal government to the provinces. Consequently, at least 15 ministries should have been closed in the federal government. This was recognized by the finance minister in his first statement after assuming charge a few months ago. However, funds transferred to the provinces under the NFC in 2010 have largely been wasted. There has been no improvement in education, health, population planning, agriculture, or other functions. Effective accountability and outcome-based governance are needed at both the federal and provincial levels. Also read this opportunity: Malaysian Government MTCP Scholarship 2024-25 in Malaysia
Debt and High Interest Rates
The biggest expenditure in the budget is the cost of debt. This accounts for about 80% of revenue due to the accumulation of huge government debt and very high interest rates fixed by the State Bank of Pakistan (SBP) to contain inflation. High interest rates increase the fiscal deficit as they escalate government expenditure because the government is the biggest borrower from banks. According to a recent publication on the banking sector’s financial position, banks’ investments in government securities increased by Rs7.6 trillion last year. In contrast, banks’ advances to the private sector reduced. This indicates that virtually all domestic savings mobilized through the banking system are used by the government to finance its unproductive expenditures.
Reducing Interest Rates
The SBP must substantially reduce the policy rate, especially as inflation has steeply decreased in recent months. Inflation was less than 11% in May 2024, compared to over 36% in May 2023. While the SBP has announced a 150 basis points cut, a reduction of at least 300 basis points is needed immediately. Interest rates should further decrease to 12% in the next few months, as inflation is likely to decelerate to 7% to 8% per IMF projections next year. This will lead to a massive reduction in the government’s interest cost and overall expenditure.
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Energy Sector and State-Owned Entities
Another major area of leakage is the energy sector and poor governance of state-owned entities (SOEs). This has created huge circular debt and liabilities. Major privatization and reforms are required to reduce the cost of energy, steeply reduce government subsidies, and improve the governance and management of SOEs.
Improving Revenue
To improve revenue, critical reforms are needed in the governance of the Federal Board of Revenue (FBR) and provincial revenue departments. This can be achieved by inducting more competent people at the top. An independent policy board of the FBR should be established. This board would be responsible for policy and oversight to ensure independent policy-making, effective oversight, and accountability of the FBR.
Taxation System Restructuring
There is a serious need to restructure the taxation system. Simplifying laws and procedures, reducing tax rates, and making the system fair and equitable are essential steps. Pakistan has one of the highest tax rates in the world. This incentivizes tax evasion and poor enforcement. By cutting tax rates, making the tax system fair, and promoting business, we can significantly increase tax collections and boost the economy. Our tax-to-GDP ratio is less than 12%, one of the lowest, primarily because of high tax rates and enacted policies. We can only increase tax collection by promoting businesses, reducing tax rates, and making the tax system fair. Ceaselessly increasing tax rates is counterproductive for both the economy and tax collections because you cannot increase tax collection by killing the economy.
In conclusion, managing the budget deficit for 2024–25 requires a multifaceted approach. It includes cutting unproductive expenditures, improving governance, reducing interest rates, and restructuring the taxation system. By addressing these key issues, Pakistan can move towards a more sustainable fiscal path.
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